The Regulation of Insurance in China 9780815358268, 9781032005928, 9781351122863

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T H E R E GUL ATION OF INSU RANCE IN CHINA

LLOYD’S INSURANCE LAW LIBRARY

Series Editors: Robert Merkin and Malcolm A. Clarke

Directors’ and Officers’ Liability Insurance Adolfo Paolini and Deepak Nambisan Insurance Law and the Financial Services Ombudsman Service Judith P. Summer Reinsuring Clauses Ozlem Gurses Insurance Disputes Third Edition The Right Honourable Lord Mance, Iain Goldrein QC and Robert Merkin The Law of Liability Insurance Malcolm A. Clarke Lloyd’s Law and Practice Julian Burling

Chinese Insurance Contracts Law and Practice Zhen Jing The Law of Liability Insurance Second Edition Malcolm A. Clarke Good Faith and Insurance Contracts Fourth Edition Peter MacDonald Eggers QC, Simon Picken and Patrick Foss The Law of Compulsory Motor Vehicle Insurance Özlem Gürses Directors’ and Officers’ Liability Insurance Adolfo Paolini and Deepak Nambisan The Regulation of Insurance in China Zhen Jing

Systemic Risk and the Future of Insurance Regulation Edited by Andromachi Georgosouli and Miriam Goldby

For more information about this series, please visit: www.routledge.com/LloydsInsurance-Law-Library/book-series/LILL

TH E REG U LAT I O N O F IN SU RANC E I N C H I N A

ZHEN JING (BA, MPHIL. AN D PHD ) Professor in Law, School of Law, Bangor University, UK

First published 2021 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Informa Law from Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2021 Zhen JING The right of Zhen Jing to be identified as author of this work has been asserted by her in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book has been requested ISBN: 978-0-8153-5826-8 (hbk) ISBN: 978-1-0320-0592-8 (pbk) ISBN: 978-1-351-12286-3 (ebk) DOI: 10.4324/9781351122863 Lloyd’s is the registered trademark of the Society incorporated by the Lloyd’s Act 1871 by the name of Lloyd’s.

This book is dedicated to the memory of my father, Shi-an Jing, who passed away in May 2020

CONTENTS

Preface Foreword (Professor Rob Merkin) Table of cases Table of legislation Table of judicial interpretations Table of regulations

xvi xix xx xxii xxvii xxx

CHAPTER 1 INTRODUCTION TO INSURANCE REGULATION AND THE INSURANCE INDUSTRY 1.1 Introduction 1.2 The nature of insurance 1.3 Reasons for and objectives of insurance regulation 1.4 The outline of this book 1.5 The development of China’s insurance industry 1.6 The present insurance market in China 1.7 The further development of the insurance industry 1.8 Conclusion CHAPTER 2 THE CHINESE LEGAL SYSTEM AND INSURANCE LEGISLATION 2.1 Introduction 2.2 Philosophical traditions of Chinese law 2.3 The legislative system 2.4 The judicial system 2.5 Insurance legislation in China 2.6 Administrative regulations by the State Council 2.7 The judicial interpretations of statutory law by the Supreme People’s Court (SPC) 2.8 Regulations enacted by the insurance supervision and regulation authority of the State Council and other relevant regulatory authorities 2.9 Self-regulation rules 2.10 The insurance regulatory hierarchy in China 2.11 Conclusion vii

1 1 2 5 11 16 26 29 31 33 33 33 34 36 37 42 47 49 50 51 51

CONTENTS

CHAPTER 3 INSURANCE SUPERVISION AND REGULATION AUTHORITY AND SYSTEM 3.1 Introduction 3.2 A historical consideration of the development of insurance regulatory authority 3.3 Statutory functions and responsibilities of the insurance supervision and regulation authority of the State Council 3.4 The China Banking and Insurance Regulatory Commission (CBIRC) 3.5 The functions and responsibilities of local offices of the CBIRC 3.6 The new duty of the local offices of the CBIRC to implement certain administrative licensing matters 3.7 The allocation of responsibilities between the CBIRC and its local offices for the supervision and regulation of property insurance companies and reinsurance companies 3.8 Methods of insurance supervision and regulation 3.9 Corrective measures and administrative penalties 3.10 Conclusion CHAPTER 4 FORMATION AND DISSOLUTION OF INSURANCE COMPANIES 4.1 Introduction 4.2 Formation of insurance companies 4.3 Formation of branch offices 4.4 Formation of overseas insurance institutions 4.5 Formation of reinsurance companies 4.6 Formation and business scope of insurance group companies 4.7 Regulation on modification, dissolution, and abolition of insurance institutions 4.8 Market access and withdrawal of non-insurance subsidiaries of insurance companies 4.9 Supervision and administration of insurance institutions 4.10 Supervision and administration of insurance group companies 4.11 Conclusion CHAPTER 5 REGULATION OF FOREIGN-FUNDED INSURANCE COMPANIES AND THE REPRESENTATIVE OFFICES OF FOREIGN INSURANCE INSTITUTIONS 5.1 Introduction 5.2 Regulation on the administration of foreign-funded insurance companies 5.3 The Implementation Rules for the RAFFIC 5.4 Administration for representative offices of foreign insurance institutions in China 5.5 Conclusion viii

52 52 52 55 57 60 63 64 65 74 80 81 81 82 90 98 104 105 109 113 115 116 118

120 120 121 131 134 141

CONTENTS

CHAPTER 6 REGULATION OF ADMINISTRATIVE LICENCING AND INSURANCE PERMITS 6.1 Introduction 6.2 The principles of insurance licensing 6.3 Administrative licensing and insurance permits 6.4 The Provisions on Implementation Procedures of Administrative Licensing 6.5 Regulation of insurance permits 6.6 Conclusion CHAPTER 7 REGULATION OF CORPORATE GOVERNANCE 7.1 Introduction 7.2 The legal framework for corporate governance of insurance companies 7.3 Statutory requirements for directors, supervisors, and senior officers of insurance companies 7.4 Requirements for directors, supervisors, and senior officers formulated by the CBIRC 7.5 The regulation of corporate governance structure 7.6 Regulation of the operation of the board of directors of insurance companies 7.7 Administration of auditing of directors and senior managers of insurance companies 7.8 Internal audit of insurance companies 7.9 Guidelines for salary management rules of insurance companies 7.10 Compliance management of insurance companies 7.11 Related-party transactions of insurance companies 7.12 Risk management of insurance companies 7.13 Comprehensive risk management of personal insurance companies 7.14 Internal control of insurance companies 7.15 Evaluation of insurance company corporate governance 7.16 Corporate governance of insurance group companies and of insurance groups 7.17 Information disclosure by insurance companies 7.18 Corporate governance action plan for three years, from 2020 to 2022 7.19 Conclusion CHAPTER 8 REGULATION ON EQUITIES OF INSURANCE COMPANIES 8.1 Introduction 8.2 Classification of equities of insurance companies 8.3 Qualifications of shareholders 8.4 Acquisition of equities 8.5 Funds for acquiring equities 8.6 Behaviours of shareholders ix

143 143 144 145 148 157 162 164 164 164 165 167 195 202 218 223 234 243 253 268 275 289 309 314 320 327 327 330 330 331 332 335 338 339

CONTENTS

8.7 8.8 8.9 8.10 8.11

Management of equity matters Submission of materials to the CBIRC Supervision and administration Equity information disclosure by insurance companies Conclusion

CHAPTER 9 REGULATION OF THE INSURANCE BUSINESS 9.1 Introduction 9.2 An overview of law and regulations for the insurance business 9.3 The regulation on scope of the insurance business 9.4 Statutory and regulatory requirements for insurance clauses and premium rates 9.5 Regulation of insurance clauses and premium rates of property insurance 9.6 Regulation of insurance clauses and premium rates of commercial motor vehicle insurance 9.7 Regulation of insurance clauses and premium rates of personal insurance 9.8 Development of insurance products by property insurance companies 9.9 Improving the supervision of insurance products of property insurance companies 9.10 Strengthening the supervision of personal insurance products 9.11 Regulation of product development and design of personal insurance companies 9.12 Regulation of information disclosure of insurance products 9.13 Premium rate adjustment and information disclosure of long-term medical insurance products 9.14 Regulation of actuaries 9.15 Regulation of the reinsurance business 9.16 Conclusion

352 352 352 353 360 362 373 398 412 422 426 429 432 444 449 451 464

CHAPTER 10 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9

REGULATION OF THE CONDUCT OF INSURANCE COMPANIES Introduction Legal framework for the regulation of the conduct of insurers Regulation on the conduct of the insurance business Regulation on the conduct of insurers in advertising or selling insurance products Prohibition of misconduct of insurers and their employees Guidelines for the determination of misleading sales of personal insurance Guiding opinions on liability for misleading sales of personal insurance The basic services of the personal insurance business Telephone sales of insurance products

341 342 345 349 350

x

465 465 466 466 467 483 484 488 494 499

CONTENTS

10.10 10.11 10.12 10.13 10.14 10.15

Retrospective administration of insurance sales practices Electronic return visit of life insurance Regulation on the conduct of insurance claims Evaluation of the service of insurance companies Evaluation of the business operation of insurance companies Conclusion

CHAPTER 11 REGULATION OF SOLVENCY 11.1 Introduction 11.2 The legal framework of regulation of solvency 11.3 The first generation of solvency regulation system 11.4 The conceptual framework of the second generation of solvency regulation system 11.5 The documentary framework of C-ROSS 11.6 The impact of the C-ROSS 11.7 The second phase of the construction of the C-ROSS 11.8 Capital guarantee funds 11.9 The management of reserves for non-life insurance businesses of insurance companies 11.10 Conclusion

532 532 533 536 541 553 554 555 560 564 570

CHAPTER 12 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 12.10 12.11 12.12 12.13 12.14 12.15 12.16 12.17 12.18 12.19 12.20 12.21

REGULATION OF THE USE OF INSURANCE FUNDS Introduction The current state of insurance funds utilization Regulatory principles for insurance funds utilization An overview of the regulatory framework regarding the use of insurance funds Channels for the use of insurance funds Insurance funds in bank deposits Insurance funds investment in bonds Insurance funds investment in stocks Investment of insurance funds in real estate Indirect investment of insurance funds in infrastructure projects Insurance funds investment in equities Investing insurance funds in infrastructure debt investment plans Insurance funds investment in collective trust funds Investment of insurance funds in venture capital funds The proportional regulation of the utilization of insurance funds Modes of insurance funds utilization Entrusted investment of insurance funds Regulation of the insurance asset custody business Decision-making operating mechanisms for insurance funds utilization Risk management and control for insurance funds utilization Supervision and administration for insurance funds utilization

511 515 518 524 527 530

xi

571 571 572 573 578 581 584 585 597 629 641 662 677 682 683 685 692 696 703 706 711 712

CONTENTS

12.22 Overseas investment with insurance funds 12.23 Administration of insurance asset management companies 12.24 Insurance asset allocation management 12.25 Internal control of insurance funds 12.26 The scoring supervision over internal control and regulatory compliance in the use of insurance funds 12.27 Five-grade risk-based insurance asset classification 12.28 Disclosure of capital use information by insurance companies 12.29 Conclusion

715 740 757 764

CHAPTER 13 REGULATION OF INSURANCE AGENTS 13.1 Introduction 13.2 Insurance intermediaries market in China 13.3 General agency principles 13.4 Regulation of insurance agents 13.5 The duties of insurance agents 13.6 Supervision and administration of insurance agents 13.7 Regulation of sideline bancassurance business 13.8 Strengthening the supervision and administration of insurance intermediaries 13.9 Strengthening the administration of intermediary channel of insurance companies 13.10 Conclusion

825 825 827 828 835 836 842 857

CHAPTER 14 REGULATION OF INSURANCE BROKERS 14.1 Introduction 14.2 Insurance brokerage market in China 14.3 An overview of regulation of insurance brokers 14.4 The features of insurance brokers 14.5 The business scope of insurance brokers 14.6 The duties of insurance brokers 14.7 Insurance brokers’ liability for loss and damages caused to the proposers 14.8 Regulatory rules for insurance brokers 14.9 Foreign-funded insurance brokers 14.10 Conclusion

883 883 883 884 885 886 887

CHAPTER 15 REGULATION OF INSURANCE ADJUSTERS 15.1 Introduction 15.2 The development of insurance adjusters 15.3 The Provisions on the Supervision and Administration of Insurance Adjusters 15.4 The basic rules for insurance adjusting 15.5 Foreign investors are permitted to operate loss adjusting business in China

919 919 920

xii

796 803 816 824

874 878 881

891 894 917 917

921 943 953

CONTENTS

15.6 15.7

Factors which affect legal effect of an insurance adjusting report Conclusion

953 959

CHAPTER 16 HEALTH INSURANCE 16.1 Introduction 16.2 The present position of commercial health insurance in China 16.3 An overview of the regulatory framework for commercial health insurance 16.4 The Opinions of the General Office of the State Council on Accelerating Development of Commercial Health Insurance 2014 16.5 The Measures for the Administration of Health Insurance 16.6 Health insurance business with individual tax preferences 16.7 Critical illness insurance 16.8 Conclusion

962 962 963

CHAPTER 17 PENSION INSURANCE 17.1 Introduction 17.2 The legal framework for the regulation of commercial pension insurance 17.3 The State Council’s opinions on the development of commercial pension insurance 17.4 The measures for the administration of old-age security management business 17.5 The programme of the elderly housing reverse mortgage pension insurance 17.6 The programme of individual tax-deferred commercial pension insurance business 17.7 The Interim Measures for the Administration of the Utilization of Individual Tax-Deferred Commercial Pension Insurance Funds 17.8 Conclusion CHAPTER 18 AGRICULTURE INSURANCE 18.1 Introduction 18.2 An overview of the regulatory framework for agriculture insurance in China 18.3 Development of agriculture insurance in China 18.4 The State Council’s regulation of agriculture insurance 18.5 Qualification requirements for an insurance company to conduct agriculture insurance 18.6 Agriculture insurance contracts clauses and premium rates 18.7 The drafting of clauses on agriculture insurance products subsidized by the Central Treasury 18.8 Catastrophe risk reserves of agriculture insurance 18.9 Underwriting and claim handing of agriculture insurance 18.10 Premium subsidies by governments xiii

963 966 974 987 995 1033 1036 1036 1037 1039 1040 1052 1060 1077 1085 1087 1087 1088 1090 1093 1101 1108 1111 1113 1116 1123

CONTENTS

18.11 18.12

The Pilot Programme on agricultural catastrophe insurance The Pilot Programme of full-cost insurance and income insurance for the three major grain crops 18.13 Further development of agriculture insurance 18.14 Self-regulation of agriculture insurance 18.15 Typical crop insurance clauses 18.16 Conclusion CHAPTER 19 CATASTROPHE INSURANCE 19.1 Introduction 19.2 The legal framework for catastrophe insurance 19.3 The China Urban and Rural Residential Building Earthquakes Catastrophe Insurance Pool and the early development of the catastrophe insurance system 19.4 The Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes 19.5 The Measures for the Administration of the Special Reserve Fund for Urban and Rural Residents’ Earthquake Catastrophe Insurance 19.6 The Model Insurance Clauses for Urban and Rural Residents’ Housing Earthquake Catastrophe Insurance 19.7 Earthquake insurance practice in Sichuan Province 19.8 Earthquake insurance systems in other countries 19.9 Conclusion CHAPTER 20 MOTOR VEHICLE INSURANCE 20.1 Introduction 20.2 Legal framework for motor vehicle insurance 20.3 Compulsory motor vehicle insurers 20.4 Persons who are required to take compulsory motor vehicle insurance 20.5 The scope of the insured persons 20.6 The limits of the amount covered under a compulsory motor vehicle insurance policy 20.7 The scope of the third-party victims 20.8 The insured’s pre-contractual duty of disclosure 20.9 The insurer’s pre-contractual duty to explain the content of the contract 20.10 The contents of a compulsory motor vehicle insurance contract 20.11 The third-party rights against the insurers 20.12 The Road Traffic Accident Social Relief Funds 20.13 Non-compulsory commercial motor vehicle insurance 20.14 Conclusion xiv

1126 1128 1132 1138 1149 1156 1159 1159 1160 1162 1163 1171 1174 1179 1183 1187 1189 1189 1190 1192 1194 1195 1197 1198 1200 1203 1204 1209 1215 1221 1231

CONTENTS

CHAPTER 21 REGULATION OF INTERNET INSURANCE 21.1 Introduction 21.2 The development of Internet insurance in China 21.3 Regulation of Internet insurance 21.4 Guarantee insurance business on Internet platform 21.5 Retrospective management of Internet insurance sales activities 21.6 The Draft of the Measures for the Supervision of the Internet Insurance Business 21.7 Conclusion

1250 1250

CHAPTER 22 22.1 22.2 22.3 22.4

REGULATION OF MUTUAL INSURANCE ORGANIZATIONS Introduction The development and significance of mutual insurance in China Pilot Measures for the Supervision and Administration of Mutual Insurance Organizations Conclusion

1233 1233 1234 1234 1243 1245

1252 1252 1253 1255 1262

CHAPTER 23 PROTECTION OF INSURANCE CONSUMERS 23.1 Introduction 23.2 Legal framework for the protection of insurance consumers 23.3 China Insurance Consumer Confidence Index 23.4 An overview of the insurance security fund 23.5 The administration of the insurance security fund 23.6 The business operation of the Insurance Security Fund Co. Ltd. 23.7 The construction of system and mechanism for protection of consumers 23.8 The handling of consumers’ complaints 23.9 Consumer disputes resolution 23.10 Conclusion

1284 1295 1304 1318

CHAPTER 24 THE SELF-REGULATORY INSTITUTIONS 24.1 Introduction 24.2 The Insurance Association of China 24.3 Insurance Asset Management Association of China 24.4 Insurance intermediary associations 24.5 Conclusion

1320 1320 1321 1324 1327 1329

Appendix: The Insurance Law of the People’s Republic of China

1330

Index

1367

xv

1264 1264 1264 1268 1268 1270 1278

P R EFACE

The law of insurance can be broadly divided into two distinct topics. One is the law of insurance contracts, which governs the contractual relations between the insurer and the insured. The other is insurance regulation, which can be generally defined as a mechanism to control the behaviour of participants in an insurance market. The Insurance Law of the People’s Republic of China (the Insurance Law) consists of both the insurance contract law and insurance regulation, governing the activities of the insurers and the insureds and regulating the behaviour of insurance companies and intermediaries in China’s insurance market. While the contractual aspect of the Insurance Law has been considered in the book: Chinese Insurance Contracts: Law and Practice (1st edn., Informa Law from Routledge, 2017), the regulatory aspect of the Insurance Law is considered in this book. Although rules which apply to insurance contracts and rules which apply to the supervision and regulation of insurance market are different, these two sets of rules work together to ensure fair play in the insurance business and safeguard the insured’s interests. China’s insurance industry and insurance market are regulated at four levels. On the top of the regulatory hierarchy is the statutory regulation by the National People’s Congress. The rules of law at this level come from the Insurance Law, which provides rules governing insurance contracts, insurance companies, insurance business operation, insurance agents and brokers, supervision and regulation of the insurance industry, and legal liability. The second level is the administrative regulation by the State Council, which promulgates rules for certain important areas of insurance, such as administration of foreign-funded insurance companies in China’s insurance market, agriculture insurance, and compulsory motor vehicle insurance. The third level is the departmental regulation by the insurance supervision and regulation authority of the State Council (the ISRA) which is responsible for regulating and supervising the insurance industry and insurance market in China. It regularly enacts administrative rules for the regulation of insurance in China. The fourth level is self-regulation. The Insurance Association of China (IAC) is the major self-regulatory institution in China. The main function of IAC is to assist the ISRA as an additional channel for the regulation of China’s insurance market. These regulatory rules can be further broken down into three types of conditions or requirements. First, the conditions that have to be fulfilled before a company is authorized to operate; second, the conditions which have to be observed during the company’s operation; and third, the conditions that have to be observed if the xvi

PREFACE

company goes into liquidation or ceases operation from any other cause. These regulatory rules for the life cycle of an insurance company are considered in this book, with more focus on the rules to be observed during a company’s operation. This book gives a systematic and comprehensive analysis of rules of law and administrative regulations and presents the whole picture of Chinese insurance regulation. The analysis includes the scope and coverage of regulatory requirements in most aspects of the regulatory structure in China, such as formation of an insurance company, its internal controls and risk management, corporate governance, operation of business, solvency, insurance fund investment, the role of intermediaries in the market, the regulation of some socially important types of insurance, the regulation of mutual insurance institutions, the protection of policyholders, and industrial self-regulation. Although the insurance regulation system varies from one jurisdiction to another because of the differences in the level of development or sophistication of the insurance markets and the types of insurance products and services, the general core principles of insurance supervision and regulation are applicable to all jurisdictions. China’s insurance industry and market have a relatively short history of development. The insurance supervision and regulation authority has attempted to make the regulatory system and rules tailored to fit into the actual situations in China in accordance with the nature, scale, and complexity of the insurance market at the different stages of its development so as to meet regulatory objectives. Since the initiation and implementation of the economic reform and the opendoor policy in 1978, China’s economy has been growing rapidly. This growth creates a favourable condition and environment for the insurance industry to develop. As a result, China’s insurance industry has also been growing very rapidly. For example, the premium income increased from ¥0.46 billion yuan in 1980 to ¥4,264.5 billion yuan (US$617 billion) in 2019. China is now the second largest insurance market in the world. An open and vigorous modern insurance market and an effective insurance regulatory system have basically been formed in China. With the rapid development of China’s insurance industry and the opening of the Chinese insurance market to the world, Chinese insurance law and regulation has become an increasingly relevant topic for insurance practitioners and academics. This book therefore provides a much-needed analysis of China’s regulatory system. It is the first systematic text written in English on the regulation of insurance in China. This book is intended primarily for insurers, academia, researchers, legislators, students, and practitioners both in China and in other countries who are interested in Chinese law and practice. This book is essential reading for insurance companies and legal practitioners looking to do business in China and is a reference for lawyers practising insurance law. It is also a useful resource for students and academics studying Chinese law. I sincerely hope that readers find this book helpful to their understanding of the Chinese insurance regulatory system and its substantive legislation. I am indebted to many people who have given me support and help in one way or another with this book. First, I would like to thank the reviewers of the proposal for this book for their support for this project. xvii

PREFACE

I am most grateful to Professor Rob Merkin QC (Distinguished Professor of China University of Political Science and Law and Professor at Reading University and Exeter University, UK) for his strong support and encouragement. Professor Merkin has kindly written the Foreword for this book. I would like to say thanks to Professor Lei Chen (Durham University, UK) for his help in obtaining some legal materials. I am grateful to the staff of the publisher, Informa Law from Routledge, especially to Amy Jones, Marie Roberts, and other editors, who have shown great patience and provided significant help in the editing and publishing of this book. My ultimate gratitude goes to all the members of my family, who have given me endless love, support, and encouragement. The materials used in this book are up-to-date as of 31 October 2020. Zhen Jing 11 November 2020

xviii

F O R EWOR D

Four years ago Professor Zhen Jing produced the first major text in the English language on the subject of the insurance law of China, Chinese Insurance Contracts: Law and Practice. That work was an outstanding achievement, explaining the law in China to a common law audience in terms that led to easy comparison between the common law and Chinese systems. The present work, The Regulation of Insurance in China, completes Professor Jing’s comprehensive study of Chinese insurance law. The book analyzes in painstaking detail the licensing system applicable to insurers and – most importantly to the European market – the admission and licensing system for foreign insurers seeking to carry on business in China. The matters analyzed will be familiar to all readers acquainted with the supervision of insurance companies and their business, including protections against insolvency, corporate governance, and the transfer of equities. Professor Jing also discusses the classes of intermediaries operating in the Chinese market and how they are regulated, and there are separate chapters on the most important forms of insurance, including agriculture and motor vehicle. Finally, the book analyzes the regulatory controls on the conduct of insurers. The value of her work cannot be overstated. The Chinese system – in common with pretty much all regulatory regimes – is labyrinthine and consists of a combination of public law, private law, and soft law. Explaining clearly how it all fits together is a major achievement. Not only is The Regulation of Insurance in China a handbook on the operation of the Chinese system for lawyers and insurance practitioners, academics interested in regulation generally and insurance regulation in particular now have a major text for use in comparative study. This work is plainly a labour of love, clearly written and packed with detail that would to those not familiar with the Chinese language otherwise be all but inaccessible. The author deserves thanks and congratulations for yet another outstanding achievement. Professor Rob Merkin QC 16 November 2020

xix

TA B LE OF CA S ES

Aneco Reinsurance Underwriting Ltd v Johnson & Higgins [2002] Lloyd’s Rep IR 91 ................................................................................................................... 893 Arbory Group Ltd v West Craven Insurance Services [2007] Lloyd’s Rep IR 491 ....... 893 BOC Insurance Co., Ltd. Wuxi Central Branch Company v Jiangyin Weierpai New Material Technology Co., Ltd (cited by the Deheng Law Firm ............................ 954 Callaghan v Dominion Insurance Co [1997] 2 Lloyd’s Rep 541 .....................................3 China Life Property Insurance Co., Ltd. Inner Mongolia Autonomous Region Branch Xing’an Central Branch v Shanghai Jingtong Construction (Group) Co., Ltd. Chongqing Branch (the insured), cited by the Deheng Law Firm ......... 959 China Pacific Property Insurance Co. Ltd. Hainan Branch (the insurer) v COSCO Shipping Co. Ltd.; (the insured), Hainan Province High People’s Court (2010) Qing Min San Zhong Zi No. 2 Civil Judgment......................................... 955 Comerford v Britannic Assurance Co Ltd (1908) 24 TLR 593 ................................... 837 Excess Insurance Co Ltd v Mathews (1925) 31 Com Cas 43 ..................................... 459 Fraser v Furman [1976] 1 WLR 898 .......................................................................... 892 Guihong Li (Mr) v China Pingan Insurance Company Shanghai Branch, decided by the Second Intermediate People’s Court, Shanghai City, Civil Court Judgment (2003) No. 110 .................................................................................... 838 HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] Lloyd’s rep IR 230 ............................................................................................... 888 Hooley Hill Rubber and Cemical Co Ltd, Re [1920] 1 KB 257 ................................. 837 Horncastle v Equitable Life Assurance Society of the United States (1906) 22 TLR 735 ............................................................................................................. 837 Huang Chen (Mr) and Mr Tao Chen v Prudential Life Insurance Company Ltd. Guangdong Branch, decided by the Intermediate People’s Court, Guangzhou City, Guangdong Province, Civil Court Judgment (2009) No 4198...................... 839 Insurance Co of Africa v Scor (UK) Reinsurance Ltd [1985] 1 Lloyd’s Rep 312 ........ 459 Jiangang Guo (Mr) v China Life Insurance Company Ltd. Hebi Branch, decided by the Intermediate People’s Court, Hebi City, Henan Province, Civil Court Judgment (2010) No. 81 ...................................................................................... 839 Jianxiang Li (Mr) v China Life Insurance Company Shangli County Branch, decided by the Intermediate People’s Court, Pingxiang City, Jiangxi Province, Civil Court Judgment (2009) No. 75 ................................................................... 840 Lagden v O’Connor [2004] Lloyd’s Rep IR 315 ......................................................... 893 Lianshui Xinrongmei Textile Co., Ltd. v Tianan Property Insurance Co., Ltd. Huaian Central Branch, cited by the Deheng Law Firm ...................................... 958 Liesbosch Dredger v Edison (The Liesbosch) [1933] AC 449..................................... 893 O and R Jewellers v Terry [1999] Lloyd’s Rep IR 436 ................................................ 893

xx

TABLE OF CASES

People’s Insurance Company of China Chaozhou Branch v Guangdong Zezhou Arts & Crafts Co., Ltd.; (the insured), cited by the Deheng Law Firm ................ 957 People’s Insurance Company of China Shixing Branch v Shixing Tiezhai Forest Farm Co., Ltd, cited by the Deheng Law Firm.................................................... 956 Prudential Insurance Company v. Inland Revenue Commissioners [1904] 2 KB 658 ......3 Ramwade v WJ Emson & Co [1987] RTR 72 ............................................................. 893 Shenyang Yulong Wood Products Co., Ltd.; (the insured) v the People’s Insurance Company of China Benxi City Branch, cited by the Deheng Law Firm ............... 958 South Australia Asset Management Corp Respondents v York Montague Ltd (SAAMCO) [1997] AC 191................................................................................. 893 Sprung v Royal Insurance [1999] Lloyd’s Rep IR 111 ................................................ 893 Thomas Cheshire and Co. v Vaughan Bros and Co. [1920] 3 KB 240 ........................ 893 Zhong v China Life Insurance Co. Ltd. Huichang County Branch, tried by the Intermediate People’s Court, Ganzhou City, Jiangxi Province (2008) Gan Zhong Min Si Zhong Zi No. 163 ......................................................................... 830

xxi

TA B LE O F L EG IS LAT ION

Accounting Law................................. 1022 Administrative Licensing Law of the People’s Republic of China, enacted 27 August 2003, in force 1 July 2004 ......149, 157, 162, 351, 369, 403 art. 42 .............................................. 351 Administrative Punishment Law of China ....................................... 223 Agriculture Law of China .........1093, 1156 Asset Appraisal Law of the People’s Republic of China, enacted 2 July 2016, in force 1 December 2016 .............................919, 940, 943, 944, 952, 954, 960, 961 art. 15 .............................................. 938 Banking Supervision and Administration Law of China ................149, 310, 314, 858, 873, 1303 Bidding Law of China ....................... 1013 Civil Code of the PRC (People’s Republic of China) adopted at third meeting of 13th National People’s Congress, 28 May 2020 & in force 1 January 2021 ...... 828, 1191 Pt 1: General Provisions ........... 828, 884 art. 23 .............................................. 828 art. 162 .................................... 828, 829 art. 163 ............................................ 828 art. 164 ............................................ 832 art. 169 .................................... 829, 831 art. 171 ............................................ 829 art. 171(1), (2) ................................. 829 art. 171(3), (4) ................................. 830 art. 172 .................................... 829, 830 art. 173 ............................................ 835

art. 963 ............................................ 886 Civil Procedure Law (CPL)..... 49, 1192, 1307, 1315 Ch. 8 ............................................. 1306 art. 24 ............................................ 1305 art. 50 ............................................ 1308 arts. 93–96 ..................................... 1307 art. 97 ...................................1307, 1314 arts. 98, 99 ............................1307, 1308 art. 135 .......................................... 1316 art. 146 .......................................... 1316 art. 159 .......................................... 1316 arts. 194, 195 ................................. 1315 art. 201 .......................................... 1316 Pt 4: Contract Law ................. 828, 884, 889, 890, 1191 art. 496 ............................................ 890 art. 503 ............................................ 829 art. 923 ............................................ 831 art. 924 ............................................ 835 arts. 929, 930 ................................... 832 art. 933 ............................................ 835 art. 962(1)........................................ 887 art. 962(2)........................................ 889 Tort Law of the Civil Code ..... 49, 1191, 1215, 1216 Ch. 5 ............................................. 1191 art. 1179 ........................................ 1192 art. 1183 ........................................ 1192 art. 1183(1) .................................... 1192 art. 1208 ........................................ 1191 art. 1209 ........................................ 1196 art. 1215 .....................1191, 1196, 1197 art. 1216 ...............................1191, 1216 Commercial Banks Law of China ........................310, 858, 873 Company Law of the PRC (People’s Republic of China); adopted at 5th

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TABLE OF LEGISLATION

Meeting of the Standing Committee of the Eighth National People’s Congress, 29 December 1993, amended 25 December 1999, 27 October 2005 & 28 December 2013. The 2013 version in effect 1 March 2014 .................... 81, 82, 86, 87, 105, 109, 165–167, 202, 204, 210, 253, 310, 330, 331, 339, 351, 629, 741, 834, 843, 1260, 1272 art. 21 .............................................. 206 art. 146 .......................84, 166, 175, 845 art. 146(1)........................................ 175 arts. 148, 149 ................................... 206 Constitution of the PRC (People’s Republic of China) adopted by 5th session of 5th National People’s Congress, 4 December 1982 (amended 1988, 1993, 1999, 2004 & 2018) ........................... 34, 35 Preamble ............................................ 35 art. 5 .................................................. 35 art. 67 ................................................ 36 art. 111 .............................................. 34 art. 123 .............................................. 36 Contract Law 1999 (PRC) ............ 38, 641 Contract Law of the Civil Code............. 49 Crown Entities Act 2004— s. 112 ............................................. 1184 Earthquake and War Damage Act (New Zealand) 1944 ................... 1183 Earthquake Commission Act (New Zealand) 1993 ......... 1160, 1183–1185 s. 3(3)(1) ........................................ 1188 ss. 18, 19...............................1184, 1185 ss. 20, 22........................................ 1184 ss. 23, 24, 29 .................................. 1185 Sch. 3, para. 1 ................................ 1184 Sch. 3, para. 9 ................................ 1185 Earthquake Commission Amendment Act (New Zealand) 2019 (No. 1) ....................................... 1184 s. 9 ................................................. 1184 Economic Contract Law of the PRC 1981: adopted by 4th Session of 5th National People’s Congress (NPC) 13 December 1981 (repealed by Contract Law 1999 (PRC).............. 38

art. 25 ................................................ 38 art. 46 ................................................ 38 Enterprise Bankruptcy Law of China ... 110 art. 2 ..........................77, 110, 112, 113, 147, 1266 Financial Service Act 2012— ss. 89, 90.......................................... 837 Financial Service and Markets Act (UK) 2000 ................ 837 s. 39 ................................................. 837 Fire Protection Law of China 2008— art. 51 .............................................. 955 Government Procurement Law of China ..................................... 1013 Insurance Act 2015.............................. 888 art. 4(2) ........................................... 888 art. 4(2)(b) ....................................... 888 art. 4(3) ........................................... 888 art. 4(3)(b) ....................................... 888 Insurance Law of the PRC (People’s Republic of China) 1995, amended 2002, 2009, & 2015) ..... 1, 10, 21, 32, 37–42, 47, 49, 53, 74, 75–78, 82, 86–88, 98, 104, 105, 109, 110, 112, 113, 146, 148, 157, 162, 165–167, 178, 190, 202, 253, 276, 308, 310, 314, 330, 331, 336, 350, 352, 360, 361, 366, 367, 374, 387, 407, 408, 412, 423, 432, 452, 460, 466–469, 482–488, 499, 518, 519, 533, 535, 536, 560, 564, 571, 578, 611, 629, 641, 716, 740–742, 750, 760, 764, 826, 828, 831, 833, 834, 836, 837, 853, 858, 873, 884, 885, 888–891, 894, 895, 919, 921, 944, 959, 965, 979, 984, 993, 1013, 1016, 1019, 1022, 1093, 1098, 1102, 1104, 1105, 1138, 1156, 1161, 1190, 1192, 1214, 1255, 1263–1265, 1269, 1270, 1277, 1303, 1318, 1322 Ch. 3 ................................................. 81 Ch. 5 ....................................... 826, 884 Ch. 7 ................................. 56, 826, 884 art. 1 ............................................ 10, 40 art. 2 ................................................ 519 art. 6 .................................................. 10 art. 7 .................................................. 11

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art. art. art. art. art. art. art. art. art. art. art.

8 .................................................. 53 9 ........................................ 5, 49, 52 10(1)–(3) ....................................... 4 12(4) ............................................. 4 14 .............................................. 891 16 ............. 14, 837, 888, 1152, 1233 16(1) ................................. 837, 888 16(2) ............................... 838, 1201 16(4) ....................................... 1203 16(6) ......................................... 838 17 ................4, 8, 14, 432, 433, 435, 836, 959, 1140, 1151, 1203, 1233, 1247 art. 19 ............................................ 1153 art. 22 ...................................... 466, 519 art. 22(2) ....................................... 1151 art. 23 .......................466, 519, 520, 894 arts. 24, 25 ........................466, 519, 520 art. 28 ...................................... 451, 460 art. 29 ...................................... 451, 458 art. 44 (2002) .................................... 48 art. 52 ...................................1097, 1153 art. 62 ............................................ 1210 art. 65 ................. 873, 1213, 1214, 1228 art. 65(2) ....................1210, 1214, 1215 art. 65(3) ....................................... 1214 art. 66 ............................................ 1206 art. 67 .................................. 55, 81, 146 art. 68 ................................................ 82 art. 69 ................................................ 83 arts. 70, 71 ................................... 82, 83 art. 72 .................................. 82, 83, 118 art. 73 .......................................... 82, 83 arts. 74–79 ......................................... 90 art. 74 .......................................... 55, 90 arts. 75, 76 ......................................... 90 art. 77 .................................... 82, 83, 90 art. 78 .......................................... 83, 90 art. 79 .......................................... 56, 91 art. 80 ........................................ 55, 134 arts. 81–83 ................................... 56, 83 art. 81 .........................83, 146, 165, 166 art. 82 .........................84, 165, 167, 175 art. 83 ................................ 84, 165, 167 art. 84 ...................................... 109, 147 arts. 89, 90 .........................56, 109, 110, 147, 1266 art. 91 .......................21, 109, 110, 1266 art. 91(1) ....................................... 1267

xxiv

art. 92 ...................7, 56, 109, 111, 1266 art. 93 ...................................... 109, 111 art. 94 .............................................. 109 arts. 95–116 ..................................... 352 art. 95 .................56, 147, 148, 353, 453 art. 96 ...............................148, 353, 453 art. 97 ...................................... 535, 560 art. 98 ................................ 56, 535, 564 art. 99 ........................................ 56, 535 art. 100 ........................7, 56, 536, 1265, 1268, 1270 art. 101 .................................... 533, 535 arts. 102–105 ........................... 451, 452 art. 102 ............................................ 460 art. 103 .................................... 353, 460 art. 104 ............................................ 578 art. 105 .................................... 460, 578 art. 106 .............................. 56, 404, 578 art. 107 .............................. 55, 146, 741 arts. 108, 109 ........................... 165, 253 art. 110 ............................................ 165 art. 114 ...................................... 56, 360 art. 114(1), (2) ................................. 466 art. 115 ............................................ 466 art. 116 ............................409, 466, 469, 473, 483, 484, 841 art. 116(1)–(13) ............................... 841 arts. 117–132 ........................... 826, 884 art. 117 .................................... 825, 832 art. 118 ............. 826, 832, 883, 885, 886 arts. 119–125 ................................... 834 art. 119 ...................................... 56, 148 art. 121 ............................................ 146 art. 126 .................................... 828, 836 art. 127 .................................... 829, 838 art. 127(1)................................ 828, 829 art. 127(2)......................... 830–830, 832 art. 128 .................................... 832, 891 art. 129(3)................................ 833, 861 art. 129 .............................920, 921, 959 art. 129(1), (2) ................................. 920 art. 129(3)................................ 920, 934 art. 130 ............................................ 832 art. 131 ....................469, 473, 484, 833, 837, 840, 841, 876, 889, 890, 908 art. 133 .......................................... 5, 55 art. 134 .................................. 36, 49, 55 art. 135 .................................. 4, 56, 360

TABLE OF LEGISLATION

art. 136 ............................................ 361 art. 137 .............................................. 56 art. 138 ...................................... 78, 536 arts. 139–143 ................................... 112 arts. 139–141 ................................... 112 arts. 142, 143 ................................... 113 arts. 144–146 ............77, 112, 113, 1265 arts. 147, 148 ............77, 112, 113, 1266 art. 149 .................................... 109, 111 art. 151 .................................... 165, 253 art. 153 .................................... 112, 113 art. 157 .............................................. 57 arts. 160–170 ................................... 308 art. 160 ............................................ 222 art. 161 ............................................ 409 art. 164 ...................................... 78, 408 arts. 165–170 ................................... 856 art. 165 ............................................ 833 art. 169 .............................222, 240, 408 art. 170 .....................222, 240, 241, 409 art. 171 .....................222, 240, 241, 308 art. 172 ............................................ 308 art. 172(2)........................................ 832 art. 173 ............................................ 308 art. 175 ............................................ 834 art. 178 .............................................. 78 art. 180 ...........................56, 1320, 1321 art. 181 .......................................... 1255 art. 184 .......................................... 1088 Law of the PRC (People’s Republic of China) on Earthquake Preparedness and Disaster Mitigation— art. 48 ............................................ 1176 Legislation Law of China (adopted at 3rd Session of the 9th National People’s Congress) 15 March 2000, effective 1 July 2000, amended 15 March 2015 ......................... 34, 35 art. 7 .................................................. 34 art. 45 ................................................ 36 arts. 65, 72, 78, 80 ............................. 35 Marine Insurance Act 1906— s. 19 ................................................. 888 s. 53(1) ............................................ 891 Maritime Code of PRC (People’s Republic of China) 1992

(including Marine Insurance Contract Law) adopted at 28th Meeting of Standing Committee of 7th NPC 7 November 1992, effective 1 July 1993 ....................................... 38, 416 Ch. 12................................................ 38 ss. 1–5 ................................................ 38 arts. 216–256 ..................................... 38 art. 218(2)........................................ 452 art. 234 ............................................ 891 Metrology Law of the PRC (People’s Republic of China), adopted at 14th Session of the Standing Committee of 12th NPC of China, 24 April 2015 ......... 42 New York Insurance Law (2013)— §3420(a)(2), (b)(1) ......................... 1211 Organic Law of the People’s Court (adopted 1954, amended 1979 & 1983) .................. 36 People’s Mediation Law of the PRC (People’s Republic of China), adopted 28 August 2010, in force January 1 2011 ..................1314, 1315 art. 31 .................................. 1314 art. 33 .................................. 1315 Real Right Law .................................... 629 Road Traffic Safety Law of the PRC adopted 28 October 2003, in force 1 May 2004, amended 22 April 2011 ............. 49, 1189–1192, 1194, 1215 art. 17 ............... 1189, 1190, 1195, 1215 art. 75 ............................................ 1216 art. 76 ......................... 1190–1192, 1211 art. 119(5)...................................... 1190 Securities Investment Fund Law of China ....................................... 791 Securities Law 2019 ............................ 604 Securities Law of China, adopted at 30th Meeting of the Standing Committee of the Seventh National People’s Congress,

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February 22, 1993, promulgated by Order No. 68 of the President of the People’s Republic of China, in effect 22 February 1993........ 741, 791 Social Insurance Law of the People’s Republic of China, enacted 28 October 2010, in force 1 July 2010 ................................ 3, 1036

Ch. 2 ............................................. 1036 art. 2 .................................................... 3 Tort Law, see Tort Law under the Civil Code— Trust Law .................................... 629, 641 War Damage Act (UK) 1941 ............. 1193

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Interpretation of the provisions of the Insurance Law in respect of Insurance Agents and Insurance Brokers by the National People’s Congress of China ................ 891, 894 Interpretation of the Supreme People’s Court (SPC) on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damage in Road Traffic Accidents (the Interpretation on Compensation for Damages) adopted at the 1556th session of the Judicial Committee of the Supreme People’s Court 17 September 2012 in force 21 December 2012 ........................1191, 1192, 1194 art. 14 ............................................ 1192 art. 15 ............................................ 1192 art. 19 ............................................ 1192 art. 20 ............................................ 1194 Interpretation on Compensation for Damages ..................................... 1212 art. 2 .............................................. 1196 art. 16 ............................................ 1213 art. 17 ............................................ 1199 art. 18 ...................................1205, 1212 art. 19 ...................................1195, 1197 art. 21(3) ....................................... 1195 art. 25 ...................................1212, 1213 Notice of the Supreme People’s Court (SPC) on Issuing Several Opinions on Further Implementing the Work Principle of “Giving Priority to Mediation and Combining Mediation with

Judgment”, issued 7 June 2010 ........................................... 1307 Notice of the Supreme People’s Court (SPC) on Issuing the Overall Plan on Expanding the Pilot Reform on the Link-up of Litigation and Non-litigation Mechanism for Resolution of Contradiction and Disputes 2012 .............................. art. 10 .................................. 1314 Opinions of the Supreme People’s Court (SPC) and the China Insurance Supervisory Commission on Promoting the Construction of the Mechanism of Linking Litigation and Mediation for Insurance Disputes Nationwide in China 2016 .................. s. 1(2) ............................................ 1309 ss. 4–6 ............................................ 1311 s. 7 ................................................. 1312 s. 9.................................1310, 1312, 1313 s. 9(4) ............................................ 1315 s. 10 ......................................1310, 1313 s. 10(2) .......................................... 1310 s. 11 ............................................... 1316 Opinions of the Supreme People’s Court (SPC) on the People’s Court Further Deepening of Reform on MultiMechanisms for Dispute Resolution, issued 28 June 2016.......... 1307, 1315 Provisions of the Supreme People’s Court (SPC) Concerning Trying Civil Cases Relating to People’s Mediation Agreement, published 5 September 2002, in effect 1 November 2002 ....................... 1306

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Provisions of the Supreme People’s Court (SPC) on People’s Court Invited Mediation, adopted 23 May 2016, in effect 1 July 2016.......... 1307 arts. 3, 5......................................... 1311 art. 6 .............................................. 1310 arts. 12, 13 ..................................... 1312 art. 14 ...................................1311, 1317 art. 17 ............................................ 1308 arts. 19, 20 ..................................... 1315 arts. 23, 24 ..................................... 1314 art. 25 ...................................1314, 1316 art. 25(2) ....................1309, 1313, 1317 Provisions of the Supreme People’s Court (SPC) on Several Issues Concerning the Civil Mediation Work of the People’s Court, issued 16 September 2004 .......................... 1307 arts. 4, 17 ....................................... 1308 art. 18 ............................................ 1314 Provisions on Civil Litigation Evidence enacted by the Supreme People’s Court, Fa Shi No. 19 2019, enacted 25 December 2019, in force 1 May 2020 ..........954, 956, 958 art. 40(1) ..................................954–957 art. 41 .............................................. 959 Several Opinions of the SPC on Establishing and Improving the Link-up of Litigation and Nonlitigation Mechanism for Resolution of Contradiction and Disputes 2009 ...................... 1315 Several Opinions of the SPC on Further Displaying the Positive Roles of Litigation Mediation in Building of a Harmonious Socialist Society, issued 1 March 2007 ........................................... 1307 Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry 2014; State Council No. 29; issued & in force 10 August 2014 ..............46, 119, 189, 391, 963, 965, 1037, 1038, 1059, 1088, 1160, 1161, 1253

Pt. 2(4) .......................................... 1037 Pt. 2(4) .......................................... 1038 s. 6 ................................................... 964 s. 10 ............................................... 1161 ss. 11, 12........................................ 1089 Several Opinions of the Supreme People’s Court (SPC) on Further Displaying the Positive Roles of Litigation Mediation in the Building of a Harmonious Socialist Society 2007— art. 2 .............................................. 1306 Some Provisions of the Supreme People’s Court on Evidence in Civil Procedure 2001— art. 67 ............................................ 1309 SPC Interpretation I. 2009 on Certain Issues Concerning the Application of the Insurance Law of the PRC (published 14 September 2009, in force 1 October 2009.................. 47 Interstation 1...................................... 47 SPC Interpretation II. 2013 on Certain Issues Concerning the Application of the Insurance Law of the PRC (published 6 May 2013, in force 8 June 2013 .................................... 47 art. 3 ................................................ 841 art. 5 ................................................ 888 SPC Interpretation III. 2015 on Certain Issues Concerning the Application of the Insurance Law of the PRC (published 25 November 2015, in force 1 December 2015 .............. 48 SPC Interpretation IV. 2018 on the application of the Insurance Law (adopted at 1738th session of Judicial Committee of the Supreme People’s Court, published 14 May 2018, effective 1 September 2018................. 48, 1210 arts. 1–5 ............................................. 48 art. 1 .................................................. 48 art. 4 .................................................. 48 art. 6 .................................................. 48 arts. 7–13 ........................................... 48 arts. 14–20 ............................... 48, 1210 art. 15 ...................................1210, 1211 SPC Interpretation on Certain Issues Concerning the Application of

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Law in the Trial of Cases on Compensation for Damages in Road Traffic Accidents (adopted at 1556th session of Judicial Committee of the SPC. 17 September 2012, in force 21 December 2012 ......................... 49 SPC Interpretation on Compensation for Damages 2012 .............................. art. 18 ...................................1212, 1213 art. 16 ............................................ 1213 art. 25 ...................................1212, 1213 SPC Interpretations Concerning the Application of the Civil Procedure

Law of the People’s Republic of China, issued 18 December 2014, in force 4 February 2015 ........... 1307 Ch. 4 (mediation)........................... 1307 arts. 142–151 ................................. 1307 art. 149 .......................................... 1314 SPC Stipulation on the Judicial Explanation (2007 No. 12) — art. 5 .................................................. 47 art. 6 .................................................. 47 Supreme People’s Court Provisions on Civil Litigation Evidence 2019, see Provisions on Civil Litigation Evidence enacted by the Supreme People’s Court—

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Accounting Standards for Enterprises No. 26 − Reinsurance Contracts, enacted by the Ministry of Finance of China (Ministry of Finance No. 3) 15 February 2006 .............................. 452 Actuarial Provisions on Individual Participating Insurance enclosed in the Notice on Issuing the Actuarial Provisions on New-type Personal Insurance Products, Bao Jian Fa No. 67, 2003 ........................ 410, 451 Administrative Measures for Chief Actuaries of Insurance Companies (2010 Amendment) issued by CIRC Order No. 3, 28 September 2007, amended according to Decision of CIRC on Amending Some Rules by CIRC Order No. 10, 3 December 2010 ..................................... 199, 449 Administrative Measures for the Administration of Equity in Insurance Companies 2018, see Measures for the Administration of Equities of Insurance Companies— Administrative Measures for the Indirect Investment of Insurance Funds in Infrastructure Projects (The Measures 2016), issued by CIRC Order No. 2 on 14 June 2016, & in force 1 August 2016 ......629, 641, 646, 647, 651, 653, 659, 661 arts. 1–4 ........................................... 641 arts. 5–10 ......................................... 642 arts. 11–13 ....................................... 643 art. 13 .............................................. 657 arts. 14, 15 ....................................... 644 arts. 16–19 ....................................... 645 arts. 20–23 ....................................... 646

art. 22 .............................................. 651 art. 24 .............................................. 647 arts. 25–28 ....................................... 648 arts. 29, 30 ....................................... 649 arts. 31–34 ....................................... 650 art. 31(3) ......................................... 650 arts. 35–37 ....................................... 651 arts. 38–41 ....................................... 652 arts. 42–44 ....................................... 653 arts. 45–49 ....................................... 654 art. 46(3) ......................................... 654 arts. 50–52 ....................................... 655 arts. 53–55 ....................................... 656 art. 55(3) ......................................... 657 arts. 56–59 ....................................... 657 arts. 60–64 ....................................... 658 arts. 65–70 ....................................... 659 arts. 71–80 ....................................... 660 art. 82 .............................................. 661 arts. 83, 84 ....................................... 662 Administrative Measures for the Market Access of Branch Offices of Insurance Companies, the CIRC Order No. 20 (2013) .....131, 134, 142 Administrative Measures on Information Disclosure of Insurance Companies (the CIRC Order No. 7 (2010), repealed by Measures for the Administration of the Information Disclosure by Insurance Companies 2018 (The Measures 2018)........... 321 Administrative Provisions on the Postholding Qualifications of Directors, Supervisors and Senior Managers of Insurance Companies............ 501, 509 Administration Rules of Capital Guarantee Funds of Insurance Companies (CIRC), 3 April 2015 ................... 535

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TABLE OF REGULATIONS

Application Guideline No. 1 for the Internal Control of Insurance Funds – Bank Deposits 2015 ........ 783 art. 2 ................................................ 783 arts. 3–7 ........................................... 784 arts. 8–15 ......................................... 785 arts. 16–22 ....................................... 786 Application Guideline No. 2 for the Internal Control of Insurance Funds – Fixed Return Investment 2015 ............................................. 787 arts. 2–5 ........................................... 787 arts. 6–12 ......................................... 788 arts. 13–15 ....................................... 789 arts. 16–22 ....................................... 790 arts. 23, 24 ....................................... 791 Application Guideline No. 3 for the Internal Control of Insurance Funds – Stocks and Stock Fund 2015 ............................................. 791 arts. 2–5 ........................................... 791 arts. 6–10 ......................................... 792 arts. 11–15 ....................................... 793 art. 16 .............................................. 794 arts. 17–22 ....................................... 795 arts. 23–26 ....................................... 796 Articles of Association of the Beijing Insurance Intermediary Association (BIIA)......................................... 1329 art. 6 .............................................. 1328 art. 36 ............................................ 1328 Articles of Association of the Insurance Asset Management Association of China (IAMAC) .......................... 1326 arts. 3, 6......................................... 1325 Articles of Association of the Insurance Association of China (IAC) ......... 1323 art. 2 .............................................. 1321 arts. 3, 6......................................... 1322 arts. 7, 8......................................... 1323 arts. 9, 10 ....................................... 1324 art. 18 ............................................ 1321 Basic Contents of the Notification of Importance Information on Life Insurance for Insurance Application (The Basic Contents), Bao Jian Fa No. 68, 2009 ........................ 475, 479

ss. 1, 2 ............................................. 479 s. 3–6 ............................................... 480 Basic Rules for Insurance Adjusting (Basic Rules 2018) issued by the CBIRC, the current banking and insurance regulatory authority, Yin Bao Jian Fa No. 21, issued & in effect 2 May 2018 .... 919, 943–945, 949, 952, 953, 957, 959 arts. 2, 3........................................... 944 arts. 4–6 ........................................... 945 arts. 7............................................... 946 arts. 8, 9................................... 946, 956 arts. 10–13 ....................................... 947 art. 11 .............................................. 957 arts. 14–16 ....................................... 948 arts. 17–19 ....................................... 949 art. 20 ...................................... 949, 953 arts. 21, 22 ....................................... 950 art. 23 ...................................... 950, 957 arts. 24–27 ....................................... 951 arts. 28–30 ....................................... 952 art. 32 .............................................. 944 Basic Rules for Insurance Companies’ Critical Illness Insurance Services for Urban and Rural Residents (for Trial Implementation), Bao Jian Fa No. 86, 9 October 2016 ..................................1012, 1016 arts. 1–5 ......................................... 1016 arts. 6–9 ......................................... 1017 arts. 10–15 ..................................... 1018 arts. 16, 17 ..................................... 1019 arts. 18–21 ..................................... 1020 arts. 22–27 ..................................... 1021 arts. 28–31 ..................................... 1022 Basic Service Standards for Public Insurance Adjusting Institutions, Bao Jian Fa No. 3, 2013 ............... 944 Basic Standards for Insurance Companies’ Critical Illness Insurance Services for Urban and Rural Residents (for Trial Implementation) 2016, see Basic Rules for Insurance Companies’ Critical Illness Insurance Services for Urban and Rural Residents (for Trial Implementation) 2016—

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CBIRC (China Banking and Insurance Regulatory Commission)— CBIRC Guiding Opinions, see Notice of the CBIRC on Issuing the Guiding Opinions on the Implementation of Comprehensive Reform of Motor Vehicle Insurance— CIRC (China Insurance Regulatory Commission)— Comprehensive Commercial Motor Vehicle Insurance Clauses of the Ping An Insurance Company .................................... 1222 Compulsory Motor Vehicles Insurance Clauses ....................................... 1321 Compulsory Motor Vehicle Traffic Accident Liability Insurance Regulation (adopted at executive meeting No. 127 of State Council 1 March 2006, in force 1 July 2006, amended 30 March 2012, 17 December 2012 & 6 February 2016 ...............................23, 44, 1191, 1204, 1207, 1209, 1215 Chs. 1–5................................... 44, 1191 art. 3 ...........................1199, 1200, 1232 art. 2 .....................................1189, 1194 art. 4 ..................................... 1192–1194 arts. 5–9 ................................1192, 1193 art. 5 (2006) ............................ 44, 1191 art. 5 (2012) ............................ 44, 1191 art. 6 .............................................. 1204 art. 6, Standard Clauses 1–27......... 1204 clse. 12–17 ..................................... 1206 clse. 18–20 ..................................... 1207 clse. 22 ..................................1208, 1232 clse. 23 ........................................... 1209 clse. 24 ........................1209, 1216, 1217 clse. 27 ..................................1207, 1209 art. 10 .........................1192, 1194, 1202 art. 10 (2016) .................................... 10 art. 11 ............................................ 1200 art. 14 ............... 1201, 1202, 1209, 1232 art. 15 ............................................ 1209 art. 16 ............................................ 1208 art. 16(2) ....................................... 1201 art. 17 ............................................ 1202 art. 21 ............................................ 1205 art. 22 .........................1197, 1205, 1212 art. 23 ............................................ 1197

art. 28 ...................................1206, 1207 arts. 29, 32 ..................................... 1208 art. 38 ............................................ 1194 art. 39 ...................................1194, 1217 art. 42 ................................... 1195–1197 art. 42(2) ....................................... 1195 art. 43 (2012) .......................... 44, 1191 arts. 1208–1217.............................. 1191 Decision of the CIRC on Amending the Interim Measures for the Administration of the Utilization of Insurance Funds, CIRC Order No. 3 (2014) repealed ........ 579 Decision of the CIRC on Amending the Provisions on the Supervision and Administration of Insurance Brokerage Institutions, CIRC Order No. 6, issued 27 April 2013 (repealed by Provisions on the Supervision and Administration of Insurance Brokers 2018). ...... 885, 894 Decisions of the Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC) 12 November 2013) ................................. s. 12 ............................................... 1160 Deposit Insurance Regulation (State Council Order No. 660) 2003, as adopted at 67th executive meeting of State Council 29 October 2014, in force on 1 May 2015 .................. 44 art. 3 .................................................. 45 arts. 5, 6............................................. 45 art. 19 ................................................ 45 Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds (The detailed Rules 2012), Bao Jian Fa No. 93, (CIRC) issued & in force 12 October 2012 .............................580, 715, 730, 736, 739, 740 arts. 2, 3........................................... 730 arts. 4, 5........................................... 731 art. 6 ........................................ 731, 734 arts. 7, 8........................................... 732 arts. 9–11 ......................................... 733 art. 11(1)–(3) ................................... 734

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TABLE OF REGULATIONS

art. 12 .............................................. 734 arts. 13–15 ....................................... 735 arts. 16–22 ....................................... 736 arts. 23–29 ....................................... 737 arts. 30, 31 ....................................... 738 arts. 32, 33 ....................................... 739 Annex. 1 ........................... 733–735, 740 Annex. 2 .......................................... 738 Detailed Rules for the Implementation of the Measures for the Administration of the Reserves of Non-life Insurance Business of Insurance Companies (for Trial Implementation), Bao Jian Fa No. 10, 2 February 2005 ..................................... 568, 570 art. 2 ................................................ 568 arts. 3–9 ........................................... 569 arts. 10–12 ....................................... 570 Detailed Rules for the Implementation of the RAFFIC (The Implementation Rules 2019), CIRC Order No. 4 (2004) 13 May 2004, amended by Decision of CIRC on amending Some Rules by CIRC Order No. 10 (2010) 3 December 2010, by Decision of the CIRC Order No. 4 (2018) to amend Four Sets of Rules Including the Detailed Rules for the Implementation of the RAFFIC, 13 February 2018, and by CBIRC Order No. 4 (2019) 29 November 2019 .............. 121, 129, 131–134, 142 art. 3 (2019) ............................ 131, 132 art. 4 ................................................ 133 art. 5 ........................................ 131, 133 art. 5(2) ........................................... 133 art. 6 ........................................ 131, 133 arts. 9–14 ......................................... 123 art. 15 ...................................... 123, 132 art. 15 (2019) .................................. 133 art. 16 (2018) .................................. 133 arts. 17–22 ....................................... 124 art. 23 .............................................. 125 art. 25(3) ......................................... 131 art. 25 (2019) .................................. 131 art. 27–30 ........................................ 128 art. 31 ...................................... 128, 129 art. 32 .............................................. 129

Earthquake Commission Regulations (New Zealand) 1993 ..................................1183, 1184 reg. 3 ............................................. 1185 reg. 4 ............................................. 1184 reg. 10............................................ 1185 Emergency Response Plan in the Insurance Industry (ERP Rules) ..........................751–757 Financial Rules for Financial Enterprises .................................. 1161 Fire Accident Investigation Regulations (Ministry of Public Security) 30 April 2009 ............................................. 955 art. 5 ................................................ 955 General Principles of Agriculture Insurance Service (Insurance Association of China, T/IAC 0001-2016) 1 November 2016 ..................................1111, 1138 s. 1 ................................................. 1138 ss. 3, 4 ........................................... 1139 s. 5 ................................................. 1140 s. 6.1 .............................................. 1140 s. 6.1.1 ........................................... 1140 s. 6.1.2(a) ....................................... 1140 s. 6.1.2(b) ...................................... 1141 s. 6.1.3 ........................................... 1141 s. 6.2 .............................................. 1141 s. 6.2.1 ........................................... 1141 s. 6.2.1(a) ....................................... 1141 s. 6.2.2–2.3 .................................... 1141 s. 6.2.4, 5 ....................................... 1142 s. 6.3.1, 2 ....................................... 1142 s. 6.3.3 ........................................... 1143 s. 6.4, 5 .......................................... 1143 s. 7.1 .............................................. 1143 s. 7.2 .............................................. 1144 s. 7.2.1, 2 ....................................... 1144 s. 7.2.3–5 ....................................... 1145 s. 7.3 .............................................. 1145 s. 7.4–6 .......................................... 1146 s. 7.7 .............................................. 1147 s. 7.7.1, 2 ....................................... 1147 s. 7.8 .............................................. 1147 s. 8 ................................................. 1147 ss. 9, 10 ......................................... 1147

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Guidance on Promoting the Pilot Work for Establishing A Quick Insurance Contract Dispute Resolution Mechanism (CIRC), issued 2007 ........................................... 1305 Guide to Custody of Stock Assets of Insurance Companies (for Trial Implementation), Bao Jian Fa No. 16, issued by CIRC 8 November 2004, in force 17 February 2005 ..........597, 602, 614 arts. 1–4 ........................................... 615 art. 5 ........................................ 615, 617 art. 6(4), (7) ..................................... 617 art. 7 ................................................ 616 arts. 8–12 ......................................... 617 arts. 13, 14 ....................................... 618 arts. 15–20 ....................................... 619 arts. 21–27 ....................................... 620 art. 28 .............................................. 615 Guide to Risk Control on Utilization of Insurance Funds, Bao Jian Fa No. 43, 2004 ........................ 599, 605 Guide to the Clinical Diagnosis and Treatment of Persons Injured in Road Traffic Accidents ............ 1219 Guideline for the Risk Control of Insurance Funds (for Trial Implementation), Bao Jian Fa No. 43, issued by the CIRC 28 April 2004 (abolished) ............. 764 Guidelines for Small-Sum Insurance Claim Settlement Services (for Trial Implementation), Bao Jian Xiao Bao No. 201, issued & in effect 24 October 2015........................... 520 arts. 2–7 ........................................... 521 arts. 8–10 ......................................... 522 arts. 11–16 ....................................... 523 arts. 17–19 ....................................... 524 Guidelines for the Administration of Indirect Investment of Insurance Funds in Infrastructure Debt Investment Plans (Trial Implementation), Bao Jian Fa No. 53, 2007 ................................ 678 Guidelines for the Bylaws of Insurance Companies 2017; Bao Jian Fa No. 36 [2017], issued & in force 24 April 2017 ................................. 88

Guidelines for the Determination of Misleading Sales of Personal Insurance; Bao Jian Fa No. 87 (2012) ............................................ 50 Guidelines for the Development of Insurance Products by Property Insurance Companies, Bao Jian Fa No. 115; Notice on issuing the Guidelines released on 30 December 2016, in effect 1 January 2017 ............................. 412 arts. 3, 5, 6....................................... 412 arts. 7, 8........................................... 413 arts. 9–12 ......................................... 414 arts. 13–16 ....................................... 415 arts. 17–22 ....................................... 416 arts. 23–29 ....................................... 417 arts. 30–35 ....................................... 418 arts. 36–41 ....................................... 419 arts. 42–46 ....................................... 420 arts. 47–52 ....................................... 421 Guidelines for the Establishment of Infrastructure Debt Investment Plan Products (The Guidelines) Bao Jian Fa No. 41, 2009 ............. 678 Guidelines for the Internal Audit of Insurance Companies (for Trial Implementation), Bao Jian Fa No. 26 issued by CIRC 9 April 2007 ..................................... 224, 726 Guidelines for the Professional Ethics of Public Insurance Adjusting Practitioners, Bao Jian Fa No. 143, 2004............................... 944 Guidelines for the Risk Control in the Use of Insurance Funds (for Trial Implementation), Bao Jian Fa No. 43, 2004 ............. 717 Guidelines for the Risk Management of Insurance Companies (for Trial Implementation), Bao Jian Fa No. 23 (2007) ............................... 275 Guidelines of the CBIRC on Strengthening the Development of Consumer Rights and Interests Protection System and Mechanism in Banking and Insurance Institutions, Yin Bao Jian Fa No. 38, in force 4 November 2019 ............................................. 1267

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Guidelines of the CIRC on Carrying out the Pilot Programmes on Elderly Reverse Mortgage Pension Insurance, Bao Jian Fa No. 53, issued & in force 17 June 2014 ..... 1038 Guidelines on Carrying out the Pilot Programme of the Elderly Housing Reverse Mortgage Pension Insurance (CIRC), Bao Jian Fa No. 53, issued & in force 17 June 2014 ....................1038, 1039, 1053–1056, 1059, 1060 Pt. 1 ............................................... 1053 Pt. 2 ............................................... 1054 Pt. 3 ............................................... 1055 Pt. 4 ............................................... 1056 Pt. 5 ............................................... 1057 Pt. 6 ............................................... 1059 Pt. 6(2), (3).................................... 1053 Guidelines on Developing Individual Tax-Deferred Commercial Pension Products (The Guidelines on TaxDeferred Pension Products 2018), jointly issued by the CBIRC, the Ministry of Finance, the Ministry of Human Resources and Social Security, and the State Administration of Taxation, Yin Bao Jian Fa No. 20, issued & in force on 25 April 2018 .......... 1061, 1062, 1067 Pts. 1, 2 ......................................... 1062 Pt. 3 ............................................... 1065 Guidelines on Strengthening the Development of Consumer Rights and Interests Protection System and Mechanisms in Banking and Insurance Institutions; (The Guidelines 2019), Yin Bao Jian Fa No. 38 (2019)..........50, 1284– 1286, 1295 s. 1 ................................................. 1286 s. 2 ................................................. 1288 s. 3 ................................................. 1290 ss. 4, 5 ........................................... 1291 s. 6 ................................................. 1293 s. 7 ................................................. 1294 s. 8 ................................................. 1295 Guiding Opinion on Regulating the Insurance Company

Corporate Governance Structure (CIRC), Bao Jian Fa No. 2, issued 5 January 2006 ............. 23, 195 s. 1 ................................................... 195 s. 2 ................................................... 196 s. 2(1), (2)........................................ 196 s. 2(3), (4)........................................ 197 s. 3 ................................................... 198 s. 4 ................................................... 199 s. 4(1)–(3) ........................................ 199 s. 5 ................................................... 200 s. 5(1), (2)........................................ 200 s. 6 ................................................... 201 s. 6(1)–(4) ........................................ 201 Guiding Opinions 2019, see Notice of Issuing the Guiding Opinions on Accelerating the High-Quality Development of Agriculture Insurance— Guiding Opinions on Carrying Out the Work of Critical Illness Insurance for Urban and Rural Residents; National Development and Reform Commission No. 2605, issued jointly by the National Development and Reform Commission, Ministry of Health, Ministry of Finance, Ministry of Human Resources and Social Securities, Ministry of Civil Affairs and the CIRC on 24 August 2012 ..............50, 965, 995, 1001 Guiding Opinions on Regulating the Corporate Governance Structure of Insurance Companies (for Trial Implementation), Bao Jian Fa No. 2 (2006)................................. 269 Guangdong Province Forestry Insurance Claims Operation Regulations (Trial) 2012— art. 11 .............................................. 956 Guidance of Shandong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (the Guidance of the HPC of Guangdong Province 2011)................. art. 26 ............................................ 1199

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Implementation Rules 2019, see Detailed Rules for the Implementation of the RAFFIC— Insurance Agent Contract from Pingan Life Insurance Company Ltd ........ 836 clause 6(2) ............................... 838, 840 clause 6(4), (5)................................. 842 clause 6(6) ....................................... 841 clause 6(7), (8)................................. 842 clause 7(2) ....................................... 840 Insurance Association of China: General Principles of Agriculture Insurance Service, 1 November 2016 .......... 1090 Insurance Companies Provisions 2015, see Provisions on the Administration of Insurance Companies 2015— Insurance Company Solvency Supervision Rules ........................... 28 Insurance Company Solvency Supervision Rules No. 10: Comprehensive risk rating (classified supervision) 2015— art. 22(2) ......................................... 334 Interim Measures for Business Supervision and Administration of China Insurance Security Fund Co., Ltd (CIRC–CISFCL), Bao Jian Ting Fa No. 51, 7 July 2009 ................................. 1278 Interim Measures for Equity Investment with Insurance Funds, Bao Jian Fa No. 79, issued & in force (CIRC) 31 July 2010 ..........580, 641, 685, 824 Interim Measures for Naming Personal Insurance Products, CIRC No. 42 (2000) issued on 23 March 2000, repealed by Measures for the Administration of Insurance Clauses and Premium Rates of Personal Insurance Companies 2015 ............................................. 398 Interim Measures for Prohibiting Securities Frauds 1993.................. 604 Interim Measures for the Administration of Affiliated Transactions of Insurance Companies, Bao Jian Fa No. 24, 2007 .................... 816 Interim Measures for the Administration of Entrusted Investment of Insurance Funds ................... 675, 676

Interim Measures for the Administration of Financial Management of Insurance Companies’ Critical Illness Insurance for Urban and Rural Residents (CIRC) 2016 ........................................... 1022 art. 1 .............................................. 1022 arts. 2–10 ....................................... 1023 arts. 11–17 ..................................... 1024 arts. 18–24 ..................................... 1025 arts. 25–32 ..................................... 1026 arts. 33–36 ..................................... 1027 Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013, see Notice of the CIRC on Issuing the Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013— Interim Measures for the Administration of Insurance Companies’ Exit from the Market of Critical Illness Insurance for Urban and Rural Residents, and other regulatory rules, Bao Jian Fa No. 86, 9 October 2016 .......1012, 1030, 1033 arts. 1–6 ......................................... 1030 art. 6(3)–(6) ..........................1031, 1032 arts. 7, 8......................................... 1031 arts. 9–14 ....................................... 1032 arts. 15, 16 ..................................... 1033 Interim Measures for the Administration of Non-Insurance Subsidiaries of Insurance Companies 2014 (The Non-Insurance Subsidiaries Measures), Bao Jian Fa No. 78 (2014), issued & in force 28 September 201......................... 114 arts. 34–39 ....................................... 114 Interim Measures for the Administration of Old-Age Security Management Business (the CIRC No. 43, 2013 (repealed) ................................... 1040 Interim Measures for the Administration of Overseas Investment with Insurance Funds (The Measures 2007), (jointly enacted by the CIRC, the People’s Bank of

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China, and the State Administration of Foreign Exchange, CIRC Order No. 2) issued & in force 26 July 2007 .................580, 641, 675, 715–717, 721, 722, 725, 730, 736, 740 arts. 1–4 ........................................... 716 arts. 5–9 ........................................... 717 art. 9 ................................................ 731 arts. 10, 11 ............................... 718, 731 art. 12 ...................................... 719, 732 arts. 13–15 ....................................... 719 art. 16 .............................................. 720 arts. 17, 18 ....................................... 721 art. 19 .............................................. 722 arts. 20–25 ....................................... 723 arts. 26–31 ....................................... 724 arts. 32–35 ....................................... 725 arts. 36–41 ....................................... 726 art. 37 .............................................. 641 arts. 42–46 ....................................... 727 arts. 47–52 ....................................... 728 arts. 53–56 ....................................... 729 arts. 57–59 ....................................... 730 Interim Measures for the Administration of Related Party Transactions of Insurance Companies (repealed by The Measures 2019), Bao Jian Fa No. 24 (2007).......................... 254 Interim Measures for the Administration of Risk Adjustment of Insurance Companies’ Critical Illness Insurance for Urban and Rural Residents 2016, Bao Jian Fa No. 86, 9 October 2016 .......................... 1012 arts. 1–3 ......................................... 1027 arts. 4–6 ......................................... 1028 art. 7 .....................................1028, 1029 arts. 8–13 ....................................... 1029 art. 10 ............................................ 1030 Interim Measures for the Administration of Stock Investments of Insurance Institutional Investors (The Measures 2004), (jointly by CIRC and CSRC No. 12,), issued & in effect 24 October 2004 ...... 23, 580, 597, 598, 608, 610 arts. 1, 2........................................... 598 arts. 3–7 ........................................... 599 arts. 8, 9........................................... 600

arts. 10–13 ....................................... 601 art. 14 ...............................601, 608, 623 arts. 15, 16 ....................................... 602 art. 18 ...................................... 602, 603 arts. 19–21 ....................................... 603 arts. 22–27 ....................................... 604 arts. 28–33 ....................................... 605 arts. 34–39 ....................................... 606 arts. 40, 41 ....................................... 607 art. 41(10)........................................ 607 arts. 42–50 ....................................... 608 arts. 51, 52 ....................................... 609 arts. 53–59 ....................................... 610 Interim Measures for the Administration of the Health Insurance Business with Individual Tax Preferences, see Notice of the CIRC on Issuing the Interim Measures for the Administration of the Health Insurance Business with Individual Tax Preferences (the Measures 2015) — Interim Measures for the Administration of the Individual Tax-Deferred Commercial Pension Insurance Business, Yin Bao Jian Fa No. 23, 2018 .............................. 1077 Interim Measures for the Administration of the Office Qualification Examination for Directors, Supervisors and Senior Executives of Insurance Institutions (The Interim Measures 2016), Bao Jian Fa No. 6i, ssued by the CIRC 18 January 2016 ........... 179 arts. 2–5 ........................................... 179 arts. 6–12 ......................................... 180 arts. 13–21 ....................................... 181 arts. 22–26 ....................................... 182 Interim Measures for the Administration of the Underwriting and Claims Settlement of Agriculture Insurance; Bao Jian Fa No. 31 (2015) ..........................50, 1098, 1138 Interim Measures for the Administration of the Utilization of Individual TaxDeferred Commercial Pension Insurance Funds, Yin Bao Jian Fa No. 32, issued & in force 22 June 2018 .....................1077, 1078

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arts. 1–4 ......................................... 1077 arts. 3, 4......................................... 1078 arts. 5–9 ......................................... 1077 art. 5 .............................................. 1078 art. 6 .............................................. 1079 arts. 7, 8................................1078, 1079 arts. 10–14 ............................1077, 1080 arts. 15–21 ..................................... 1077 arts. 15–18 ..................................... 1081 arts. 19–21 ..................................... 1082 art. 22 ...................................1077, 1082 arts. 23–29 ............................1077, 1083 arts. 30–36 ..................................... 1077 arts. 30–32 ..................................... 1084 arts. 33–35 ..................................... 1085 Interim Measures for the Administration of the Utilization of Insurance Funds, promulgated by the CIRC Order No. 9, 30 July 2010, in force 31 August 2010, amended by CIRC Order No. 3, 4 April 2014 (repealed)..............578, 579, 621 Interim Measures for the Administration of Transfer of Insurance Business by Insurance Companies ............... 359 Interim Measures for the Administration of Use of Insurance Funds ............ 629 Interim Measures for the Bidding of Insurance Companies for the Critical Illness Insurance for Urban and Rural Residents, Bao Jian Fa No. 86, 9 October 2016 ................. 1012–1014 arts. 1–6 ......................................... 1013 arts. 7–11 ....................................... 1014 arts. 12–16 ..................................... 1015 art. 17 ............................................ 1016 Interim Measures for the Financial Management of Insurance Companies’ Critical Illness Insurance for Urban and Rural Residents, Bao Jian Fa No. 86, 9 October 2016 .......................... 1012 Interim Measures for the Investment of Insurance Funds in Bonds (The Measures 2012), (CIRC), Bao Jian Fa No. 58, issued & in force 16 July 2012 ........... 579, 585, 586, 590, 594, 602

arts. 1–4 ........................................... 586 arts. 6–9 ........................................... 587 art. 10 .............................................. 588 arts. 11–14 ....................................... 590 arts. 15–20 ....................................... 591 arts. 21–26 ....................................... 592 arts. 27–32 ....................................... 593 arts. 33–37 ....................................... 594 Interim Measures for the Investment of Insurance Funds in Equity, see Interim Measures for Equity Investment with Insurance Funds— Interim Measures for the Investment of Insurance Funds in Real Estate (The Interim Measures 2010), Bao Jian Fa No. 80, promulgated and implemented by CIRC 31 July 2010 ..................580, 629, 681 s. 2 ................................................... 629 Interim Measures for the Retrospective Administration of Insurance Sales Practices (The Measures 2017), Bao Jian Fa No. 54, issued 28 June 2017, in force 1 November 2017 ..........512, 514, 515 arts. 4, 5........................................... 512 art. 6 ........................................ 513, 514 art. 6(2) ........................................... 514 art. 7 ................................................ 513 arts. 8–12 ......................................... 514 arts. 13–16 ....................................... 515 Interim Measures for the Supervision of the Internet Insurance Business (CIRC), (The Measures 2015), Bao Jian Fa No. 69, in force 1 October 2015 ................1234, 1235, 1242, 1243, 1250 arts. 2, 3......................................... 1235 arts. 4, 5......................................... 1236 arts. 6–8 ......................................... 1237 art. 9 .............................................. 1238 arts. 10–12 ..................................... 1239 arts. 13–17 ..................................... 1240 arts. 18–22 ..................................... 1241 arts. 23–25 ..................................... 1242 art. 26 ...................................1242, 1243 arts. 27, 28 ..................................... 1235 Interim Measures for the Training Management of Directors,

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Supervisors and Senior Executives of Insurance Companies, Bao Jian Fa No. 27 (2008)........... 187, 188 Interim Measures of Premium Rate Floating for Compulsory Motor Vehicle Traffic Accident Liability Insurance, Bao Jian Fa No. 52, (2007) ............................ 1203 Interim Measures on the Administration of Concurrent-Business Insurance Agency, regulating part-time insurance agents (CIRC), 4 August 2000 ............................................... 835 Interim Provisions for the Administration of Insurance Asset Management Companies (The Interim Provisions 2011) formulated in CIRC Order No. 2, 21 April 2004, in force on 1 June 2004, amended 7 April 2011 ................................. 741 art. 3 ................................................ 741 arts. 4–7 ........................................... 742 art. 8 ........................................ 742, 743 arts. 9–13 ......................................... 743 arts. 14–16 ....................................... 744 arts. 17–22 ....................................... 745 arts. 23–26 ....................................... 746 arts. 27–31 ....................................... 747 arts. 32–40 ....................................... 748 arts. 41–44 ....................................... 749 arts. 45–52 ....................................... 750 Interim Provisions on the Administration of Infrastructure Debt Investment Plans (The Provisions 2012), Bao Jian Fa No. 92, promulgated and implemented by CIRC 12 October 2012 ............. 580, 678–681 arts. 7–20 ......................................... 678 Interim Regulations on the Administration of Insurance Enterprises 1985 enacted by State Council 3 March 1985 ......................................... 38, 39 art. 4 .................................................. 39 International Association of Insurance Supervisors, Insurance Core Principles (ICP) .......................... 1295 pl. 19 ............................................. 1295 pl. 19.11.1...................................... 1295

Market Access by Foreign Investors Special Administrative Measures for Foreign Investment Access (Negative List) (2018 Version) promulgated by the National Development and Reform Commission and the Ministry of Commerce 28 June 2018 .......... 132 Measures for Administrative Punishments; CBIRC Order No. 8 (2020), issued 15 June 2020, in effect 1 August 2020............. 78, 79 arts. 3, 4............................................. 79 art. 7 .................................................. 79 art. 8 .................................................. 80 Measures for Business Supervision and Administration of China Insurance Security Fund Co., Ltd (The Measures 2015), Bao Jian Ting Fa No. 79, 14 December 2015 ...........1278, 1282, 1284 arts. 3, 4......................................... 1278 arts. 3–11 ....................................... 1279 arts. 12–20 ..................................... 1280 arts. 21–26 ..................................... 1281 arts. 27–31 ..................................... 1282 arts. 31–37 ..................................... 1283 arts. 38–42 ..................................... 1284 Measures for Evaluating the Services of Personal Insurance Companies, Bao Jian Fa No. 73, (2013), replaced by Notice of the CIRC on Issuing the Measures for Evaluating the Services of Insurance Companies (for Trial Implementation) 2015................... 524 Measures for the Administration of Agriculture Insurance Premium Subsidies by the Central Treasury; Ministry of Finance No. 123, issued 19 December 2016, in force 1 January 2017 .................... 50, 1089, 1092, 1095, 1124 arts. 4–6 ......................................... 1124 art. 7 .............................................. 1125 art. 8(1), (3) ................................... 1125 art. 9 .............................................. 1126

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arts. 22–25 ....................................... 336 arts. 26–29 ....................................... 334 art. 29 .............................................. 351 art. 30(1), (2) ........................... 337, 338 art. 30(4) ......................................... 338 arts. 31–35 ....................................... 338 art. 36 ...................................... 338, 339 arts. 37–43 ....................................... 339 arts. 44–48 ....................................... 340 art. 46 .............................................. 351 art. 46(1) ......................................... 340 art. 46(2) ................................. 340, 342 art. 48 .............................................. 342 arts. 49–54 ....................................... 341 art. 50 .............................................. 348 art. 53(3) ......................................... 348 art. 55 .............................................. 336 arts. 56–72 ....................................... 342 arts. 62–65 ....................................... 343 art. 62 .............................................. 348 arts. 63–66 ....................................... 344 art. 66 ...................................... 343, 344 arts. 67–70 ....................................... 344 arts. 67, 69 ....................................... 348 arts. 71, 72 ............................... 344, 345 arts. 73–77 ....................................... 346 arts. 78–84 ....................................... 347 arts. 85–91 ....................................... 348 art. 92 .............................................. 349 Measures for the Administration of Foreign Insurance Institutions’ Representative Offices in China (The Measures for Representative Offices 2018), formulated by CIRC Order No 5, 12 July 2006, and amended by CIRC Order No 4, 13 February 2018 ..............................121, 135, 140 arts. 1, 2........................................... 121 arts. 3, 4........................................... 137 art. 5 ................................................ 135 arts. 6–9 ........................................... 136 arts. 10–17 ....................................... 137 art. 18(1), (2) ................................... 138 arts. 19–22 ....................................... 138 arts. 23–29 ....................................... 139 arts. 30–36 ....................................... 140 arts. 37–39 ....................................... 141 Measures for the Administration of Handling Complaints of Banking

Measures for the Administration of Approval and Recordation of Personal Insurance Products, CIRC Order No. 6 (2004) issued on 30 June 2004, repealed by Measures for the Administration of Insurance Clauses and Premium Rates of Personal Insurance Companies 2015 ............ 398 Measures for the Administration of Catastrophe Risk Reserve of Agricultural Insurance, Ministry of Finance No. 129, issued 8 December 2013, in force 1 January 2014 .................1089, 1096, 1114–1116 arts. 3, 5, 9, 10, 13 ......................... 1114 art. 14 ............................................ 1114 arts. 17, 19, 20 ............................... 1115 Measures for the Administration of Equities of Insurance Companies (The Equities Measures) CIRC Order No. 6 (2010), issued 4 May 2010 (repealed by Equities Measures 2018), amended by CIRC Order No. 4, 15 April 2014, and by CIRC Order No. 5, issued 2 March 2018, in force 10 April 2018 (repealed all previous CIRC’s regulatory documents in respect of regulation of equities of insurance companies) .............88, 123, 131, 132, 134, 330, 331, 334, 337, 338, 342, 347–351, 1258 arts. 1–5 ........................................... 331 art. 4 ................................................ 337 art. 6 ........................................ 332, 337 art. 7 ........................................ 332, 351 art. 8 .................................332, 333, 348 arts. 11 ..................................... 332, 333 art. 11(2) ......................................... 333 arts. 12, 13 ............................... 333, 348 art. 14 .............................................. 333 art. 15 ...............................333, 334, 348 arts. 16–18 ....................................... 334 arts. 19–20. 335 art. 20(1), (5) ................................... 336 art. 20(6), (7) ................................... 337 arts. 21–31. ...................................... 335

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arts. 4–6 ........................................... 434 art. 7 ................................................ 435 arts. 8–15 ......................................... 436 arts. 16–18 ....................................... 437 arts. 19, 20 ....................................... 438 arts. 21–23 ....................................... 439 art. 25 .............................................. 440 art. 25(1)–(5) ................................... 441 arts. 28–30 ....................................... 442 arts. 31–33 ....................................... 443 arts. 34, 35 ....................................... 444 Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies, CIRC Order No. 3, 30 December 2011, revised and implemented 19 October 2015...........361, 409, 412, 1065, 1066, 1260 arts. 3, 4........................................... 398 arts. 5–11 ......................................... 399 arts. 12–16 ....................................... 400 arts. 17–22 ....................................... 401 arts. 21–26 ....................................... 402 art. 21(2)–(7) ................................... 402 arts. 27–29 ....................................... 403 arts. 30–34 ....................................... 404 arts. 35–39 ....................................... 405 art. 37(3) ......................................... 409 arts. 40–42 ....................................... 406 arts. 43–46 ....................................... 407 arts. 48, 49 ....................................... 408 arts. 50–54 ....................................... 407 Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies, (The Measures 2010), CIRC Order No. 3, issued 5 February & in force 1 April 2010 ..... 361, 362–364, 366, 367, 369, 370, 372, 374, 378, 394, 1108, 1109, 1111 art. 2 ................................................ 362 arts. 4–7 ........................................... 362 art. 7 ................................................ 364 arts. 8–12 ......................................... 363 art. 10(1) ......................................... 363 arts. 13–16 ....................................... 364 art. 14 .............................................. 371 arts. 17–21 ....................................... 365

and Insurance Consumers, CBIRC Order No. 3, promulgated 14 January 2020, in force 1 March 2020 ....................... 50, 1267 Measures for the Administration of Health Insurance (first enacted by the CIRC 7 August 2006, in force 1 September 2006), CBIRC Order No. 3 (The Measures 2019), issued 31 October 2019, in force 1 December 2019 .........445, 962, 963, 966, 974, 976, 981, 983–987 arts. 1–72 ......................................... 974 art. 2 ................................................ 985 arts. 3–6 ........................................... 975 art. 4 ................................................ 986 arts. 7–12 ......................................... 976 arts. 13–19 ....................................... 977 art. 15 .............................................. 985 art. 20 ...................................... 978, 985 arts. 21–25 ....................................... 978 arts. 26–34 ....................................... 979 art. 28 .............................................. 986 arts. 31–33 ....................................... 986 art. 35 ...................................... 979, 986 art. 36 ...................................... 980, 986 arts. 37–41 ....................................... 980 art. 38 .............................................. 986 arts. 42–48 ....................................... 981 arts. 49, 50 ....................................... 982 arts. 51–56 ....................................... 983 art. 57 ...................................... 983, 986 arts. 58–64 ....................................... 984 art. 59 .............................................. 986 arts. 65–69 ....................................... 985 Measures for the Administration of Information Disclosure by Insurance Companies, Yin Bao Jian Fa No. 2 (2018)..........................349–351 Measures for the Administration of Information Disclosure of New-type Personal Insurance Products in 2009 (The Measures 2009), CIRC Order No. 3, issued 25 September 2009 in force 1 October 2009....... 429, 433, 437, 444, 1238 art. 2 ................................................ 433 art. 3 ........................................ 433, 434

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arts. 22–25 ....................................... 366 art. 22 .............................................. 372 arts. 24, 25 ....................................... 368 arts. 26–31 ....................................... 367 art. 30 .............................................. 369 arts. 32–36 ....................................... 368 arts. 37–41 ....................................... 369 art. 40 .............................................. 368 arts. 42–44 ....................................... 370 Measures for the Administration of Insurance Group Companies (For Trial Implementation), Bao Jian Fa No. 29 (2010), issued & in force 12 March 2010 ............................................. 105 arts. 1–3 ........................................... 105 arts. 4, 5........................................... 106 arts. 6, 7........................................... 107 arts. 8–15 ......................................... 108 art. 16 .............................................. 109 arts. 40–48 ....................................... 116 arts. 40–45 ....................................... 117 arts. 46–48 ....................................... 118 Measures for the Administration of Insurance Institutions’ Independent Directors, Yin Bao Jian Fa No. 35, 30 June 2018 ....... 197 Measures for the Administration of Insurance Permits (Measures of Permits) CIRC Order No. 1, 22 June 2007, in force 1 September 2007 ............143, 144, 157, 162, 844 arts. 1–4 ........................................... 157 art. 5 ........................................ 148, 158 arts. 6–8 ........................................... 158 art. 9 ........................................ 148, 158 arts. 10, 11 ....................................... 158 arts. 12–18 ....................................... 159 arts. 19–24 ....................................... 160 arts. 25–29 ....................................... 161 Measures for the Administration of Livestock Breeding Insurance Premium Subsidies by the Central Treasury 2008, Ministry of Finance No. 27, in effect 1 March 2008 (replaced by the Measures for the Administration of Agriculture Insurance Premium Subsidies

by the Central Treasury 2016, 1 January 2017) .......................... 1092 Measures for the Administration of Planting Insurance Premium Subsidies by the Central Treasury 2008, Ministry of Finance No. 26, in effect 1 March 2008 (replaced by the Measures for the Administration of Agriculture Insurance Premium Subsidies by the Central Treasury 2016, 1 January 2017) ................ 1092 Measures for the Administration of OldAge Security Management Business, Bao Jian Fa No. 73, Issued & in force 2015 ...........1040, 1042, 1052 Ch. 1 ............................................. 1040 arts. 1–6 ......................................... 1040 arts. 3–5 ......................................... 1041 Ch. 2 ............................................. 1040 arts. 7–34 ....................................... 1040 arts. 7–10 ....................................... 1041 arts. 11–13 ..................................... 1042 arts. 14–18 ..................................... 1043 arts. 19–21 ..................................... 1044 arts. 22–26 ..................................... 1045 arts. 27–29 ..................................... 1046 arts. 28–34 ..................................... 1047 Ch. 3 ............................................. 1040 art. 35 ...................................1040, 1047 arts. 36–41 ............................1040, 1048 art. 42 ...................................1040, 1049 Ch. 4 ............................................. 1040 arts. 43–53 ..................................... 1040 arts. 43–46 ..................................... 1049 arts. 47–49 ..................................... 1050 arts. 50–53 ..................................... 1051 Ch. 5 ............................................. 1040 arts. 54–57 ............................1040, 1052 Ch. 6 ............................................. 1040 arts. 58–60 ..................................... 1040 art. 59 ............................................ 1052 Measures for the Administration of Public Complaints, CBIRC Order No. 2, issued 14 January 2020, in force 1 March 2020 ................ 1267 Measures for the Administration of Related Party Transactions of Insurance Companies (The Measures 2019), Yin Bao Jian

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Fa No. 35, issued in force 25 August 2019 ............254, 259, 260, 263, 265–268 art. 2 ................................................ 254 arts. 4–9 ........................................... 267 art. 4 ................................................ 254 art. 5 ........................................ 254, 256 art. 5(1)–(3) ..................................... 255 art. 6 ........................................ 255, 256 art. 6(1)–(3) ............................. 254, 255 art. 6(4) ........................................... 254 arts. 7, 8........................................... 255 art. 9 ................................................ 256 arts. 10–18 ....................................... 267 art. 10 .............................................. 256 arts. 11, 12 ....................................... 257 art. 13 .............................................. 258 art. 14 ...................................... 258, 259 arts. 15, 16 ....................................... 258 arts. 17–24 ....................................... 259 arts. 19–37 ....................................... 268 art. 19 .............................................. 267 arts. 25–31 ....................................... 260 art. 29 .............................................. 267 arts. 32–35 ....................................... 261 arts. 36–38 ....................................... 262 arts. 38–48 ....................................... 268 art. 39 .......................................262–264 art. 40 .............................................. 262 arts. 41–44 ....................................... 263 arts. 45–47 ....................................... 264 arts. 48–53 ....................................... 265 arts. 49–59 ....................................... 268 arts. 54–57 ....................................... 266 arts. 58, 59 ....................................... 267 Measures for the Administration of the Bancassurance Business of Commercial Banks (The Measures of Bancassurance), Yin Bao Jian Ban Fa No. 179, (repealing all previous regulations in respect of bancassurance business) in force 1 October 2019 .............836, 873, 881 Chs. 1–6........................................... 857 art. 1 ................................................ 857 arts. 2–15 ......................................... 858 arts. 9–11 ......................................... 859 arts. 12–15 ....................................... 860 arts. 16–53 ....................................... 861

arts. 19–22 ....................................... 862 arts. 23–25 ....................................... 863 arts. 26–30 ....................................... 864 arts. 31, 32 ....................................... 865 arts. 33, 34 ....................................... 866 arts. 35–37 ....................................... 867 art. 38 ...................................... 868, 872 arts. 39–45 ....................................... 868 arts. 46, 47 ....................................... 869 arts. 48, 49 ............................... 869, 872 art. 50 ...................................... 870, 873 arts. 51, 52 ....................................... 870 arts. 53–56 ....................................... 871 arts. 57–62 ....................................... 872 arts. 63–67 ....................................... 873 art. 70 .............................................. 857 Measures for the Administration of the Formation of Overseas Insurance Institutions by Insurance Companies (The Measures 2015) CIRC Order No. 3 (2015), previously formulated by CIRC Order No. 7 (2006)..................... 98, 99, 103 arts. 4–6 ............................................. 99 art. 7 .................................................. 98 art. 9 .................................................. 99 art. 10 .............................................. 100 art. 11 ...................................... 100, 103 art. 12 .............................................. 100 arts. 13–18 ....................................... 101 arts. 19–25 ....................................... 102 art. 26 .............................................. 103 arts. 27–31 ....................................... 103 arts. 32, 33 ......................................... 99 art. 34 .............................................. 104 Measures for the Administration of the Handling of Complaints of Banking and Insurance Consumers (The Measures 2020), CBIRC Order No. 3, 2020 ...1296, 1300, 1303 arts. 2–5 ......................................... 1296 arts. 6–10 ....................................... 1297 art. 8 .............................................. 1303 arts. 11–14 ..................................... 1298 arts. 15–19 ..................................... 1299 art. 18 ............................................ 1303 arts. 20–24 ..................................... 1300 arts. 25, 26 ............................1301, 1304

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arts. 27–30 ..................................... 1301 arts. 28, 29 ..................................... 1304 arts. 31–39 ..................................... 1302 arts. 40, 41 ..................................... 1303 Measures for the Administration of the Information Disclosure by Insurance Companies 2018 (The Measures 2018), enacted by the CIRC 12 May 2010, amended by the CBIRC (Order. No. 2) 28 April 2018, in effect 1 July 2018 ............ 320, 321, 324, 326, 327 arts. 3–5 ........................................... 321 arts. 7–10 ......................................... 321 art. 7(2)–(6) ..................................... 324 art. 7(7), (8) ..................................... 325 arts. 11–13 ....................................... 322 arts. 14–19 ....................................... 323 arts. 20, 21 ....................................... 324 arts. 22–27 ....................................... 325 arts. 28–34 ....................................... 326 arts. 36, 37 ....................................... 327 Measures for the Administration of the Insurance Security Fund, formulated jointly by the CIRC, the Ministry of Finance, and the People’s Bank of China in 2008 (CIRC Order No. 2), issued & in force 11 September 2008 .........................536, 1265, 1268, 1277, 1278 art. 3 .............................................. 1270 arts. 4–8 ......................................... 1271 arts. 9–13 ....................................... 1272 arts. 14, 15 ..................................... 1273 art. 16 ...................................1270, 1274 art. 16(2) ....................................... 1274 arts. 17–19 ..................................... 1274 arts. 20–23 ..................................... 1275 arts. 24–26 ..................................... 1276 arts. 27–32 ..................................... 1277 arts. 33, 34 ..................................... 1278 Measures for the Administration of the Insurance Security Fund, issued 30 December 2004 ........... 1270 Measures for the Administration of the Special Reserve Fund for Urban and Rural Residents’ Earthquake Catastrophe

Insurance (The Measures 2017); Ministry of Finance No. 38, issued 2 May 2017, in force 1 June 2017 ......................... 50, 1161, 1168, 1171 arts. 2–4 ......................................... 1171 arts. 5–11 ....................................... 1172 arts. 12–20 ..................................... 1173 Measures for the Administration of the Utilization of Insurance Funds (The Measures 2018), 24 January 2018, by CIRC Order No. 1, in force 1 April 2018 .........................50, 571, 579, 611, 621, 692, 693, 714, 715, 764, 787, 824, 1077 arts. 2, 4........................................... 579 arts. 6–20 ......................................... 581 art. 7 ................................................ 584 arts. 10–14 ....................................... 582 arts. 12–31 ....................................... 592 arts. 15–19 ....................................... 583 art. 20 .............................................. 584 arts. 21–25 ....................................... 693 art. 26 .............................................. 692 arts. 27–29 ....................................... 694 arts. 30, 31 ....................................... 695 arts. 32–46 ....................................... 706 arts. 33–35 ....................................... 707 arts. 36–38 ....................................... 708 arts. 39–42 ....................................... 709 arts. 43–46 ....................................... 710 arts. 47–52 ....................................... 711 arts. 53–59 ....................................... 712 arts. 60–65 ....................................... 713 arts. 66–71 ....................................... 714 arts. 72–74 ....................................... 715 arts. 75, 76 ....................................... 579 Measures for the Corporate Governance Evaluation of Insurance Institutions with Legal Person Status (for Trial Implementation), Bao Jian Fa No. 112, issued by the CIRC 6 December 2015 ................... 71, 309 Measures for the Management of Reserves for Non-life Insurance Businesses of Insurance Companies (for Trial Implementation), (CIRC

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Order No. 13) 15 December 2004, in effect 15 January 2005 ..................................... 535, 565 arts. 2–9 ........................................... 565 arts. 10–14 ....................................... 566 arts. 15–20 ....................................... 567 arts. 21, 22 ....................................... 568 Measures for the Management of Social Relief Funds for Road Traffic Accidents (For Trial Implementation), (The SRF Measures), Order of the Ministry of Finance, CIRC, Ministry of Public Security, Ministry of Health, and Ministry of Agriculture No. 56, enacted 10 September 2009, in force 1 January 2010 ........................... 1215 arts. 1–40 ....................................... 1218 arts. 3–5 ......................................... 1219 arts. 6–11 ....................................... 1217 art. 12 ...................................1216, 1218 art. 12(3) ....................................... 1220 arts. 13–17 ..................................... 1218 arts. 18, 19 ..................................... 1219 arts. 20–29 ..................................... 1220 art. 24 ...................................1215, 1218 arts. 25, 26 ..................................... 1215 art. 30 ............................................ 1221 Measures for the Punishment of Illegal Conducts in the Intermediary Business of Insurance Companies (CIRC Order No. 4) issued 25 September 2009, & in force 1 October 2009 ............................ 826 Measures for the Supervision and Administration of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners, CIRC Order No. 3, issued by the CIRC 6 January 2013 (repealed by Provisions on the Supervision and Administration of Insurance Brokers 2018) ....................... 885, 894 Measures for the Supervision and Administration of Insurance Sales Personnel (CIRC Order No. 2) issued 6 January 2013, in effect 1 July 2013 ............. 468, 835 art. 2 ................................................ 468

art. 19 .............................................. 469 arts. 23, 24 ....................................... 469 arts. 25, 26 ....................................... 470 Measures of Permits, see Measures for the Administration of Insurance Permits— Measures of the China Insurance Regulatory Commission (CIRC) on the Implementation of Administrative Licensing, CIRC Order No. 4, 30 June 2004, in force 1 July 2004; amended by CIRC Order No. 2, 14 February 2014 (The 2014 version of the Measures has now been repealed by the Provisions of the CBIRC on the Implementation Procedures of Administrative Licensing, issued by CBIRC 24 May 2020 in force 1 July 2020, CBIRC Order No. 7 (Provisions of Licensing) ........... 143, 163, 369 Measures on Enterprise Annuities (which was issued by the Ministry of Human Resources and Social Security and the Ministry of Finance and came into effect on 1 February 2018 .................... 1036 Measures on the Participation of Insurance Funds in Financial Derivative Products ....................... 611 Memorandum of the Seminar Concerning Difficult Issues in Road Traffic Accident Disputes by the First Civil Court of the High People’s Court of Shanghai, 31 December 2011 ........................................... 1199 para. 11 .......................................... 1200 Model Clauses of IAC (Insurance Association of China), of Commercial Motor Vehicle Insurance of the Insurance Association of China (Model Clauses) 2012 ...................... 375, 378, 385, 387 Model Clauses of the Comprehensive Commercial Motor Vehicle Insurance (previously 2014), formulated by the IAC in

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2020 (The Model Clauses 2020) .................................1222, 1230 Ch. 1 ............................................. 1222 cl. 1................................................ 1222 cl. 6................................................ 1222 cls. 7–10 ......................................... 1223 cl. 11.....................................1223, 1224 cls. 12, 15, 18 ................................ 1224 cl. 20.............................................. 1225 cl. 21.....................................1224, 1225 cls. 22–24 ..............................1225, 1226 cl. 25.............................................. 1227 cls. 26–28 ....................................... 1228 cls. 31, 32 ...................................... 1228 cls. 33–35 ....................................... 1229 cl. 36.............................................. 1230 Model Insurance Clauses for Urban and Rural Residents Housing Earthquake Catastrophe Insurance (Trial Version) (The Model Insurance Clauses 2016) formulated by Insurance Association of China, 8 June 2017 .............1162, 1174, 1179 arts. 1–5 ......................................... 1174 arts. 6–10 ....................................... 1175 art. 8 .............................................. 1178 arts. 11–18 ..................................... 1176 arts. 19–25 ..................................... 1177 art. 26 ...................................1177, 1178 arts. 27–32 ..................................... 1178 arts. 33–35 ..................................... 1179 Notice by the China Banking Regulatory Commission of Further Strengthening the Compliance Sales and Risk Management of the Bancassurance Business of Commercial Banks, CBRC No. 90, 2010 (repealed by Measures for the Administration of the Bancassurance Business of Commercial Banks 2019) ............. 857 Notice by the CIRC and the CBRC of Further Regulating the Bancassurance Sales Activities of Commercial Banks, CIRC No. 3, 2014 (repealed by Measures for the Administration of the

Bancassurance Business of Commercial Banks 2019) .............. 857 Notice by the General Office of the China Banking Regulatory Commission of Further Regulating the Administration of the Bancassurance Business, CBRC General Office No. 47, 2009 (repealed by Measures for the Administration of the Bancassurance Business of Commercial Banks 2019) .............. 857 Notice Concerning the Matter of Authorizing its Local Offices to Approve Certain Administrative Licensing, Yin Bao Jian Ban Fa No. 69, 11 March 2019 .................. 63 Notice of Carrying out Commercial Health Insurance Pilot Programme with Individual Income Tax Preference (Ministry of Finance No. 56, jointly issued by the Ministry of Finance, the State Administration of Taxation, and the CIRC) 8 May 2015 (abolished by The Notice 2017)............. 987, 988 s. 1 ................................................... 987 Notice of Further Specifying the Matters concerning the Administrative Licensing for Banking Sideline Insurance Agents, CIRC No. 58, 2016 (repealed by Measures for the Administration of the Bancassurance Business of Commercial Banks 2019) .............. 857 Notice of Issuing the Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes, issued jointly by the China Insurance Regulatory Commission (the CIRC, the former insurance regulatory authority) and the Ministry of Finance, with other relevant departments, (The Notice 2016), Bao Jian Fa No. 39, issued & in force 11 May 2016 ....1161, 1162 Notice of Issuing the Regulatory Guidelines for the Bancassurance Business of Commercial Banks, CIRC No. 10, 2011 (repealed

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by Measures for the Administration of the Bancassurance Business of Commercial Banks 2019).............. 857 Notice of Matters concerning the Administrative Licensing for Banking Sideline Insurance Agents, CIRC No. 44, 2016 (repealed by Measures for the Administration of the Bancassurance Business of Commercial Banks 2019).............. 857 Notice of Regulating the Bancassurance Business, CIRC No. 70, 2006 (repealed by Measures for the Administration of the Bancassurance Business of Commercial Banks 2019) ............................................ 857 Notice of the CBIRC General Office on Issues Concerning Premium Rate Adjustment of Long-term Medical Insurance Products, CBIRC General Office (2020) issued & in force 25 March 2019 ............................................. 966 Notice of the CBIRC on Abolishing and Modifying Some Regulatory Documents, Yin Bao Jian Fa No. 5, 2020 .......................... 205, 820 Notice of the CBIRC on Effectively Strengthening the Administration of Employees of Full-Time Insurance Intermediary Institutions, 16 Yin Bao Jian Ban Fa No. 42, 2020 .................... 885 Notice of the CBIRC on Expanding the Business Scope of Foreignfunded Insurance Brokerage Companies, Yin Bao Jian Fa No. 19, issued & in force 27 April 2018 ....................... 885, 917 art. 1 ................................................ 917 art. 2 ................................................ 917 Notice of the CBIRC on Expanding the Scope of Elderly Housing Reverse Mortgage Pension Insurance, Yin Bao Jian Fa No. 43, issued & in force 31 July 2018 ......................1039, 1053 Notice of the CBIRC on Implementing the Main Responsibilities of

Insurance Companies and Strengthening the Administration of Insurance Sales Personnel, 15 Yin Bao Jian Ban Fa No. 41, 2020 ............................................. 885 Notice of the CBIRC on Issues Concerning Further Strengthening and Improving the Supervision of Insurance Products of Property Insurance Companies, Yin Bao Jian Ban Fa No, 17, 19 February 2020 .............................. 371 Notice of the CBIRC on Issuing the Guiding Opinions on the Implementation of Comprehensive Reform of Motor Vehicle Insurance, issued 2 September 2020, in force 19 September 2020 ..... 374, 377, 1198, 1222 s. 4 ................................397, 1189, 1198 ss. 6, 8, 9, 11 ................................... 397 s. 12 ................................... 10, 394, 398 s. 13 ................................................. 398 Notice of the CBIRC on Issuing the Interim Measures for the Administration of the Individual Tax-Deferred Commercial Pension Insurance Business (The Measures 2018), Yin Bao Jian Fa No. 23, issued & in force 16 May 2018 ...........1038, 1067, 1068 arts. 1–4 ......................................... 1067 arts. 5–7 ................................1067, 1068 art. 5(1), (4), (5) ............................ 1068 arts. 8–10 ..............................1067, 1068 arts. 11–19 ..................................... 1067 arts. 11, 12 ..................................... 1069 arts. 13, 14 ..................................... 1070 arts. 15–19 ..................................... 1071 arts. 20, 21 ............................1067, 1071 arts. 22–24 ............................1067, 1072 arts. 25–27 ..................................... 1067 art. 28 ...................................1067, 1072 arts. 29–36 ............................1067, 1073 arts. 37–39 ............................1067, 1074 arts. 40–47 ............................1067, 1075 arts. 48, 49 ............................1067, 1076 art. 50 .........................1067, 1076, 1077 arts. 51–55 ............................1067, 1076

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arts. 56–58 ..................................... 1067 Notice of the CBIRC on Issuing the Interim Measures for the Administration of the Utilization of Individual Tax-Deferred Commercial Pension Insurance Funds, Yin Bao Jian Fa No. 32, issued 22 June 2018 ........................................... 1039 Notice of the CBIRC on Issuing the Measures for the Regulatory Assessment of Corporate Governance of Banking and Insurance Institutions (The Measures 2019) (for Trial Implementation) 2019; Yin Bao Jian Fa No. 43, 25 November 2019 .............. 71, 309, 310 arts. 2–4 ........................................... 310 art. 5 .......................................... 71, 310 art. 6 .......................................... 72, 310 art. 7 .......................................... 72, 311 arts. 8, 9........................................... 311 arts. 10, 11 ................................. 72, 312 art. 12 ........................................ 73, 312 art. 13 .............................................. 312 art. 14 ........................................ 73, 312 arts. 15–18 ....................................... 313 art. 19 ........................................ 73, 313 arts. 20, 21 ................................. 73, 314 Notice of the CBIRC on Issuing the Reform Plan for Responsibilities of the Supervisory Authorities for Property Insurance Companies and Reinsurance Companies (The Plan 2020) ............................. 64 ss. 3, 4 ............................................... 64 s. 5 ..................................................... 65 Appx. 1 .............................................. 64 Appxs. 2, 3 ......................................... 65 Notice of the CBIRC on Issuing the Three-year Action Plan (2020 to 2022) for Improving Corporate Governance in the Banking and Insurance Industry (The Action Plan 2020), Yin Bao Jian Fa No. 40, published & implemented 18 August 2020 ............................ 327 Notice of the CBIRC on Matters Concerning Insurance Funds Investment in Bank Capital

Supplementary Bonds, Yin Bao Jian Fa No. 17, issued & in force 20 May 2020 ................................ 585 Notice of the CBIRC on Regulating Retrospective Management of Internet Insurance Sales Activities (The Notice 2020), Yin Bao Jian Fa No. 26, issued 22 June 2020, in effect 1 October 2020 .......1245, 1247, 1249, 1251 s. 1 ................................................. 1245 ss. 2–8 ............................................ 1246 art. 7 .............................................. 1247 ss. 9–14 .......................................... 1247 ss. 15–22 ........................................ 1248 ss. 23, 24........................................ 1245 s. 25 ............................................... 1249 Notice of the CBIRC on Strengthening the Administration of Business via Intermediary Channel of Insurance Companies, 14 Yin Bao Jian Ban Fa No. 19, 2019 .................... 885 Notice of the CBIRC, the Ministry of Finance, the Ministry of Human Resources and Social Security, and the State Administration of Taxation on Issuing the Guidelines on Developing Individual TaxDeferred Commercial Pension Products 2018, Yin Bao Jian Fa No. 20, issued & in force 25 April 2018 .................................. 1038 Notice of the CIRC and CBIRC on Regulating the Insurance Asset Custody Business, Bao Jian Fa. No. 84, issued & in force 24 October 2014................... 693, 703 s. 1 ................................................... 703 s. 2 ................................................... 703 ss. 3–6 .............................................. 704 ss. 7–9 .............................................. 705 ss. 10–12 .......................................... 706 Notice of the CIRC on Addressing Regulatory Deficiencies to Establish a Rigorous and Effective Insurance Regulation System, Bao Jian Fa No. 44, 2017 ................................ 429 Notice of the CIRC on Adjusting the Policies Relating to Overseas Investment with Insurance Funds

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(The Notice 2015), Bao Jian Fa No. 33, issued & in force 27 March 2015 ..................... 715, 739 ss. 1–6 .............................................. 740 Notice of the CIRC on Adjusting the Range of Self-determined Pricing for Commercial Motor Vehicle Insurance in Some Regions, Bao Jian Chan Xian No. 61, 2018 ................................ 396 Notice of the CIRC on Amending Some Provisions of the Interim Provisions on the Administration of Insurance Asset Management Companies, Bao Jian Fa No. 19, 2011 ............................................. 741 Notice of the CIRC on Clarifying the Relevant Matters on the Administration of Branch Offices of Insurance Companies 2010 (The Clarifying Notice 2010) Bao Jian Fa No. 49, issued & in force 10 June 2010 ..................... 96 s. 1(2)–(5) .......................................... 96 s. 3(1) ................................................ 97 s. 3(2), (3).......................................... 98 Notice of the CIRC on Implementing the Provisions on the Administration of the Solvency of Insurance Companies, Bao Jian Fa No. 89, in force 21 October 2008 ..............................533, 537, 539 s. 1(1) .............................................. 540 s. 1(2) .............................................. 540 s. 1(3) .............................................. 541 Notice of the CIRC on Issues Concerning Adjusting and Managing Premium Rates for Commercial Motor Vehicle Insurance, Bao Jian Chan Xian No. 145, issued & in force 8 June 2017 .........374, 393, 396, 1221 s. 1 ................................................... 393 s. 2 ................................................... 394 s. 3, 4 ............................................... 395 Notice of the CIRC on Issues Concerning Further Improving the Actuarial System of Personal Insurance, Bao Jian Fa No. 76, issued & implemented 2 September 2016................. 450, 451

Notice of the CIRC on Issues Concerning Further Regulating Related-Party Transactions of Insurance Companies (repealed by The Measures 2019), Bao Jian Fa No. 36 (2015) ........... 254 Notice of the CIRC on Issues Concerning Further Strengthening the Disclosure of Information of Related-Party Transactions of Insurance Companies (repealed by The Measures 2019), Bao Jian Fa No. 52 (2016) ........... 254 Notice of the CIRC on Issues Concerning Implementing the Guidelines for the Remuneration Management Rules of Insurance Companies (for Trial Implementation), Bao Jian Fa No. 101, 2 November 2012 .......... 241 ss. 1–4 .............................................. 242 ss. 5–7 .............................................. 242 Notice of the CIRC on Issues Concerning Promoting Nationwide the Pilot Reform of the Administration System for Commercial Motor Vehicle Insurance Clauses and Premium Rates, Bao Jian Chan Xian No. 113, issued & in force 27 June 2016 .......... 373, 374, 392, 396, 1221 s. 3 ................................................... 393 Notice of the CIRC on Issues Concerning Regulating the Market Order for the Telemarketing Business of Property Insurance Companies and Prohibiting Disturbing Residents by Telemarketing, Bao Jian Chan Xian No. 42, issued & in force 14 January 2013 ...... 499, 510 s. 1–3 ............................................... 510 s. 4–6 ............................................... 511 Notice of the CIRC on Issues Concerning the Implementation of the Administrative Measures for the Information Disclosure of New-type Personal Insurance Products 2009, Bao Jian Fa

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Notice of the CIRC on Issuing the Administrative Measures for Personal Insurance Telesales Business, Bao Jian Fa No. 40, 25 April 2013 ....................... 499, 501 arts. 3–5 ........................................... 499 arts. 6–8 ........................................... 500 arts. 9, 10 ......................................... 501 art. 11 ...................................... 501, 502 arts. 12–15 ....................................... 502 arts. 16–19 ....................................... 503 arts. 20–25 ....................................... 504 arts. 26–29 ....................................... 505 arts. 30–32 ....................................... 506 arts. 33–35 ....................................... 507 arts. 36–40 ....................................... 508 arts. 41–47 ....................................... 509 Notice of the CIRC on Issuing the Administrative Measures for the Market Access of Branch Offices, Bao Jian Fa No. 20 (2013), issued 15 March 2013, in force 1 April 2013 ............................................... 95 Notice of the CIRC on Issuing the Administrative Measures for the Training of Directors, Supervisors and Senior Executives of Insurance Institutions, Bao Jian Fa No. 43, 19 April 2015 ............................... 168 Notice of the CIRC on Issuing the Basic Rules for the Internal Control of Insurance Companies (The Basic Rules 2010), Bao Jian Fa No. 69, 10 August 2010, in force 1 January 2011 ............................................. 289 arts. 2, 3........................................... 289 art. 4 ................................................ 290 arts. 5, 6........................................... 291 arts. 7, 8........................................... 292 arts. 9–12 ......................................... 293 arts. 13, 14 ....................................... 294 arts. 15–17 ....................................... 295 arts. 18–20 ....................................... 296 arts. 21–23 ....................................... 297 arts. 24–26 ....................................... 298 arts. 27 ............................................. 299 art. 28, 29 ........................................ 299 art. 30 .............................................. 300 arts. 31, 32 ....................................... 301 arts. 33–36 ....................................... 302

No. 104, issued 27 September 2009, in force 1 October 2009 ...... 433 s. 1 ................................................... 435 Notice of the CIRC on Issues Concerning the Implementation of the Interim Measures for the Administration of Related Party Transactions of Insurance Companies (repealed by The Measures 2019), Bao Jian Fa No. 88 (2008) ............................... 254 Notice of the CIRC on Issues Concerning the Increased Regulatory Ratio of Insurance Funds Invested in Blue-Chip Stocks, Bao Jian Fa No. 64, released & in force 8 July 2015 .............. 507, 620 ss. 1–5 .............................................. 621 Notice of the CIRC on Issues Concerning the Investment in the Stocks of Companies Listed on the Growth Enterprise Market with Insurance Funds, Bao Jian Fa No. 1, issued & in force 7 January 2014 ..............................597, 598, 621 ss. 1–5 .............................................. 622 s. 6 ................................................... 623 Notice of the CIRC on Issues Concerning the Pilot Evaluation of the Solvency Risk Management Capability of Insurance Companies during the Transition Period of China Risk-Oriented Solvency System, Bao Jian Cai Hui No. 125, issued 15 July 2015 ............... 534 Notice of the CIRC on Issuing Rules for the Scoring Supervision over Internal Control and Regulatory Compliance in the Use of Insurance Funds, (The Rules 2014), Bao Jian Fa No. 54, issued & in force 22 June 2014 ............... 796, 803 art. 2 ................................................ 796 arts. 5–8 ........................................... 797 art. 9 ................................................ 798 arts. 10–13 ....................................... 799 arts. 14–19 ....................................... 800 art. 20 .............................................. 801 arts. 21–27 ....................................... 802 arts. 28, 29 ....................................... 803

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Sales of Personal Insurance, Bao Jian Fa No. 87, 29 September 2012 ..............................484, 485, 487 art. 1 ................................................ 484 arts. 2, 3........................................... 485 art. 4 ................................................ 486 arts. 5–7 ................................... 484, 486 art. 8 ........................................ 484, 487 art. 9 ........................................ 485, 487 art. 10 .............................................. 487 art. 11 .............................................. 488 Notice of the CIRC on Issuing the Guidelines for the Implementation of Comprehensive Risk Management of Personal Insurance Companies (The Guidelines 2010), Bao Jian Fa No. 89, issued & in force 24 October 2010............ 275–277, 289 art. 1 ................................................ 276 arts. 3–5 ........................................... 276 arts. 6–11 ......................................... 277 arts. 12–19 ....................................... 278 arts. 20–22 ....................................... 279 arts. 23–26 ....................................... 280 arts. 27, 28 ....................................... 281 arts. 29–36 ....................................... 282 arts. 37–43 ....................................... 283 arts. 44–50 ....................................... 284 arts. 51–55 ....................................... 285 arts. 56–60 ....................................... 286 arts. 61–66 ....................................... 287 arts. 67–73 ....................................... 288 art. 75 .............................................. 289 Notice of the CIRC on Issuing the Guidelines for the Major Emergency Response Management in the Insurance Asset Management (The Guidelines 2007), (Bao Jian Fa No. 42, issued & in force 30 May 2007 ........................ 751, 757 art. 2–5 ............................................ 751 arts. 6....................................... 751, 754 arts. 7, 8........................................... 752 arts. 9–14 ......................................... 753 arts. 15–18 ....................................... 754 arts. 19–22 ....................................... 755 arts. 23–25 ....................................... 756 arts. 26–28 ....................................... 757 Notice of the CIRC on Issuing the Guidelines for the Remuneration

arts. 37–39 ....................................... 303 arts. 40–44 ....................................... 304 arts. 45–47 ....................................... 305 arts. 48–53 ....................................... 306 arts. 54, 55 ....................................... 307 arts. 56–58 ....................................... 306 art. 59 .............................................. 289 Notice of the CIRC on Issuing the Detailed Rules for the Implementation of the Measures for the Administration of the Reserves of Non-life Insurance Business of Insurance Companies (for Trial Implementation), Bao Jian Fa No. 10, 2 February 2005 ......... 535 Notice of the CIRC on Issuing the Guidance Framework and Model Clauses of Individual Tax Preferential Health Insurance Products, Bao Jian Fa No. 118, issued on 14 December 2015 ........ 988 Notice of the CIRC on Issuing the Guideline for the Internal Control of Insurance Funds (GICIF) and the Application Guidelines, Bao Jian Fa No. 114, issued 7 December 2015, in force 1 January ...............764, 765, 767, 771 arts. 1, 2........................................... 765 art. 3 ........................................ 765, 766 arts. 4, 5........................................... 766 arts. 6–9 ........................................... 767 arts. 10–13 ....................................... 768 arts. 14–17 ....................................... 769 arts. 18–23 ....................................... 770 arts. 24–30 ....................................... 771 arts. 31–34 ....................................... 772 arts. 35–37 ....................................... 773 arts. 38–42 ....................................... 774 art. 43 .............................................. 775 arts. 44–46 ....................................... 776 arts. 47–49 ....................................... 777 arts. 50–55 ....................................... 778 arts. 56–59 ....................................... 779 arts. 60–63 ....................................... 780 arts. 64–70 ....................................... 781 arts. 71–74 ....................................... 782 arts. 75–79 ....................................... 783 Notice of CIRC on Issuing the Guidelines for the Determination of Misleading

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arts. 2–5 ........................................... 202 arts. 6–11 ......................................... 203 arts. 12–18 ....................................... 204 arts. 19–24 ....................................... 205 arts. 25–27 ....................................... 206 arts. 28–33 ....................................... 207 arts. 34–38 ....................................... 208 arts. 39–42 ....................................... 209 arts. 43–48 ....................................... 210 arts. 49–54 ....................................... 211 arts. 55–59 ....................................... 212 arts. 60–67 ....................................... 213 arts. 68–73 ....................................... 214 arts. 74–79 ....................................... 215 arts. 80–84 ....................................... 216 arts. 85, 86 ....................................... 217 art. 87 .............................................. 218 Notice of the CIRC on Issuing the Guidelines to the Articles of Association of Insurance Companies, (Bao Jian Fa No. 36, (2017) ............................ 1259 Notice of the CIRC on Issuing the Guiding Opinions on Personal Insurance Companies’ Inquiry into the Liability for Misleading Sales Practices, Bao Jian Fa No. 99, 23 October 2012, in force 1 January 2013 ................ 488 art. 3................................................ 488 arts. 5–7 ........................................... 489 arts. 8–10 ......................................... 490 art. 11 .............................................. 491 arts. 12–15 ....................................... 492 arts. 16–19 ....................................... 493 art. 20 .............................................. 494 Notice of the CIRC on Issuing the Implementation Plans for Regulating the Work on the PostHolding Qualification Examinations of Directors, Supervisors and Senior Executives of Insurance Institutions, Bao Jian Fa No. 122, 24 December 2015, in force 1 January 2016 ..................................... 167, 168 Notice of the CIRC on Issuing the Interim Administrative Measures for the Entrusted Investment of Insurance Funds (The Measures of Entrusted Investment 2012),

Management Rules of Insurance Companies (The Guidelines 2012) (for Trial Implementation), Bao Jian Fa No. 101, 2 November 2012 .............................. 234, 241–243 arts. 3, 4........................................... 234 arts. 5–7 ........................................... 235 art. 8........................................ 235, 242 arts. 9, 10 ......................................... 235 arts. 11–16 ....................................... 236 art. 17 ...................................... 237, 242 art. 18 .............................................. 237 art. 19 ...................................... 237, 242 art. 19(1) ......................................... 242 arts. 20–23 ....................................... 238 arts. 24–27 ....................................... 239 arts. 28–30 ....................................... 240 art. 31 .............................................. 241 Notice of the CIRC on Issuing the Guidelines for the Risk Management of Insurance Companies (for Trial Implementation) (The Guidelines 2007), Bao Jian Fa No. 23, 6 April 2007, in force 1 July 2007 ..................................... 269, 275 arts. 1–6 ........................................... 269 arts. 7–10 ......................................... 270 art. 10 .............................................. 271 art. 11 .............................................. 271 art. 12 ...................................... 271, 272 art. 13 .............................................. 271 arts. 14–16 ....................................... 272 arts. 17–23 ....................................... 273 arts. 24–32 ....................................... 274 arts. 33–37 ....................................... 275 Notice of the CIRC on Issuing the Guidelines on Consolidated Supervision of Insurance Groups (The Guidelines 2014), Bao Jian Fa No. 96, 4 December 2014 ..................................... 315, 317 arts. 13–15 ....................................... 318 arts. 16–19 ....................................... 319 arts. 20–22 ....................................... 320 Notice of the CIRC on Issuing the Guidelines on the Operation of the Board of Directors of Insurance Companies (The Guidelines 2008), Bao Jian Fa No. 58, 8 July 2008, in effect 1 October 2008............... 202

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Bao Jian Fa No. 60, issued & in force 16 July 2012 ........... 692, 693, 696, 699, 703 arts. 2–5 ........................................... 696 art. 6 ........................................ 697, 698 art. 7 ................................................ 697 arts. 8–12 ......................................... 698 arts. 13–16 ....................................... 699 arts. 17–21 ....................................... 700 arts. 22–26 ....................................... 701 arts. 27–30 ....................................... 702 art. 31 .............................................. 703 Notice of CIRC on Issuing the Interim Measures for Equity Investment with Insurance Funds (the Interim Measures 2010), Bao Jian Fa No. 79, issued & in force 31 July 2010 ........... 662, 663, 668, 670, 671–675 arts. 2–4 ........................................... 662 arts. 5–7 ........................................... 663 art. 9 ................................................ 663 art. 9(1), (3), (7), (8) ....................... 675 art. 10 ...................................... 664, 668 art. 10(1), (3), (8)–(10) .................... 665 art. 11 ...............................665, 668, 670 art. 12 .............................................. 665 art. 12(2), (4), (5), (8) ..................... 666 art. 13 ...................................... 666, 668 arts. 14–16 ....................................... 667 arts. 17–18 ....................................... 668 art. 19 ...................................... 668, 669 art. 20 .............................................. 669 arts. 21–24 ....................................... 670 arts. 25–29 ....................................... 671 art. 30 .............................................. 672 art. 30(3), (6), (8) ............................ 673 arts. 31–34 ....................................... 673 arts. 35, 36 ....................................... 674 arts. 37–39 ....................................... 675 art. 39 .............................................. 663 Notice of the CIRC on Issuing the Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013 (The Interim Measures 2013), Bao Jian Fa No. 19, issued & in force 12 March 2013 .................... 965, 995, 1001, 1002, 1012

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arts. 1–4 ......................................... 1002 art. 5 ...........................1002, 1004, 1011 art. 6 .............................................. 1003 art. 7 ...........................1003, 1004, 1011 arts. 8–11 ....................................... 1004 art. 12 .........................1005, 1011, 1012 arts. 13–16 ..................................... 1005 arts. 17–22 ..................................... 1006 arts. 23–29 ..................................... 1007 art. 24 ...................................1011, 1012 arts. 30–35 ..................................... 1008 arts. 36–43 ..................................... 1009 arts. 44–49 ..................................... 1010 art. 50 ............................................ 1011 arts. 51–52 ............................1011, 1012 arts. 53, 54 ..................................... 1012 Notice of the CIRC on Issuing the Interim Measures for the Administration of the Health Insurance Business with Individual Tax Preferences (The Measures 2015), Bao Jian Fa No. 82, issued & in force 10 August 2015 ..............................965, 988, 989 art. 2 ................................................ 988 art. 5 ........................................ 988, 989 arts. 6–9 ........................................... 989 arts. 10–20 ....................................... 990 arts. 21–28 ....................................... 991 arts. 29–35 ....................................... 992 arts. 36–43 ....................................... 993 Notice of the CIRC on Issuing the Interim Measures for the Administration of the Office Qualification Examination for Directors, Supervisors and Senior Executives of Insurance Institutions, Bao Jian Fa No. 6, 18 January 2016 ........................... 167 Notice of the CIRC on Issuing the Interim Measures for the Administration of Variable Annuity Insurance, Bao Jian Fa No. 25, 2011 ................................ 410 art. 7 ................................................ 411 Notice of the CIRC on Issuing the Interim Measures for the Bidding of Insurance Companies for the Critical Illness Insurance for Urban and Rural Residents and Other

TABLE OF REGULATIONS

arts. 17, 18 ....................................... 223 art. 19 .............................................. 218 Notice of the CIRC on Issuing the Measures for the Administration of Capital Guarantee Funds of Insurance Companies, Bao Jian Fa No. 39, 2011 ................... 560, 561 Notice of the CIRC on Issuing the Measures for the Administration of Capital Guarantee Funds of Insurance Companies, Bao Jian Fa No. 37, 2015 ................................ 561 arts. 3–8 ........................................... 561 arts. 9–15 ......................................... 562 arts. 16–18 ....................................... 563 art. 19 ...................................... 563, 564 arts. 20–27 ....................................... 564 Notice of the CIRC on Issuing the Measures for the Administration of Insurance Group Companies (The Measures 2010) (For Trial Implementation), Bao Jian Fa No. 29, 12 March 2010 ................ 315 art. 17 .............................................. 315 art. 18 ...................................... 315, 316 arts. 19–22 ....................................... 316 art. 23 ...................................... 316, 317 arts. 24–28 ....................................... 317 Notice of the CIRC on Issuing the Measures for the Administration of Old-Age Security Management Business, Bao Jian Fa No. 73, issued & in force 30 July 2015 .... 1038 Notice of the CIRC on Issuing the Measures for the Compliance Management of Insurance Companies (The Measures 2016), Bao Jian Fa No. 116, 30 December 2016, in effect 1 July 2017 ..............................243, 252, 253 arts. 2–5 ........................................... 244 arts. 6–9 ........................................... 245 art. 10 .............................................. 246 arts. 11–14 ....................................... 247 art. 15 .............................................. 248 art. 16 ...................................... 248, 250 arts. 17–19 ....................................... 249 arts. 20–25 ....................................... 250 arts. 26–31 ....................................... 251

Rules 2016 (The Interim Measures and Other Rules 2016), Bao Jian Fa No. 86, issued & in force 9 October 2016 ........................... 966, 995, 1012, 1013 Notice of CIRC on Issuing the Interim Measures for the Investment of Insurance Funds in Real Estate, Bao Jian Fa No. 80, promulgated & in force 31 July 2010 .....629, 634, 640 arts. 1, 2........................................... 629 arts. 3–6 ........................................... 630 art. 8 ........................................ 630, 640 art. 9 ........................................ 631, 632 art. 10 ...............................631, 635, 637 art. 10(2) ......................................... 638 art. 11 .............................................. 632 art. 11(1)(1)–(5) ............................... 633 art. 12 .............................................. 632 art. 13 .............................................. 633 arts. 14–16 ....................................... 634 arts. 17–19 ....................................... 635 arts. 20–24 ....................................... 636 arts. 25–28 ....................................... 637 arts. 29–31 ....................................... 638 arts. 32–34. ...................................... 639 arts. 35, 36 ....................................... 640 art. 37 .............................................. 641 Notice of the CIRC on Issuing the Measures for Evaluating the Services of Insurance Companies (for Trial Implementation), Bao Jian Fa No. 75, issued & in force 31 July 2015 ................................. 524 arts. 3–9 ........................................... 525 arts. 10–16 ....................................... 526 arts. 17–22 ....................................... 527 Notice of the CIRC on Issuing the Measures for the Administration of Auditing of Directors and Senior Managers of Insurance Companies (The Measures 2010), Bao Jian Fa No. 78, published by CIRC 2 September 2010, in force 1 January 2011 ............................................. 218 arts. 2–5 ........................................... 219 arts. 6–11 ......................................... 220 arts. 12–14 ....................................... 221 arts. 15, 16 ....................................... 222

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s. 4(11) ............................................ 553 s. 5 ................................................... 559 Notice of the CIRC on Issuing the Plan for Construction of the Second Phase of the C-ROSS, Bao Jian Fa No. 67, 18 September 2017 ..............................535, 555, 556 s. 2 ................................................... 555 Notice of the CIRC on Issuing the Plan for the Building of China’s Second-Generation Solvency Supervision System, Bao Jian Fa No. 24, 29 March 2012 ....................................... 26, 533 Notice of the CIRC on Issuing the Provisions on the Participation of Insurance Funds in the Stock Index Futures Trading, Bao Jian Fa No. 95, enacted & in force 12 October 2012 .......... 597, 610 Notice of the CIRC on Issuing the Solvency Regulatory Documents (No. 1–17) for Insurance Companies, Bao Jian Fa No. 22, 13 February 2015 .... 534, 553 regs. 1–12 ................................. 553, 554 regs. 13–17 ....................................... 554 Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies, No. 1: Affiliated Transactions, Bao Jian Fa No. 44, 19 May 2014.................................580, 816, 823 art. 3 ........................................ 816, 818 arts. 4–6 ........................................... 817 arts. 7, 8........................................... 818 Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies, No. 2: the Persons Responsible for the Risks, Bao Jian Fa No. 42, 10 April 2015 ................580, 816, 818 arts. 3, 4........................................... 818 arts. 5–8 ........................................... 819 Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by

arts. 32–37 ....................................... 252 art. 38 .............................................. 253 art. 39 .............................................. 244 Notice of the CIRC on Issuing the Measures for the Hierarchical Management of Business Scope of Insurance Companies, Bao Jian Fa No. 41, 2 May 2013 ..................... 354 arts. 3–7 ........................................... 354 art. 7(1) ........................................... 355 art. 7(2) ........................................... 356 art. 7(3) ........................................... 355 art. 7(4), (5) ..................................... 356 arts. 8–11 ......................................... 355 arts. 12–15 ....................................... 356 arts. 16, 17 ....................................... 357 arts. 18, 19 ....................................... 358 arts. 20–24 ....................................... 359 arts. 25–27 ....................................... 360 Notice of the CIRC on Issuing the Operation Evaluation Indicator System of Insurance Companies (for Trial Implementation) (The Indicator System), Bao Jian Fa No. 80, 7 August 2015.................. 527 s. 1 ................................................... 528 Notice of the CIRC on Issuing the Overall Framework of the Second-Generation Solvency Supervision System of China, Bao Jian Fa No. 42, 3 May 2013 ......................533, 541, 555, 556 ss. 1, 2 ............................................. 542 s. 3 ........................................... 542, 556 s. 3(1) ...................................... 542, 556 s. 3(1)(i) ........................................... 542 s. 3(1)(ii), (iii) .................................. 543 s. 3(2), (3)................................ 544, 558 s. 3(3)(i) ........................................... 544 s. 3(3)(ii) .......................................... 545 s. 3(3)(iii), (iv) ................................. 546 s. 3(3)(v) .......................................... 547 s. 4 ........................................... 547, 559 s. 4(1) .............................................. 547 s. 4(2) .............................................. 548 s. 4(3), (4)........................................ 549 s. 4(5), (6)........................................ 550 s. 4(7), (8)........................................ 551 s. 4(9), (10) ...................................... 552

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art. 19 ...................................... 227, 233 arts. 20–22 ....................................... 228 art. 23 ...................................... 228, 233 arts. 24–28 ....................................... 229 arts. 29–32 ....................................... 230 arts. 33–37 ....................................... 231 art. 38 ...................................... 231, 233 arts. 39–43 ....................................... 232 arts. 44, 45 ....................................... 233 art. 47 .............................................. 234 Notice of the CIRC on Matters Concerning Further Strengthening the Equity Information Disclosure by Insurance Companies, Bao Jian Fa No. 62, 15 July 2016 ........349–351 ss. 1, 2 ............................................. 349 ss. 3–6 .............................................. 350 Notice of the CIRC on Matters Concerning Further Strengthening the Management of Related-Party Transactions of Insurance Companies (repealed by The Measures 2019), Bao Jian Fa No. 52 (2017) ........... 254 Notice of the CIRC on Matters Concerning the Formal Implementation of the China Risk Oriented Solvency System, issued 25 January 2016 ................. 534 Notice of the CIRC on Matters Concerning the Investment of Insurance Funds in Preferred Shares (the Notice 2014), Bao Jian Fa No. 80, promulgated & implemented 17 October 2014 ..................................... 675, 677 s. 1 ................................................... 675 ss. 2–7 .............................................. 676 ss. 8–14 ............................................ 677 Notice of the CIRC on Matters Concerning the Investment of Insurance Funds in Venture Capital Funds, Bao Jian Fa No. 101, 12 December 2014 ..................................... 683, 685 s. 1 ................................................... 683 ss. 2, 3 ............................................. 684 ss. 4–9 .............................................. 685 Notice of the CIRC on Matters Concerning the Investments in

Insurance Companies, No. 3: Acquisition of Shares of a Listed Company Subject to Notification and Announcement Requirements, Bao Jian Fa No. 121, 23 December 2015 ..............................580, 816, 819 art. 2 ................................................ 819 arts. 3, 4........................................... 820 arts. 5–7 ........................................... 821 Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies, No. 4: Investment in Large-amount Unlisted Equities and Largeamount Real Estate, Bao Jian Fa No. 36, 4 May 2016 ......581, 816, 821 arts. 2–4 ........................................... 821 art. 5 ................................................ 822 arts. 6–10 ......................................... 823 arts. 11–15 ....................................... 824 Notice of the CIRC on Issuing the Work Plan for Deepening the Pilot System Reform of the Administration of the Commercial Motor Vehicle Insurance Clauses and Premium Rates (The Work Plan), Bao Jian Chan Xian No. 24, issued & in force 20 March 2015 ....... 373, 384, 385, 389, 393, 395, 1221 ss. 1, 2 ............................................. 384 s. 3 ................................................... 388 s. 4 ................................................... 389 s. 5 ................................................... 391 Notice of the CIRC on Issuing the Work Rules for the Internal Audit of Insurance Institutions (The Rules 2015), Bao Jian Fa No. 113 on 7 December 2015 ........... 223, 224, 231, 232, 234 arts. 2–4 ........................................... 224 arts. 6, 7........................................... 224 arts. 8–12 ......................................... 225 art. 13 ...................................... 225, 233 arts. 14, 15 ....................................... 226 art. 16 ...................................... 226, 233 arts. 17, 18 ....................................... 227

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Collective Fund Trust Plans with Insurance Funds, Bao Jian Fa No. 38, 2014 ................................ 682 Notice of the CIRC on Matters Concerning the Registration of Debt Investment Plans 2013 (the Notice 2013), Bao Jian Fa No. 93, issued & in force 24 January 2013 ............678, 681, 682 ss. 1, 2 ............................................. 681 ss. 3–6 .............................................. 682 Notice of the CIRC on Matters Related to the Transition Period of the Implementation of China’s RiskOriented Solvency System, Bao Jian Cai Hui No. 15, issued 13 February 2015 ......................... 534 Notice of the CIRC on Promoting the Work on Notification of Important Information for Insurance Application, Bao Jian Fa No. 68, issued 22 May 2009, in effect 1 October 2009 .................... 468, 475 ss. 1, 2 ............................................. 475 s. 3 ................................................... 476 Notice of the CIRC on Reforming the Independent Registration of the Recordation Products of Property Insurance Companies ..... 420 Notice of the CIRC on Regulating the Product Development and Design of Personal Insurance Companies, BaoJianRenShenXianNo. 134, 11 May 2017 ................................ 430 ss. 1, 2 ............................................. 430 ss. 3, 4 ............................................. 431 Notice of the CIRC on Regulating the Stock Investment Business of Insurance Institutions, Bao Jian Fa No. 45, issued & in force 18 March 2009 ..................... 598, 623 ss. 1, 3 ............................................. 623 s. 4 ........................................... 623, 624 ss. 5, 6 ............................................. 624 Notice of the CIRC on Relevant Issues Concerning the Implementation of the Measures for the Administration of Insurance Clauses and Insurance Premium

Rates of Property Insurance Companies, (replacing the Notice on the Relevant Issues concerning the Implementation of the Measures for the Administration of Insurance Clauses and Insurance Rates of Property Insurance Companies, Bao Jian Fa No. 109, issued by CIRC 25 November 2005), Bao Jian Fa No. 43, in force 1 May 2010 ......................361, 370, 373, 422 s. 1 ................................................... 370 ss. 2, 3, 5 ......................................... 371 ss. 6–8 .............................................. 372 Notice of the CIRC on Relevant Issues Regarding the Implementation of the Administrative Measures on Information Disclosure of Insurance Companies, Bao Jian Tong Xin No. 604 (2010), repealed by Measures for the Administration of the Information Disclosure by Insurance Companies 2018 (The Measures 2018) ................... 321 Notice of the CIRC on Relevant Matters Concerning the Implementation of the Measures for Administration of Insurance Permits, Bao Jian Fa No. 70, issued & in force 13 August 2007 .................... 144, 161 ss. 1, 2 ............................................. 162 s. 3 ........................................... 146, 162 ss. 4, 5, 7 ......................................... 162 ss. 11, 12.......................................... 146 Notice of the CIRC on Relevant Matters Concerning the Policy Reform of Premium Rates of Ordinary Personal Insurance: Bao Jian Fa No. 62 [2013] ............. 25 s. 1(2) ................................................ 25 Notice of the CIRC on Several Issues concerning the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies, Bao Jian Fa No. 2, issued 4 January 2012 ....361, 409, 412 ss. 1–4 .............................................. 410 ss. 5–10 ............................................ 411

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ss. 11, 12.......................................... 412 Notice of the CIRC on Strengthening and Improving the Proportional Regulation of the Utilization of Insurance Funds, Bao Jian Fa No. 13, (CIRC multilevel proportional regulation framework) issued & in force 23 January 2014 ..............................580, 621, 686 s. 1 ................................................... 686 ss. 2, 3 ............................................. 687 ss. 4, 5 ............................................. 688 s. 6 ................................................... 689 s. 7 ................................................... 690 Annex............................................... 691 Notice of the CIRC on Strengthening the Administration of the Clauses and Premium Rates for Commercial Motor Vehicle Insurance, Bao Jian Fa No. 16, issued & in Force 23 February 2012 ........373, 374, 1221 s. 1 ................................................... 374 s. 2 ................................................... 376 s. 3 ................................................... 377 s. 4 ................................................... 378 Notice of the CIRC on Strengthening the Administration of the Guarantee Insurance Business on Internet Platforms, Bao Jian Chang Xian No. 6, 19 January 2016............... 1243 ss. 1–3 ............................................ 1243 ss. 4–10 .......................................... 1244 ss. 11, 12........................................ 1245 Notice of the CIRC on Strengthening the Administration of the Operational Qualification of the Agriculture Insurance Business (The Notice 2013), Bao Jian Fa No. 26, issued & in force 7 April 2013 .............. 1090, 1098, 1101, 1102 ss. 1, 2 ........................................... 1102 ss. 3–5 ............................................ 1103 ss. 6, 7 ........................................... 1104 Notice of the CIRC on Strengthening the Management of Chief Actuaries of Personal Insurance Companies, Bao Jian Shou Xian No. 620, issued 1 August 2013 in effect 5 August 2013 ............................................. 450

Notice of the CIRC on Strengthening the Regulation of the Application of External Credit Rating in the Investment of Insurance Funds in Bonds, Bao Jian Fa No. 61, issued & in force 31 July 2013 ...... 585 Notice of the CIRC on Strengthening the Supervision of Personal Insurance Products, Bao Jian Fa No. 199, 2 September 2016 ..... 426 s. 1 ................................................... 426 ss. 2, 3 ............................................. 427 ss. 4, 5 ............................................. 428 ss. 6, 7 ............................................. 429 Notice of the CIRC on the Interpretation of the Relevant Articles in the Administrative Measures for the Information Disclosure of Newtype Personal Insurance Products 2009, Bao Jian Shou Xian No. 1161, issued & implemented 12 November 2009 ....................... 433 s. 1 ................................................... 434 s. 2 ................................................... 435 s. 3 ................................................... 434 Notice of the CIRC on the Trial Implementation of the Guidelines for the Five-Grade Risk-based Insurance Asset Classification, (The Guidelines 2014), Bao Jian Fa No. 82, issued & in effect 17 October 2014.................. 803, 804, 809, 814 arts. 1–3 ........................................... 803 arts. 4, 5........................................... 804 arts. 6–9 ........................................... 805 art. 10 .............................................. 806 art. 11 ...................................... 806, 809 art. 11(2) ......................................... 812 art. 12 .............................................. 808 arts. 13–15 ....................................... 809 art. 16 .............................................. 811 arts. 17, 18 ....................................... 812 arts. 19, 20 ....................................... 813 arts. 21–23 ....................................... 814 arts. 24–31 ....................................... 815 art. 32 .............................................. 816 Notice of the General Office of the CBIRC on Further Clarifying

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ss. 3–6 .............................................. 517 ss. 7–10 ............................................ 518 Notice of the General Office of the CBIRC on Regulatory Requirements for Commercial Motor Vehicle Insurance Rates, Yin Bao Jian Ban Fa No. 57, issued & in force 29 June 2018 ......374, 395, 1222 ss. 1–5 .............................................. 396 Notice of the General Office of the CBIRC on Relevant Matters Regarding Strengthening the Actuarial Supervision of Personal Insurance, published 21 January 2020 ..................................... 450, 451 Notice of the General Office of CBIRC on Strengthening the Management of Intermediary Channels of Insurance Companies, Yin Bao Jian Ban Fa No. 19, issued 26 February 2019 .............................471, 827, 874, 875 arts. 1–3 ........................................... 878 arts. 4–11 ......................................... 879 arts. 12–20 ....................................... 880 arts. 21–23 ....................................... 881 Notice of the General Office of the CBIRC on the Implementation of the Main Responsibility of Insurance Companies to Strengthen the Administration of Insurance Sales Personnel (Yin Bao Jian Ban Fa No. 41) issued implemented 12 May 2020 ...........26, 468, 470, 531 arts. 1–3 ........................................... 470 arts. 4–7 ........................................... 471 arts. 8–12 ......................................... 472 arts. 13–17 ....................................... 473 arts. 18–21 ....................................... 474 arts. 22, 23 ....................................... 475 Notice of the General Office of the CIRC on Issuing the Measures for Business Supervision and Administration of China Insurance Security Fund Co., Ltd., (2015 Revision), Bao Jian Ting Fa No. 79, issued & in force 14 December 2015 ..................... 1265

the Operating Conditions for Agriculture Insurance Business, 1 June 2020 ......................1090, 1101, 1107, 1108 arts. 1–3 ......................................... 1104 arts. 4, 5......................................... 1105 art. 5(2) ......................................... 1106 arts. 6–8 ......................................... 1106 arts. 9–16 ....................................... 1107 arts. 17, 18 ..................................... 1108 Notice of the General Office of the CBIRC on Further Strengthening and Improving the Supervision on the Products of Property Insurance Companies, implemented 1 March 2020 ....................... 422, 425 s. 1 ................................................... 422 s. 1(1), (2)........................................ 422 s. 1(3), (4)........................................ 423 s. 2 ................................................... 423 s. 2(1) .............................................. 423 s. 2(2), (3)........................................ 424 s. 3 ................................................... 425 s. 3(1)–(3) ........................................ 425 s. 4(1), (2)........................................ 425 Notice of the General Office of the CBIRC on Issues Concerning the Premium Rate Adjustment of Longterm Medical Insurance Products 2020 ............................................. 446 ss. 1–4 .............................................. 446 s. 5 ................................................... 447 ss. 6–9 .............................................. 448 ss. 10–13 .......................................... 449 Notice of the General Office of the CBIRC on Issuing the Actuarial Provisions on General Personal Insurance, published 21 January 2020 ..................................... 450, 451 Notice of the General Office of the CBIRC on Matters Concerning the Investments in Collective Fund Trust Plans with Insurance Funds, Yin Bao Jian Ban Fa No. 144, 19 June 2019 ........................ 682, 683 Notice of the General Office of the CBIRC on Promoting Electronic Return Visit of life Insurance 2020 ...... ss. 1, 2 ............................................. 516

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Order No. 230 issued 6 December 2019 ..........132, 134, 142 Notice on Effectively Strengthening the Administration of Employees of Full-Time Insurance Intermediary Institutions, Yin Bao Jian Ban Fa No. 42, which was issued on 12 May 2020 .................827, 874, 878 ss. 1, 2 ............................................. 875 ss. 3–5 .............................................. 876 ss. 6–8 .............................................. 877 s. 9 ................................................... 878 Notice on Expanding the Scope of Elderly Housing Reverse Mortgage Pension Insurance, Yin Bao Jian Fa No. 43, 31 July 2018 .........1059, 1085 ss. 1–3 ............................................ 1060 Notice on Financial Management of Insurance Security Fund of Insurance Companies (Ministry of Finance), released May 1997 ........................................... 1269 Notice on Further Improving the Drafting of Clauses on Agriculture Insurance Products Receiving Insurance Premium Subsidies of the Central Treasury: formulated jointly by the CIRC, the Ministry of Finance and the Ministry of Agriculture, Bao Jian Fa No. 25, issued & in force 15 February 2015 .............. 1090, 1099, 1111, 1113 ss. 1–5 ............................................ 1112 ss. 6–12 .......................................... 1113 Notice on Further Regulating the Personal Insurance Telesales and Tele-interviews Behaviours, Bao Jian Fa No. 99 (2010) (repealed by Notice of the CIRC on Issues concerning Regulating the Market Order for the Telemarketing Business of Property Insurance Companies and Prohibiting Disturbing Residents by Telemarketing 2013) ...................... 499 Notice on Further Strengthening the Business Commencement Check of Insurance Companies (hereinafter, (The Business Commencement Check Notice) 2017 Bao Jian Fa No. 51 [2017], issued & in force 22 June 2017 ............................................... 87

Notice of the General Office of the CIRC on Launching the Independent Registration Platform for the Recordation Products of Property Insurance Companies ..... 420 Notice of the General Office of the CIRC on Matters Concerning the Health Insurance Business with Individual Tax Preferences 2016, General Office No. 1, issued & in force 4 January 2016......965, 988, 994 ss. 1–5 .............................................. 994 ss. 6–10 ............................................ 995 Notice of the Ministry of Finance, the State Administration of Taxation, and the CIRC on the Promotion of the Pilot Policy for Commercial Health Insurance with Individual Tax Preference to Nationwide Implementation, Ministry of Finance No. 39, issued 28 April 2017 & in force 1 July 2017 ......... 966 Notice of the Ministry of Finance, the State Administration of Taxation, the Ministry of Human Resources and Social Securities, the CBIRC, the China Securities Regulatory Commission, on jointly Carrying out the Pilot Project of Individual Tax-Deferred Commercial Pension Insurance 2018, Ministry of Finance No. 22, issued & in force 2 April 2018 ........ 50, 1038, 1040, 1060, 1062 Pt. 1 ............................................... 1061 Pt. 1(2) .......................................... 1061 Notice on Carrying out the Pilot Project of Individual Tax-Deferred Commercial Pension Insurance, 2 April 2018 ............................... 1085 Notice on Carrying out the Pilot Work of Establishing the Mechanism for Linking Litigation with Mediation for Insurance Disputes in Some Regions of China, (SPC and the CIRC Notice 2012), 18 December 2012 ........................................... 1304 Notice on Clarifying Timing of Removing Foreign Ownership Restrictions on Joint Venture Life Insurance Companies (CBIRC)

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Development of Agriculture Insurance (The Guiding Opinions 2019), issued jointly by the Ministry of Finance, the Ministry of Agriculture and Rural Affairs, the CBIRC, and the National Forestry and Grassland Administration (Ministry of Finance No. 102), 19 September 2019, in force 16 October 2019.........50, 1090, 1093, 1132, 1136, 1137 s. 1(2) ............................................ 1094 s. 3 ........................................1133, 1156 s. 4 ................................................. 1133 ss. 5–7 ............................................ 1134 s. 6 ................................................. 1158 ss. 8–11 .......................................... 1135 ss. 12–14 ........................................ 1136 ss. 15–17 ........................................ 1137 s. 18 ............................................... 1138 Notice on Issuing the Implementation Plan for Earthquake Catastrophe Insurance for Urban and Rural Residents in Yibin City, issued by the Office of the People’s Government of Yibin City, The CBIRC, Sichuan Bureau, 29 September 2019............1181, 1182 Notice on Issuing the Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes, Bao Jian Fa No. 39, 2016 .........1163, 1634 s. 1(1), (2)...................................... 1164 s. 2(1), (2)...................................... 1165 s. 2(3), (4)...................................... 1166 s. 3(1) ............................................ 1166 s. 3(2) ............................................ 1167 s. 3(3)(1) ........................................ 1167 s. 3(3)(2) ........................................ 1168 s. 4(1) ............................................ 1168 s. 4(2) ............................................ 1169 s. 5(1) ............................................ 1169 s. 5(2)–(5) ...................................... 1170 Notice on Issuing the Implementation Plans for Regulating the Work on the Post-Holding Qualification Examinations of Directors, Supervisors and Senior Executives

para. 1................................................ 87 paras. 2–4 ........................................... 88 paras. 5–9 ........................................... 89 para. 10 .............................................. 90 Notice on Implementing the Main Responsibilities of Insurance Companies and Strengthening the Administration of Insurance Sales Personnel, Yin Bao Jian Ban Fa No. 41, issued 6 September 2020 ..................................... 827, 874 Notice on Issues Concerning the Measures for the Administration of Approval and Recordation of Personal Insurance Products, CIRC No. 76 (2004) issued on 1 July 2004, repealed by Measures for the Administration of Insurance Clauses and Premium Rates of Personal Insurance Companies 2015 ............................................. 398 Notice on Issues Concerning the Payment of Insurance Security Fund (CIRC), released March 2005 ........................................... 1270 Notice on Issues Concerning the Premium Rate Adjustment of Long-term Medical Insurance Products on 25 March 2020 ......... 445 Notice on Issuing the Administrative Measures for the Training of Directors, Supervisors and Senior Executives of Insurance Institutions, Bao Jian Fa No. 43, 19 April 2015 ............................................. 187 arts. 3–6 ........................................... 188 arts. 7–10 ......................................... 189 arts. 11–14 ....................................... 190 arts. 15–22 ....................................... 191 arts. 23–30 ....................................... 192 arts. 31, 32 ....................................... 193 arts. 33–43 ....................................... 194 Notice on Issuing the Guidelines on Developing Individual TaxDeferred Commercial Pension Products, Yin Bao Jian Fa No. 20, 25 April 2018 ....................1040, 1085 Notice on Issuing the Guiding Opinions on Accelerating the High-Quality

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of Insurance Institutions, Bao Jian Fa No. 122, 24 December 2015, in force 1 January 2016 ................ 183 s. 1 ................................................... 183 s. 1(1)–(4) ........................................ 183 s. 2 ................................................... 183 s. 3 ................................................... 184 s. 4 ................................................... 185 s. 5 ................................................... 187 Notice on Issuing the Interim Measures for the Administration of the Individual Tax-Deferred Commercial Pension Insurance Business, Yin Bao Jian Fa No. 23, 16 May 2018 ..................................1040, 1085 Notice on Issuing the Interim Measures for the Administration of the Underwriting and Claim Settlement of Agriculture Insurance (CIRC), Bao Jian Fa No. 31, issued 17 March 2015, in force on 1 April 2015 ......................1090, 1116 arts. 1–43 ....................................... 1116 arts. 2, 3......................................... 1116 arts. 4, 5......................................... 1117 art. 6(1)–(3) ................................... 1117 arts. 7–12 ....................................... 1118 art. 10 ............................................ 1120 arts. 13, 14 ..................................... 1119 art. 15(1), (2) ................................. 1119 arts. 16–18 ..................................... 1120 art. 21 ............................................ 1120 arts. 22–27 ..................................... 1121 arts. 28–30 ..................................... 1122 art. 31(1), (2) ................................. 1122 art. 32 ............................................ 1122 arts. 33–39 ..................................... 1123 arts. 41, 42 ..................................... 1116 Notice on Issuing the Interim Measures for the Administration of the Utilization of Individual TaxDeferred Commercial Pension Insurance Funds, Yin Bao Jian Fa No. 32, 22 June 2018 ........1040, 1085 Notice on Issuing the Interim Measures for the Insurance Asset Allocation Management (The Measures 2012), Bao Jian Fa No. 61, issued & in force 16 July 2012 ......................... 757, 764

arts. 2, 3........................................... 757 arts. 4–8 ........................................... 758 arts. 9–14 ......................................... 759 arts. 15–20 ....................................... 760 arts. 21–24 ....................................... 761 arts. 25–28 ....................................... 762 arts. 29–33 ....................................... 763 arts. 34–38 ....................................... 764 art. 18 .............................................. 759 Notice on Issuing the Measures for the Administration of Capital Guarantee Funds of Insurance Companies, see Notice of the CIRC on Issuing the Measures for the Administration of Capital Guarantee Funds of Insurance Companies— Notice on Issuing the Work Plan for the Earthquake Catastrophe Insurance for Urban and Rural Residents in Sichuan Province published by the General Office of the Sichuan Provincial Government (No. 97), 15 May 2017 ........................................... 1180 s. 2(2) ...................................1180, 1181 Notice on Issuing the Work Plan for the Pilot Programme of Earthquake Insurance for Urban and Rural Residents in Sichuan Province, published by the General Office of the Sichuan Provincial Government (No. 84), 28 April 2015 ........................................... 1179 Notice on Launching the Pilot Programme of Full Cost Insurance and Income Insurance for the Three Major Grain Crops (The Notice 2018), Ministry of Finance No. 93, issued & in force 20 August 2018 ........................1089, 1128, 1131 appdx. 1, Working Plan for the Pilot Programme of Full Cost Insurance and Income Insurance for the Three Major Grain Crops 2018 .................... s. 3 ................................................. 1128 ss. 4–6 ............................................ 1129 s. 6(5) ............................................ 1131 s. 7 ................................................. 1130

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Notice on Liberating the Short-term Accident Insurance Rates and Simplifying the Recordation Formalities for Short-term Accident Insurance, CIRC No. 78 (2000) issued on 16 May 2000, repealed by Measures for the Administration of Insurance Clauses and Premium Rates of Personal Insurance Companies 2015 ........................... 398 Notice on Matters Concerning Further Strengthening the Regulation of Stock Investments with Insurance Funds, Bao Jian Fa No. 9, promulgated & in force 24 January 2017 ................... 598, 625 s. 1 ................................................... 625 ss. 2–3 .............................................. 626 s. 4 ........................................... 626, 628 s. 5 ........................................... 626, 627 ss. 6–9 .............................................. 627 ss. 10–12 .......................................... 628 ss. 13–15 .......................................... 629 Notice on Matters Concerning Insurance Fund Investment in Bank Capital Supplementary Bonds, Yin Bao Jian Fa No. 7, 2019 ...................... 596 Notice on Matters Concerning Insurance Fund Investment in Bank Capital Supplementary Bonds (new version), Yin Bao Jian Fa No. 17, 20 May 2020 (The 2020 Version of the Notice) ................................. 596, 597 Notice on Matters concerning the Persons Responsible for the Investment Risks of Insurance Institutions, Bao Jian Fa No. 28, 2013 ..................................... 739, 818 Notice on Matters of Including the Seed Production of Three Main Grain Crops in the Catalogue of Agricultural Insurance Premium Subsidies from Central Finance, jointly issued by the Ministry of Finance, the Ministry of Agriculture and Rural Affairs, and the CBIRC, Ministry of Finance No. 91, in effect 30 July 2018...................... 1126 Notice on Permitting Foreign Investors to Operate Loss Adjusting Business

in China, Yin Bao Jian Fa No. 29, (The Notice on Foreign Investors), 19 June 2018 ................................ 953 ss. 1, 2 ............................................. 953 Notice on Promoting the Standardized Development of the Telesales Business of Life Insurance Companies, Bao Jian Fa No. 38 (2008) (repealed by Notice of the CIRC on Issues concerning Regulating the Market Order for the Telemarketing Business of Property Insurance Companies and Prohibiting Disturbing Residents by Telemarketing 2013) ................. 499 Notice on Recent Issues of Life Insurance Products (CBIRC) published 2 July 2020 ................... 530 Notice on Regulating the Bank Deposit Business for Insurance Funds (The Notice 2014), (CIRC), Bao Jian Fa No. 18, issued & in force 28 February 2014 ................. 579, 584 ss. 1–3 .............................................. 584 ss. 4–7 .............................................. 585 Notice on Strengthening the Administration of Agricultural Insurance Clauses and Premium Rates (CIRC) Bao Jian Fa No. 25, issued on 7 April 2013 ....................... 1090, 1099, 1108, 1109, 1110 ss. 1–5 ............................................ 1109 ss. 6–10 .......................................... 1110 ss. 11–15 ........................................ 1111 Notice on Strengthening the Administration of Business via Intermediary Channel of Insurance Companies, see Notice of the General Office of CBIRC on Strengthening the Management of Intermediary Channels of Insurance Companies— Notice on Strengthening the Regulation of the Application of External Credit Rating in the Investment of Insurance Funds in Bonds (The Notice 2013), Bao Jian Fa No. 61, 2013 ........................ 594, 596 art. 1 ........................................ 594, 595

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arts. 2–5 ........................................... 595 arts. 6–8 ........................................... 596 Notice on Temporarily Not Allowing to Entrust the Management and Use of Assets to Securities Companies, Bao Jian Fa No. 67, 2000 (repealed) ..................................... 696 Notice on the Implementation of the Pilot Programme of the Individual Income Tax Policy for Commercial Health Insurance (jointly issued by the Ministry of Finance, the State Administration of Taxation, and the CIRC), Ministry of Finance No. 126, 27 November 2015 (abolished by The Notice 2017) .................................... 987, 988 s. 1 ................................................... 987 Notice on the Pilot Programme of Agricultural Disaster Insurance in the Main Grain Production Provinces, Ministry of Finance No. 43, issued & in force 17 May 2017 .............. 1089, 1126, 1127, 1128 s. 1 ................................................. 1127 ss. 5, 6 ........................................... 1127 appdx 1: the Pilot Programme Working Plan— s. 4 ................................................. 1127 Notice on the Promotion of the Pilot Policy for Commercial Health Insurance with Individual Tax Preference to Nationwide Implementation (jointly issued by the Ministry of Finance, the State Administration of Taxation, and the CIRC, after completion of the Pilot Programme, The Ministry of Finance No. 39, 28 April 2017............. 50, 988 Notice on the Relevant Matters concerning Submitting the Internal Audit Report of Branches of Insurance Companies to the Local Offices of China Insurance Regulatory Commission, Bao Jian Fa No. 56 (2008).......................... 221 On-site Inspection Measures of the CBIRC Order No. 7 (for Trial

Implementation) 2019; issued 24 December 2019, in effect 28 January 2020 ....... 66, 75, 852, 912 art. 2 .................................................. 66 art. 6 ............................................ 66, 67 arts. 7, 12 ........................................... 67 art. 13 ................................................ 68 art. 14 ........................................ 68, 853 arts. 15, 19 ......................................... 68 arts. 21, 23 ......................................... 67 art. 24 ................................................ 68 art. 25 ................................................ 68 art. 26 ................................................ 69 arts. 29, 30, 33, 34 ............................. 69 art. 38 ................................................ 70 art. 39 .............................................. 853 arts. 46, 47 ......................................... 70 arts. 48, 50, 51 ................................... 75 art. 52 ........................................ 75, 853 arts. 53–59 ......................................... 76 Opinions of the CIRC on Deepening the Reform of the Administrative System of Commercial Motor Vehicle Insurance Clauses and Premium Rates, Bao Jian Fa Nos. 1 & 18, issued & in force 3 February 2015 ...........373, 380, 384, 392, 393, 395, 1221 s. 1(2) .............................................. 380 s. 1(3) .............................................. 381 s. 2 ................................................... 381 ss. 3, 4 ............................................. 382 s. 5 ................................................... 383 Opinions of the General Office of the State Council on the Comprehensive Implementation of Critical Illness Insurance for Urban and Rural Residents (The Opinions 2015); No. 57; issued & in force 28 July 2015 ...........46, 965, 995, 996, 1013, 1016, 1022 s. 1 ................................................... 996 ss. 2, 3 ............................................. 997 s. 4 ................................................... 998 s. 5 ................................................... 999 s. 6 ................................................. 1000 s. 7 ................................................. 1001 Opinions on Accelerating the Development of the Modern

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Insurance Service Industry: State Council No. 29 (The Opinions 2014) 10 August 2014 ......................................... 45, 46 Opinions on Comprehensively Implementing Critical Illness Insurance for Urban and Rural Residents, The State Council general Office No. 57, 28 July 2015 ........................................... 1012 Opinions on Promoting the Construction of the Mechanism of Linking Litigation and Mediation for Insurance Disputes Nationwide in China (the SPC and the CIRC Opinions 2016), SPC No. 374, 14 November 2016 ..................... 1304 Opinions on Promoting the Development of Commercial Insurance in Social Service, jointly issued by The CBIRC and other 12 Government departments, Yin Bao Jian Fa No. 4, 23 January 2020 .................966, 1034, 1039, 1086 People’s Insurance Company of China Corn Planting Insurance Clauses (PICC Corn Insurance Clauses) .............................1149, 1152 art. 2 .............................................. 1149 arts. 3–5 ......................................... 1150 arts. 6–11 ....................................... 1151 art. 12 ............................................ 1152 art. 13(1)–(4) ................................. 1152 art. 14 ............................................ 1153 art. 15(1)–(3) ................................. 1153 art. 16 ............................................ 1153 art. 17 ...................................1153, 1156 arts. 18, 19 ..................................... 1154 arts. 20–22 ..................................... 1155 arts. 24, 25, 27 ............................... 1155 art. 28 ............................................ 1156 Pilot Measures for the Supervision and Administration of Mutual Insurance Organizations (CIRC), (The Pilot Measures 2015), Bao Jian Fa No. 11, issued 23 January 2015 ...............1253–1257, 1262, 1263

art. 1 .............................................. 1255 arts. 2–6 ......................................... 1256 arts. 7–10 ....................................... 1257 arts. 11–15 ..................................... 1258 arts. 16–19 ..................................... 1259 art. 21 ............................................ 1259 arts. 22–28 ..................................... 1260 arts. 29–36 ..................................... 1261 art. 37 ............................................ 1262 arts. 40, 41, 48, 49 ......................... 1262 Placement Slip of China Property Insurance Company Ltd (and other reinsurance companies)— art. 7 ................................................ 459 arts. 12, 15 ....................................... 460 Policy of Compulsory Motor Vehicle Traffic Accident Liability Insurance of Pingan Insurance Company of China cls. 9, 10 ........................................ 1213 Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, Zhong Bao Xie Fa No. 216, (2009) .....1203, 1208 Ch. 1 Practical procedure in underwriting s. 1(1)(4) ........................................ 1204 s. 5(2)(6) ...............................1204, 1209 Procedural Requirements in Dealing with Traffic Accidents enacted by China Public Security Ministry 11 July 2008, in effect 1 January 2009 ..................................1206, 1207 Provisional Regulations on Insurance Administration (issued by the People’s Bank of China) July 1996 ............................................ art. 32 ............................................ 1269 Provisions of Licensing, see Measures of the China Insurance Regulatory Commission (CIRC) on the Implementation of Administrative Licensing— Provisions of Licensing, see Provisions of the CBIRC (China Banking and Insurance Regulatory Commission on the Implementation Procedures of Administrative Licensing—

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Provisions of the CBIRC on the Implementation Procedures of Administrative Licensing, issued by CBIRC 24 May 2020 in force 1 July 2020, CBIRC Order No. 7 (The Provisions of Licensing) ...... 143, 148, 149, 162, 163 art. 1 ................................................ 149 arts. 3, 4........................................... 144 arts. 5, 6........................................... 149 art. 7 ........................................ 144, 150 arts. 8–10 ......................................... 150 art. 11 ...............................144, 145, 151 arts. 12–14 ....................................... 151 art. 15 ...................................... 144, 152 arts. 16–18 ....................................... 152 art. 19 ...................................... 144, 153 arts. 20–24 ....................................... 153 art. 24(1)–(3) ................................... 154 art. 22 .............................................. 145 arts. 23, 24 ....................................... 163 art. 25 ...................................... 154, 163 art. 26 .............................................. 154 arts. 27–29 ....................................... 155 arts. 30, 31 ............................... 145, 155 art. 32 ...................................... 155, 156 arts. 33, 34 ....................................... 156 arts. 35–37 ....................................... 157 Provisions of the Measures for Derivatives .................................... 612 Provisions on Administration of Insurance Adjusters (Trial Implementation) by the CIRC, 2000 ..................................... 920, 921 Provisions on Administration of Insurance Agent Institutions (CIRC), 1 December 2004, amended 25 September 2009 and renamed the Provisions on the Supervision and Administration of Full-Time Insurance Agencies. Amended again (CIRC Order No. 3), 19 October 2015 (The Agency Provisions 2015) ...... 826, 835, 836, 842, 843, 845, 856, 881 art. 2(1), (2) ..................................... 843 arts. 3, 5, 6....................................... 843

art. 7 ................................................ 844 arts. 11–15 ....................................... 844 art. 16 ...................................... 845, 882 arts. 17–19 ....................................... 845 arts. 20–25 ....................................... 846 art. 26 ...................................... 847, 849 arts. 27–32 ....................................... 847 arts. 33–38 ....................................... 848 art. 34 .............................................. 854 arts. 39–42 ....................................... 849 arts. 43, 44 ............................... 849, 855 art. 45 ...................................... 850, 855 arts. 46–53 ....................................... 850 art. 49 .............................................. 855 arts. 54–59 ....................................... 851 arts. 60–64 ....................................... 852 arts. 65–86 ....................................... 853 arts. 71–74 ....................................... 854 arts. 75–80 ....................................... 855 arts. 81–86 ....................................... 856 arts. 87, 88 ....................................... 843 Provisions on Administration of Insurance Agents (For Trial) People’s Bank of China, 30 November 1997 ....................... 835 Provisions on the Administration of Insurance Companies (The Insurance Company Provisions) May 2004, amended October 2009 & 19 October 2015, (CIRC Order No. 3) 2015 ...... 49, 54, 81, 84, 93–95, 109, 111, 116, 134, 167, 173, 195, 276, 336, 352, 354, 466, 468, 499, 509 Chs. 2–4............................................. 81 Ch. 5 ........................................... 81, 82 Chs. 6, 7 ............................................ 81 arts. 3, 4............................................. 91 art. 4(3) ....................................... 92, 95 arts. 6–25 ........................................... 91 arts. 6–14 ................................. 84, 1258 art. 6 .................................................. 84 arts. 7, 8............................................. 85 art. 9 .......................................... 85, 353 art. 10 ................................................ 85 arts. 11–13 ......................................... 86 art. 14 ................................................ 87 art. 15 ................................................ 91 arts. 16, 17 ......................................... 92

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art. 18 .......................................... 92, 93 art. 19 ................................................ 93 arts. 20, 21 ......................................... 93 arts. 22–25 ......................................... 94 arts. 26–34 ....................................... 109 art. 27 ...................................... 109, 110 arts. 28–34 ....................................... 111 arts. 31–34 ....................................... 112 arts. 35–40 ......................................... 91 art. 35 ................................................ 94 arts. 36–40 ......................................... 95 arts. 41–48 ....................................... 352 arts. 41, 42 ....................................... 353 art. 43 .............................................. 361 art. 44 ...................................... 466, 468 arts. 45–54 ....................................... 467 arts. 45, 46 ....................................... 468 art. 55 .............................................. 195 art. 57 .............................................. 167 arts. 59–69 ....................................... 115 arts. 64–69 ....................................... 116 Provisions on the Administration of Insurance Company Solvency Margin and Regulatory Indices, in force 24 March 2003 (CIRC Order No. 1, 2003, regulating insurance company solvency until 1 September 2008) ............................. 533, 536–538 arts. 4, 5........................................... 537 arts. 6, 11, 12 ................................... 538 Provisions on the Administration of the Office Qualifications for the Directors, Supervisors and Senior Executives of Insurance Companies (The Provisions 2018), CIRC Order No. 4, (& 2018 amendment) 13 February 2018 ................ 167, 168, 172, 173, 176, 178, 247 arts. 2, 4........................................... 168 arts. 5–11 ......................................... 169 arts. 12, 13 ....................................... 170 arts. 14–16 ....................................... 171 arts. 17–21 ....................................... 172 arts. 22–24 ....................................... 173 arts. 25–28 ....................................... 174 art. 29 .............................................. 175 art. 29(1) ......................................... 175 arts. 30–32 ....................................... 175

arts. 33–37 ....................................... 176 arts. 38, 39 ....................................... 177 arts. 40, 41 ............................... 176, 177 art. 42 .............................................. 177 arts. 43–47 ....................................... 178 arts. 48, 49 ....................................... 179 Provisions on the Administration of the Solvency of Insurance Companies, in force 1 September 2008, (CIRC Order No. 1, 2008), repealed the 2003 Provisions..............533, 538, 539 art. 3–5 ............................................ 538 arts. 7, 8, 37..................................... 538 arts. 38–41 ....................................... 539 Provisions on the Basic Services of the Personal Insurance Business, CIRC Order NO. 4, promulgated 11 February 2010, in force 1 May 2010 .......................... 494, 499 arts. 2–5 ........................................... 494 arts. 7–14 ......................................... 495 arts. 15–18 ....................................... 496 arts. 19–23 ....................................... 497 arts. 24–31 ....................................... 498 Provisions on the Formation of Reinsurance Companies 2002 (The Provisions 2002) CIRC Order No. 4; issued & in force 17 September 2002............... 104, 105 arts. 2–7 ........................................... 104 arts. 8, 9........................................... 105 Provisions on the Functions, Structure and Staffing of the China Banking and Insurance Regulatory Commission; General Office of the CPC Central Committee and General Office of the State Council 31 December 2018, in effect 14 August 2018 ................. 57 art. 2 .................................................. 57 art. 3 .................................................. 59 art. 3(14), (15) ................................... 58 arts. 4, 5............................................. 57 Provisions on the Major Emergency Response in the Insurance Industry 2003 (The Response Provisions 2003), CIRC Order No. 3, issued 18 December 2003 and in force 1 February 2004 ....751, 752, 755, 756

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art. 10(7) ......................................... 751 Provisions on the Participation of Insurance Funds in the Stock Index Futures Trading (the Provisions 2020), Yin Bao Jian Ban Fa No. 59, issued by CBIRC 23 June 2020 ........................ 597, 611 ss. 1, 3–5 .......................................... 611 arts. 6–11 ......................................... 612 ss. 12, 13.......................................... 613 arts. 14–16 ....................................... 614 Provisions on the Participation of Insurance Funds in Treasury Bond Futures Trading ................... 611 Provisions on the Regulatory Duties of the Local Offices of the CIRC 2016 (The Provisions 2016) CIRC Order No. 1 (2016); issued 11 January 2016, effective 1 March 2016 ............................................... 60 arts. 3–9 ............................................. 61 arts. 10–17 ......................................... 62 arts. 18–20 ......................................... 63 Provisions on the Supervision and Administration of Full-Time Insurance Agencies 2015, see Provisions on Administration of Insurance Agent Institutions 2004— Provisions on the Supervision and Administration of Insurance Adjustment Institutions, CIRC Order No. 7, issued 25 September 2009, amended and updated by CIRC 1 February 2018 (The Provisions of Insurance Adjusters 2018), CIRC Order No. 2, issued 1 February 2018, in force 1 May 2018 ............ 826, 919, 921, 924, 942, 944, 945, 952–954, 957, 959–961 arts. 1–111 ....................................... 921 art. 2 ................................................ 919 art. 3 ................................................ 922 art. 4 ........................................ 922, 954 art. 5 ........................................ 921, 961 arts. 6, 7........................................... 922 art. 9 ........................................ 939, 960 art. 9(1)–(4) ..................................... 922

arts. 10, 11 ....................................... 922 art. 12 ...................................... 923, 960 arts. 13, 14 ....................................... 923 art. 15 .............................................. 960 art. 15(1) ......................................... 923 art. 15(2) ......................................... 924 art. 16 ...............................924, 939, 960 art. 17 .............................................. 924 art. 18 ...................................... 924, 960 art. 19 ...................................... 925, 938 art. 20 ...................................... 925, 939 arts. 21, 22 ....................................... 925 arts. 23, 24 ....................................... 926 art. 25 ...............................926, 935, 960 arts. 26–28 ....................................... 927 arts. 29, 30 ....................................... 928 art. 31 .......................876, 928, 935, 960 art. 32 .............................................. 929 arts. 33, 34 ............................... 929, 931 arts. 35–39 ....................................... 930 arts. 40–42 ....................................... 931 art. 43 ...................................... 924, 931 arts. 44–51 ....................................... 932 arts. 45, 47 ....................................... 961 arts. 52–58 ....................................... 933 art. 53 .............................................. 940 art. 56 ...................................... 940, 957 art. 59 ...................................... 933, 961 arts. 60–66 ....................................... 934 arts. 61, 62, 67 ......................... 935, 961 arts. 68–71 ....................................... 935 art. 72 ...................................... 936, 961 art. 73 .............................................. 936 arts. 74–80 ....................................... 937 arts. 81, 82 ....................................... 938 art. 83(1), (2) ................................... 939 arts. 84–88 ....................................... 939 arts. 89–91 ....................................... 940 arts. 92–95 ....................................... 941 arts. 96, 97 ....................................... 942 art. 98 ...................................... 942, 960 arts. 99–104 ..................................... 943 art. 100 ............................................ 961 art. 105 ............................................ 923 art. 107 ............................................ 921 Provisions on the Supervision and Administration of Insurance Brokerage Institutions, CIRC Order No. 6, issued 25 September 2009 (repealed by Provisions on the

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Supervision and Administration of Insurance Brokers 2018). ...... 885, 894 Provisions on the Supervision and Administration of Insurance Brokers (The Provisions of Brokers), CIRC Order No. 3, issued 1 February 2018, in force 1 May 2018 ....................49, 826, 885, 894–896, 899, 900 Chapter 1 (arts. 1–5) ........................ 894 Chapter 2 (arts. 6–34) ...................... 894 art. 1–5 ............................................ 895 art. 6 ........................................ 883, 885 art. 7 ........................................ 896, 909 art. 8 ................................................ 896 art. 9 ................................................ 897 art. 10 ...................................... 896, 897 art. 11–14 ........................................ 897 arts. 15, 16 ....................................... 898 arts. 17–19 ....................................... 899 art. 20 .............................................. 900 arts. 21, 22 ............................... 900, 903 arts. 23–27 ....................................... 901 arts. 28–31 ....................................... 902 arts. 32–34 ....................................... 903 Chapter 3 (arts. 35–67) .................... 894 arts. 35–41 ....................................... 904 art. 36 ...............................886, 887, 917 art. 37 .............................................. 914 art. 42 .............................................. 905 art. 43 ...................................... 891, 905 art. 44 .............................................. 905 arts. 45, 46 ............................... 887, 905 art. 47 ...............................887, 906, 915 arts. 48, 49 ....................................... 906 art. 50 ...............................889, 906, 915 arts. 51, 52 ....................................... 906 art. 53 ...................................... 890, 907 art. 53(2) ......................................... 889 arts. 54–58 ....................................... 907 arts. 59–62 ....................................... 908 art. 63 ...................................... 908, 915 arts. 64, 65 ............................... 909, 915 art. 66 .............................................. 909 art. 67 ...................................... 909, 915 Chapter 4 (arts. 68–73) .................... 894 arts. 68, 69 ....................................... 909 arts. 70–73 ....................................... 910 Chapter 5 (arts. 74–76) .................... 894 arts. 74–76 ....................................... 911

Chapter 6 (arts. 77– 83)................... 894 arts. 77–79 ....................................... 911 arts. 80–83 ....................................... 912 Chapter 7 (arts. 84–103) .................. 894 arts. 84–89 ....................................... 913 arts. 90–92 ....................................... 914 arts. 93–98 ....................................... 915 arts. 99–103 ..................................... 916 Chapter 8 (arts. 104–109) ................ 894 arts. 104, 105 ................................... 895 RAFFIC, see Regulation of the PRC on the Administration of ForeignFunded Insurance Companies of the PRC— Regulation for Implementing the Road Traffic Safety Law of the People’s Republic of China, enacted by the State Council 28 April 2004, in force 1 May 2004 ........................... art. 90 ............................................ 1208 Regulation of Agriculture Insurance, adopted at 222nd executive meeting of the State Council 24 October 2012, in force on 1 March 2013 (State Council order No. 666): amended 6 February 2016 ....... 43, 44, 1087, 1089, 1093, 1098, 1100–1102, 1104, 1105, 1108, 1110, 1111, 1138, 1156, 1157, 1255 arts. 1–9 ......................................... 1093 art. 1 .............................................. 1093 art. 2 .................................................. 43 art. 2(1), (2) ................................... 1087 art. 3 ..................... 43, 1094, 1132, 1157 art. 3(1) ................................1088, 1093 art. 3(2) ......................................... 1094 arts. 4–6 ......................................... 1095 art. 7 ..................... 43, 1095, 1099, 1124 art. 8 ...............................44, 1096, 1156 art. 9 ...............................44, 1096, 1124 art. 9(1) ......................................... 1095 arts. 10–15 ..................................... 1093 art. 10(1) ....................................... 1096 art. 10(2) ....................................... 1097 art. 11 .........................1097, 1153, 1156 arts. 12–14 ..................................... 1097 art. 15 ............................................ 1098 art. 16 ...................................1093, 1096 art. 17 .........................1093, 1098, 1100

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art. 17(6) ....................................... 1108 art. 18 ...................................1093, 1098 arts. 19–22 ..................1093, 1098, 1099 arts. 23 .............. 1093, 1098, 1099, 1101 arts. 24–27 ..................................... 1100 art. 24 .........................1093, 1098, 1101 art. 25 ...................................1093, 1098 arts. 26, 27 ............................1093, 1100 arts. 28–30 ..................1093, 1100, 1101 art. 31 ...................................1093, 1100 art. 32 ...................................1093, 1101 art. 33 ............................................ 1093 Regulation of China on Foreign Exchange Administration............... 716 Regulation of the PRC on Contract of Property Insurance 1983 (promulgated by State Council 1 September 1983: partially repealed by the Insurance Law 1995 ............. 38 Regulation of the PRC on the Administration of Foreign-Funded Insurance Companies of the PRC (RAFFIC), enacted by the State Council 12 December 2001, effective 1 February 2002 (Decree No. 336), amended 30 May 2013 (by State Council Order No. 636), 6 February 2016 (by State Council Order No. 666), & 30 September 2019 (by State Council Order No. 720) ................... 42, 43, 120–122, 125, 128–132, 141, 14, 354 art. 2 ................................................ 120 art. 3 (2019) .............................. 43, 122 art. 4 ................................................ 122 art. 5(1), (2) ..................................... 122 art. 6 ................................................ 122 art. 7(1) (2019) ................................ 122 art. 7(2), (3) ..................................... 122 art. 8 ................................................ 122 art. 8 (2016) .................................... 125 art. 8 (2019) ............................ 125, 141 art. 9 ................................................ 124 art. 9(2)–(4) ..................................... 123 art. 10 .............................................. 124 art. 11 ...................................... 124, 125 art. 11(1), (4), (5), (6) ..................... 124 art. 11(9) ......................................... 125 art. 12(1), (2) ................................... 125

arts. 13, 14 ....................................... 125 arts. 15–18 ....................................... 127 art. 19(1), (2) ................................... 127 art. 20(1), (2) ................................... 127 art. 21 .............................................. 127 arts. 22, 23 ....................................... 128 art. 24(1), (2) ................................... 128 art. 25 .............................................. 128 arts. 26–30 ....................................... 129 arts. 31–35 ....................................... 130 arts. 36, 37 ....................................... 131 art. 38, 39 ........................................ 122 art. 39 .............................................. 122 art. 40 ...................................... 126, 141 art. 41 (2019) .......................... 126, 142 Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance, see Compulsory Motor Vehicle Traffic Accident Liability Insurance Regulation— Regulation on Penalties and Disciplinary Actions against Illegal Fiscal Conduct ..................................... 1101 Regulations for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies .................... 387 Regulations on Administration of Reinsurance Business (CIRC), 2005, amended 2010 & by CIRC Order No. 3, 2015 (The Regulations 2015) ........ 452–455, 457, 460, 463 Ch. 3 ............................................... 463 art. 2 ................................................ 453 art. 2(4) ........................................... 453 art. 2(5) ........................................... 454 art. 2(6) ........................................... 455 art. 2(7) ........................................... 457 art. 3 ................................................ 457 art. 6 ................................................ 461 art. 7 ................................................ 453 art. 9 ................................................ 453 art. 10 .............................................. 460 art. 11 ...................................... 453, 461 arts. 12, 13 ....................................... 461 arts. 18, 19 ....................................... 463 art. 20(1), (2) ................................... 463 arts. 21, 22, 33 ................................. 463 Regulations on Administration of Reinsurance of Property

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Insurance Companies, Bao Jian Fa No. 7, 12 January 2012 (The Regulations 2012),............ 452, 454–457, 461, 462 Ch. 2 ............................................... 454 art. 5(1), (2) ..................................... 461 Ch. 3 ............................................... 454 s. 1(3) .............................................. 459 s. 1(6) ...................................... 459, 462 s. 1(10) ............................................ 461 s. 2(1) ...................................... 454, 457 s. 2(2) .............................................. 454 ss. 2(4), (5) ...................................... 457 s. 3(1), (2)........................................ 455 Regulations on Investigation and Handling of Marine Traffic Accidents art. 9(3) ........................................... 955 Regulations on Natural Disaster Relief, The State Council Order No. 577, 2010 .................. 1181 Requirements for the Work on Notification of Important Information on Life Insurance for Insurance Application (The Requirements), Bao Jian Fa No. 68, 2009 ........................... 475 s. 1(1)–(5) ........................................ 476 s. 2(1) .............................................. 476 s. 2(2)–(7) ........................................ 477 s. 2(8) .............................................. 478 s. 3 ................................................... 478 Resolution of the NPC Standing Committee on Strengthening the Work of Law Interpretation, adopted at 19th Meeting of Standing Committee of 5th NPC, 10 June 1981 .................. 37, 47 art. 2 .................................................. 47 Self-discipline Convention for Members of the IAMAC (2018 amendment) ............1326, 1327 arts. 1–3 ......................................... 1326 arts. 4–11 ....................................... 1327 Several Opinions of the General Office of the State Council on Accelerating the Development of Commercial Health Insurance 2014 (The 2014 Opinions),

No. 50, issued & in force 27 October 2014............. 46, 965, 966 s. 1 ................................................... 967 s. 2(2) .............................................. 967 s. 3(1) .............................................. 968 s. 3(2), (3)........................................ 969 s. 4(1)–(3) ........................................ 970 s. 5(1)–(3) ........................................ 971 s. 5(4), (5)........................................ 972 s. 6(1)–(3) ........................................ 973 s. 6(4) .............................................. 974 Several Opinions of the General Office of the State Council on Accelerating the Development of Commercial Pension Insurance, General Office of the State Council No. 59, issued & in force 29 June 2017 .................. 46, 1038, 1039, 1059 Several Opinions of the State Council on Accelerating the Development of the Pension Service Industry, The State Council No. 35, issued & in force 6 September 2013 ................. 46, 1036, 1038, 1039, 1053, 1059 Several Opinions of the State Council on Promoting the Development of Health Services; No. 40 (2013); issued and in force 28 September 2013 ............................... 46, 964, 965 s. 2(3) .............................................. 964 Several Opinions of the State Council on the Reform and Development of the Insurance Industry, issued 15 June 2006, No. 23, 2006........ 1037 Several Opinions of the Supreme People’s Court (SPC) on Establishing and Improving the Link-up of Litigation and Non-litigation Mechanism for Resolution of Contradiction and Disputes, issued 24 July 2009— art. 10 ............................................ 1306 art. 24 ............................................ 1316 Several Opinions on the Reform and Development of Insurance Industry, The State Council No. 23, in force 15 June 2006 ........1091, 1160 Sichuan Province Urban and Rural Resident Housing Earthquake Insurance Pilot Programme Plan,

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issued by the Sichuan Province Governmental General Office No. 84, issued & in force 28 April 2015 .. 1169 Specifications of the Use of Illness Terms for Critical Illness Insurance issued by the Insurance Association of China, IAC No. 9, 2007 ......................... 1066 State Council Document 1979 No. 99 (April 1979).................................... 18 State Council Opinion No. 29 [2014]), issued 10 August 2014 .................... 15 Supervisory Measures on Internet Insurance Business of Insurance Agencies and Brokers (Trial), in force 1 January 2012, superseded by Interim Measures for the Supervision of the Internet Insurance Business 2015, 1 October 2015 .......................... 1235 The Insurance Company Provisions, see Provisions on the Administration of Insurance Companies— The Provisions 2018, see Provisions on the Administration of the Office

Qualifications for the Directors, Supervisors and Senior Executives of Insurance Companies— Work Plan for the Pilot Program of Deepening the Reform of the Administrative System of Commercial Motor Vehicle Insurance Clauses and Premium Rates, see Notice of the CIRC on Issuing the Work Plan for Deepening the Pilot System Reform of the Administration of the Commercial Motor Vehicle Insurance Clauses and Premium Rates— Work Plan for Deepening the Pilot Reform of the Administration System of the Commercial Motor Vehicle Insurance Clauses and Premium Rates, see Notice of the CIRC on Issuing the Work Plan for Deepening the Pilot System Reform of the Administration of the Commercial Motor Vehicle Insurance Clauses and Premium Rates—

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CHAPTER 1

Introduction to insurance regulation and the insurance industry

1.1 Introduction A sound insurance regulatory system is necessary for maintaining a fair, safe, and stable insurance industry for protecting the rigyyyhts and interests of insurance consumers, preventing and mitigating market risks, and promoting the sustainable and healthy development of the insurance industry. Such a regulatory system ultimately contributes to the stability of the financial system of the country and the stability of the society as a whole. Modern insurance industry and insurance legislation have a relatively short history in China. The first comprehensive insurance legislation since the foundation of the People’s Republic of China in 1949, that is, the Insurance Law of the People’s Republic of China (hereinafter, the Insurance Law),1 was enacted in 1995. It was amended in 2002, 2009, and 2015 to keep pace with the rapid development of the insurance industry in China. The law of insurance can be broadly divided into two distinct topics. One is the law of insurance contracts, which governs the contractual relations between the insurer and the insured. The other is insurance regulation, which can be generally defined as a mechanism used to control the behaviour of participants in an insurance market. The Insurance Law consists of both the insurance contract law and insurance regulation, governs the activities of the insurers and the insureds, and regulates the behaviour of insurance companies and intermediaries in China’s insurance market. While the contractual aspect of the Insurance Law has been considered in the book Chinese Insurance Contracts: Law and Practice,2 the regulatory aspect of the Insurance Law is considered in this book. Although rules which apply to insurance contracts and rules which apply to the supervision and regulation of an insurance market are different, those two sets of rules work together to ensure fair play in the insurance business and safeguard the insured’s interests. This book intends to present a systematic and comprehensive analysis of the substantive legislation of insurance regulation in China, including statutory law, the regulations enacted by the central government (the State Council), 1 The Insurance Law of the People’s Republic of China was adopted at the 14th Session of the Standing Committee of the 8th National People’s Congress on 30 June 1995 and became effective as of 1 October 1995. 2 Zhen Jing, Chinese Insurance Contracts: Law and Practice (1st edn., Informa Law from Routledge, 2017).

DOI: 10.4324/9781351122863-1

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the regulations developed by the insurance supervision and regulation authority of the State Council,3 and self-regulations by the insurance industry.4 1.2 The nature of insurance Insurance is a risk-transfer and loss-spreading arrangement. When you insure a car or a house, you cannot insure that the car shall not be lost or the house burnt, as the occurrence of an accident with the car or a fire in the house is an uncertain event, but what you do insure is that a sum of money shall be paid by the insurer to indemnify the loss upon the happening of this uncertain event. There must be an uncertainty in terms of whether the event will ever happen or not (this is the case for indemnity insurance) or if the event is one which is certain to happen at some time but the time when the event is to occur is uncertain (this is the case for life insurance). The need for an uncertain event precludes the possibility of insurance being placed after a loss has occurred. In insurance, this uncertainty is normally described in terms of risk. Insurance runs the business of risks. The word “risk” in underwriting can be defined as the uncertainty concerning a possible loss, while the word “peril” (such as a road accident or a fire) is defined as the cause of the loss. In the modern world, insurance is a primary mechanism for the management of risks, by which the insured transfers the risks of some uncertain events to the insurer by paying premiums to the insurer; in return, the insurer promises that it will pay the insured for losses caused by the happening of the uncertain events insured against under an insurance contract. In essence, the purpose of insurance arrangements is to organize the sharing among a large number of persons (the insureds) of the cost of losses which are likely to happen only to some of them or to happen at an earlier time to some than to others. In a sense, an insurer can be described as the manager of two pools: the pool of risks and the pool of premiums. The shifting of risk from an insured to the insurer and the distribution of the cost of losses among the population of the insureds for a certain type of insurance or among a community of insureds for all different types of insurance underwritten by the insurer are the primary functions of insurance. In short, the essential characteristics of insurance are risk transfer and loss spreading.5 An insurance system is able to operate because all insured are willing to substitute a relatively small certain outlay, the insurance premium, for a relatively large uncertain loss. The successful operation of the insurance system requires accurate prediction of losses. By applying the law of large numbers,6 the insurer is able to work out relatively accurate predictions of the amount of losses it will incur in a 3 In China, the insurance supervision and regulation authority of the State Council regulates the insurance industry. Currently, China Banking and Insurance Regulatory Commission (CBIRC) plays the role of the insurance supervision and regulation authority of the State Council; its functions and responsibilities will be considered in chapter 3 of this book. 4 Self-regulation will be considered in chapter 24 of this book. 5 Greg Pynt, Australian Insurance Law: A First Reference (4th edn, LexisNexis 2018) para.1.3, p. 4. 6 The law of large numbers states that the greater the number of observations of an event based on chance, the more likely the actual result will approximate the expected result. The law of large numbers

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given period.The relative accuracy of the insurer’s predictions will increase with the increase of the number of exposures in the pool of risks. If losses can be predicted accurately, then the cost can be budgeted by the insurer and shared by all insureds in advance in the form of the appropriately charged premium. The premiums paid by each insured accumulates to form a large pool of premiums, and the management of the premium pool by multichannel investment is a very important part of an insurer’s business. The successful operation of the premium pool not only can consolidate the solvency position of the insurer but can also enable the insurer to reduce the premiums to be charged to the insureds by using the investment earnings. The major part of the premium pool will be used for paying the cost of losses. The components of the premium include not only the cost of losses but also the expenses of operating the insurance company, the reserves needed for the unexpected losses, investment earning of the insurance funds, and the expected profit of the insurance company for shareholders. Behind each of these components are the corresponding processes of the insurance business and therefore insurance regulatory subjects. For example, setting of premium rates, maintaining of solvent status, corporate governance of insurance companies, investment of insurance funds, and setting aside of reserves are all important subjects for regulation by the insurance supervision and regulation authority of the State Council in China. Insurance arrangements can be carried out in the form of insurance contracts. A contract of insurance is one whereby one party (the insurer) promises in return for a money consideration (the “premium”) to pay to the other party (the insured) a sum of money or provide him or her with some corresponding benefit upon the occurrence of one or more specified events.7 In common law, insurance has been defined in broad terms as: an agreement to confer up[on] the insured a contractual right which, prima facie, comes into existence immediately when loss is suffered by the happening of an event insured against, to be put by the insurer into the same position in which the insured would have been had the event not occurred, but in no better position.8

The Insurance Law defines the term of “insurance” as a commercial insurance transaction9 whereby a proposer, in accordance with the terms and conditions of a contract, pays insurance premiums to an insurer, and the insurer assumes liability to make indemnity payments where property loss or damage is caused as a result of the occurrence of an insured event that is agreed upon in the contract, or to pay insurance benefits upon the occurrence of death, injury, or illness of the insured or the attainment of certain age or time limit agreed upon in the contract.10 An insurance contract is an agreement whereby the rights and obligations are agreed only allows accurate prediction of group results but does not allow accurate prediction of what will happen to a particular exposure in the group. 7 This is a working definition for the concept of contract of insurance derived from that given by Channell J. in Prudential Insurance Company v. Inland Revenue Commissioners [1904] 2. K.B. 658. 8 Callaghan v Dominion Insurance Co [1997] 2 Lloyd’s Rep. 541, per Sir Peter Webster. For more, see Rob Merkin, Colinvaux’s Law of Insurance (11th edn., Sweet & Maxwell 2016) paras 1-021 to 1-031, p. 16. 9 This is in contrast to social insurance. In China, social insurance is regulated by the Social Insurance Law of the People’s Republic of China; the topic of social insurance is beyond the scope of this book. 10 The Insurance Law, art.2.

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upon by the proposer and the insurer.11 A proposer (or policyholder) is a party who enters into an insurance contract with the insurer and is obliged to pay the premium under the contract.12 An insurer refers to an insurance company which enters into an insurance contract with a proposer and is obliged to make indemnity payment or pay insurance benefits under the contract.13 An insured refers to a party whose property or life or physical body is covered by an insurance contract and who is entitled to claim for insurance money. A proposer may be the insured.14 By purchasing an insurance policy, the insured expects that when the insured event occurs and causes loss, the insurer will pay him or her for the loss. Whether such an expectation can be satisfied depends on the answers to two broad questions. First, whether or not the uncertain event is covered under the insurance policy, and if covered, what the extent of the coverage is. The insured may think that the risk is fully covered but not realise that the risk is in fact excluded by an exclusion clause in the policy, or there is a deductible clause in the policy, or there is a warranty or condition precedent in the policy (breach of which may entitle the insurer to rescind the contract or to be released from liability); as a result, the insured may not recover anything from the insurer at all or not as much as what is expected. Because the recoverability is usually defined by the complex and complicated insurance clauses which are often not easily comprehended by the proposers, the questions arise as to whether or not the insurer is obliged to explain the policy terms to the proposer prior to the conclusion of the contract and whether or not the policy terms should be controlled by an insurance regulatory authority. The first question is related to contractual obligation on the insurer, which is governed by contract rules of the Insurance Law (art.17), while the second question is related to the regulation of insurance policy terms, which is governed by the regulatory rules of the Insurance Law (art.135) and by the regulations formulated by the insurance regulatory authority.15 Sometimes the insurer or its intermediary may mislead the proposer to purchase an insurance policy which does not fit his or her needs. Thus the behaviours of the insurers and their intermediaries in the process of sales of insurance products need to be regulated by statutory rules and regulatory requirements in order to protect the insured’s right to be indemnified.16 Second, even if the risk is covered and the insured has the right of recovery of the loss, whether the insured can be paid by the insurer depends on whether the insurer is financially able to honour its promise. In order to ensure that the insurer is able to meet its promise, the governmental regulatory authority steps into the affairs of insurance companies by setting up regulatory requirements for the

11 Ibid., art.10(1). 12 Ibid., art.10(2). 13 Ibid., art.10(3). 14 The Insurance Law, art.12(4). 15 The approaches to these questions vary from one jurisdiction to the next; for instance, in the UK, material regulation in the form of control over policy terms and premiums has never been a feature of regulation. See Rob Merkin, Colinvaux’s Law of Insurance (11th edn., Sweet & Maxwell 2016) para 14-002, p. 871. 16 The regulatory requirements are collectively called insurance regulations and are established by detailed and complex legislation.

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insurers to follow so as to ensure that the insurer will remain solvent. Therefore, promoting the insurer’s solvency is the most important goal of insurance regulation. 1.3 Reasons for and objectives of insurance regulation Insurance regulation represents both the rules by which the insurance market is operated and the actions by which the rules are formulated and enforced by the insurance regulatory authority. Insurance regulation provides the insurance industry with direction, management, control, intervention, correction, and service. The Insurance Law empowers the Insurance Supervision and Regulation Authority (the ISRA) of the State Council to supervise and regulate the insurance industry in China.17 The Insurance Law clearly defines the objectives of insurance supervision and regulation, namely, to maintain the order of the insurance market and protect the legitimate rights and interests of the proposers, the insureds, and the beneficiaries.18 Thus, the ultimate goal of insurance regulation is to promote the maintenance of a fair, safe, and stable insurance industry for the benefit and protection of the legitimate rights and interests of the proposers, the insureds, and the beneficiaries. In China, the insurance transaction between the insurers and the insureds is carried out in a comprehensively regulated marketplace. The insurers generally are not totally free to write any contract they choose and are not totally free to charge any premium they choose; they are required to follow the regulatory rules in conducting their insurance business and maintaining their solvency. A number of reasons may explain why the insurance industry is regulated so extensively,19 namely, the widespread severe impact of insolvency of the insurer, the inequality in both knowledge and bargaining power between the insurers and the insureds, premium rate setting before costs are known, and promotion of social goals. 1.3.1 Maintenance of solvency of insurers Predictable results are the essence of insurance, and solvency of the insurer makes the result of the insurance transaction certain and predictable. Therefore, the promotion and maintenance of insurer solvency are at the heart of all regulatory activities. Insurance is nothing more than a contingent promise to be delivered in the future, but the insured is unable to do anything in respect of the insurer’s ability in delivering of the promise. He or she is neither capable of self-protection, nor in a position to be able to evaluate or inspect the solvency status of the insurer, so the government steps into the affairs of the insurer to monitor and regulate the solvency of the insurer on behalf of the insureds. If the insurer becomes insolvent, the consequence for the insured and thirdparty claimant are very serious. The potential results of an insurer’s insolvency can be shown by typical examples, such as houses destroyed with no insurance 17 The Insurance Law, art.9. 18 Ibid., art.133. 19 Mark Dorfman, Introduction to Risk Management and Insurance (6th edn., Prentice Hall, New Jersey 1998) p. 173.

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fund to rebuild, or an insured’s liability to an injured third party who cannot be compensated by the insurance payment. A vivid example of this consequence was the failure of several UK insurers in the early 1970s when thousands of motorists became uncovered overnight, and many more were deprived of compensation in respect of motor accidents. The collapse of a life insurer is even worse. The insured or the beneficiaries under a life insurance policy are often relying on the ability of life insurance funds to provide for them in their old age or in the event of a family tragedy. The sudden collapse of such a fund can obviously have dire consequences. It is for this reason that control of life insurance companies has frequently been more far-reaching than control of property insurance companies. A life insurance policy often represents a certain amount of the insured’s savings, and a life insurer is responsible for the management of the pool of premiums paid by thousands of policyholders over many years. The accumulated premiums represent a large amount of investable funds and thus are often used for investment earnings through various investment vehicles. In order to safeguard the use of the insurance fund, government sets out requirements to control the ways in which the insurance fund is invested. The question which often arises is how much regulation is necessary. Too little regulation may be insufficient to prevent investment risks and to prevent temptation to dishonest businessman to devise fraudulent schemes under the guise of insurance, while too much control may restrict opportunities for investment and thus a possible higher level of investment return and a cheaper premium. It is a question of security versus opportunity. The question of the desirable amount of regulation as to the use of insurance funds may also be applicable to other aspects of insurance regulation.The adequacy of the extent of regulation in terms of protection of the policyholders may evolve as circumstances change, and there seems no objective amount of regulation applicable to all jurisdictions in all circumstances. As long as the insurance industry grows stably and healthily and the legitimate rights and interests of the policyholders are protected, it may be said that the amount of regulation is adequate and the regulatory system is operating satisfactorily. As a life insurance policy often represents a sizeable amount of an insured’s savings, the relationship between the insurer and the insured is comparable to that of debtor and creditor; such a relationship appears to bear a close resemblance to the fiduciary arrangement found between a bank and its depositor. Fiduciaries are held to strict requirements for their actions because they operate on public confidence. As an insurer’s operations parallel those of fiduciaries, the insurer’s solvency is a subject for government regulation.20 Even the extensive regulation in place on solvency of insurers cannot totally eliminate the possibility that they will become insolvent. In the event that an insurer is unable to deliver its promise to the insureds due to financial problems, there must be regulatory mechanisms in place to safeguard the insureds’ interests. In China, two such mechanisms exist to protect the insureds. First, where a life insurer has gone bankrupt, all of its life insurance contracts and liability reserves

20 Ibid., p. 174.

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must be transferred to other life insurers; where no agreement in respect of such transfer can be reached with other insurers, the insurance supervision and regulation authority of the State Council shall designate life insurers to accept such transfer. Where any life insurance contracts or liability reserves are transferred or accepted according to the designation of the insurance supervision and administration authority of the State Council, the legitimate rights and interests of the insureds and beneficiaries can then be protected.21 Second, the insurance security fund is in place to compensate the insureds in the case of insolvency of the insurer. The Insurance Law (art.100) requires insurance companies to make contributions to the insurance security fund which is managed in a centralized way and used to provide relief to the proposers, the insureds, or beneficiaries under the following circumstances: where an insurance company is dissolved or declared bankrupt, or to provide relief to the insurance company which accepts the life insurance contracts of a bankrupt insurance company, or where the latter is dissolved or declared bankrupt. 1.3.2 Unequal knowledge and bargaining power The statutory and regulatory control over policy terms and premium rates has been a significant feature of insurance regulation in China. The reason for the regulation of insurance policy terms lies in the inequality in both knowledge and bargaining power between the insurers and the insureds. Unlike a visible product (such as a car or a TV set) which can be touched and inspected at the time of purchasing, and can be repaired, changed, or even returned to the seller if the product does not work properly, an insurance product (a policy) is intangible. As such, it is difficult for a consumer to evaluate the product’s performance until it may be too late to argue. The problems created by an inferior insurance policy ordinarily are not readily apparent to the consumer, who could not determine its quality until he or she put it to the test and made a claim, by which time it would be too late to take remedial action. Therefore, the quality of the insurance policies must be controlled by the regulator on behalf of the consumers at the time when the insurance products are manufactured by the insurer. The quality of an insurance product (policy) is defined by the terms of the insurance policy and the premium rate. The fewer exclusions and conditions in the policies and the wider the coverage, the greater the quality of the insurance product would be. A question now arises about whether insurers should be free to incorporate into policies as many exclusion clauses, conditions, and warranties as they think fit or whether there should be some statutory control of what might be considered unfair insurance contract terms. Because the quality of the intangible product is defined by the terms of the insurance contract, insurance products need stricter consumer protection than would be justified for other products. Usually, these terms are formulated by the insurer unilaterally in the form of a standard-form contract which is normally used for consumer insurance. The

21 The Insurance Law, art.92.

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standard-form contracts are advantageous in several respects.22 However, the major disadvantage is that the insurer with superior knowledge and bargaining power may impose its will on a weaker and less informed insured. Usually, the insurers draft the terms on the basis of two considerations: on the one hand, for marketing purposes the insurers need to make the terms of the contract attractive to the potential insureds; on the other hand, the insurers need to make the terms well defined for the purpose of management of risk and control of the liability of payment under the policy. Thus the insurers often use complex wordings to limit or exclude their liability, which an ordinary insured cannot easily understand. The insured is in a weak bargaining position of “take it or leave it”, so one purpose of insurance regulation is to compensate for the inequality of knowledge and bargaining power in order to protect the weaker party of the insurance bargain. The regulation requires that the insurance contracts must be written in plain language and must be clear in structure, accurate in wording, precise in expression, and easy to understand so that the insureds can enter into the contracts on the basis of a proper understanding of the terms of the contracts. There are also regulatory restrictions on the exclusion clauses. Because of the unequal knowledge and bargaining power, the insured can be easily manipulated by an insurer’s salesman or by an insurance intermediary and encouraged to purchase an insurance policy which may not meet his or her needs. In order to regulate the insurers’ conduct in sales of insurance policies and to assist the insured to make an informed choice to insurance products, Chinese law adopts a number of approaches: first, the insurers are required to explain the content of the contracts and to clearly explain the exclusion clauses to the insured before the conclusion of a contract; otherwise, the exclusion clauses are ineffective.23 Second, as previously stated, the standard-form insurance contracts must be formulated by the insurers in accordance with the statutory requirements of the Insurance Law and the regulatory requirements of the Insurance Supervision and Regulation Authority (ISRA) and are subject to the scrutiny and approval of the ISRA. Third, the ISRA provides regulatory rules in relation to information disclosure of insurance products to require the insurers to disclose information of the products in a transparent manner. This kind of regulation is in fact for the sake of providing detailed rules for the insurers to follow in their performance of the duty of explanation of the content of the contract to the insured as required by the Insurance Law (art.17). Fourth, the Insurance Law and the ISRA require that the insurers and their salespersons, in their sales of insurance products, treat customers fairly 22 Considerable time is saved that otherwise would be required to negotiate individual contracts. Judicial interpretation of one contract can serve as a guide for the interpretation of similar kinds of contracts. Risk can be evaluated by the insurer on a more predictable basis. 23 Article 17 of the Insurance Law provides that “[w]hen standard clauses provided by the insurer are adopted for concluding an insurance contract, the standard clauses provided by the insurer to the proposer shall be attached to the insurance application form, and the insurer shall explain contents of the contract to the proposer. “When concluding an insurance contract, the insurer shall make notes on clauses which exempt the insurer of its liabilities on the application form, the insurance policy, or other certificate that are so conspicuous as to draw the proposer’s attention, and make specific and clear explanations thereof to the proposer orally or in writing; otherwise such clauses shall have no effect.”

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and do not mislead them into purchasing an unsuitable or inappropriate insurance product. In addition, as a general requirement, the ISRA obliges the insurers to disclose to the general public relevant, comprehensive, and adequate information on a timely basis in order to give the potential insureds and market participants a clear view of the insurers’ business activities, performance, and financial position. This gives an opportunity for the potential insureds to compare insurance products offered by different insurers and to choose appropriate and suitable insurance products from the insurers. 1.3.3 Premium rate of insurance products While the terms of an insurance policy determine whether the insured will be paid where the insured event occurs, the premium rate determines how much the insured will pay for the insurance policy. Both the terms and premium rate of an insurance policy are subject to the approval by or filing with ISRA in China. The premium rate is primarily determined by the nature of the risks to be covered and the costs for the future losses, and it is calculated by actuaries following the law of large numbers and by using statistical data of the frequency of the occurrence of the risks and the severity and the amount of losses in the past. In other words, the pricing of an insurance policy mainly depends on the data of losses in the past. The problem is that the insurer has to set the premium rate before the real costs in the future are fully known. The life or liability insurer may have to wait for many years to learn the costs. If we assume the law of supply and demand for most goods and services in the ordinary market, operating through open competition determines the price, the competition between suppliers is usually to the advantages of the consumers. This assumption does not, however, necessarily work to the consumer’s advantage in the insurance market. If an insurer overestimates its costs and thus sets a higher premium rate, the insurer may make money. On the other hand, if the insurer underestimates its costs, ultimately the insurer may become insolvent. The policyholder would be worse off if the insurance policy was purchased from an insurer that underpriced its insurance policy and became insolvent than if too much premium was paid for an insurance policy for the same protection from another insurer that maintains a solid solvency. In neither case, however, would the insured’s welfare be maximized. An ordinary insured is, however, not in a position to make a judgment as to the fairness and adequacy of an insurer’s premium rate. The insurance regulatory authority must, therefore, control the insurer’s premium rate for an orderly competition between insurers in order to protect the interests of the insureds. As previously stated, a free price competition cannot be relied on to promote an insured’s welfare in the insurance market; solvency regulation is used as a substitute for the competition. The insurers are not allowed to set the premium rate too high or too low; they can set it to an adequate and appropriate level at which the insurer’s solvency is soundly maintained and the insured’s interest is safeguarded. Then the question to the insurance regulatory authority is the amount of freedom in pricing the policies the insurers should be allowed. The ISRA in China responds to this question in two ways: the first is the prior approval of premium rate, which 9

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requires insurers to get prior approval from the ISRA before using the rate. The second is open rating, which allows an insurer to use whatever rate it chooses after filing the rate and the statistics with the ISRA. This approach allows more freedom for insurers to compete on prices, with some regulatory control retained. For example, for the non-compulsory commercial motor vehicle insurance, where the insurer uses the model insurance clauses formulated by the Insurance Association of China, currently, the insurer has the freedom to adjust the pricing coefficient in the range of 0.65 to 1.35. In other words, the independent pricing coefficient may be floated up or down to the maximum of 35% of the base value.24 In the future, the insurers may be permitted to freely determine the range of the independent pricing coefficient.25 1.3.4 Social role of insurance Insurance operates not only as a business but also as a social actor. In article 1 of the Insurance Law, it is clearly stipulated that safeguarding the social and economic order as well as social and public interests is one of the purposes of the Insurance Law. Some insurance regulation is formulated for the aim of promoting the social objectives of the insurance industry. The social role of insurance is particularly important in some areas of the insurance business, such as agriculture insurance, health insurance, pension insurance, catastrophe insurance, and compulsory motor vehicle insurance. Accordingly, the ISRA has developed a large number of pieces of regulation to assist, direct, promote, and control the operation and development of these lines of the insurance business and to make them more widely available to the public. For example, in compulsory motor vehicle insurance, the insurer’s freedom of contract is, to some extent, restricted. A proposer for compulsory motor vehicle insurance can choose an insurance company engaging in the compulsory motor vehicle insurance business, and the insurance company chosen is not allowed to refuse to underwrite or delay underwriting the insurance.26 In other words, the insurer’s freedom to underwrite is restricted, and it has to offer insurance to the proposer who would otherwise have been rejected because of a bad driving record. The ISRA approves premium rates under the principle of “no profit and no loss in general” in the compulsory motor vehicle insurance business.27 Here, the motor vehicle insurer has been forced to use rates lower than they otherwise would have chosen; in this way, the social goal of making insurance widely available takes precedence over other goals such as freedom of the insurer to contract with whom it wishes. To tackle the problem of the conflict with the goal of maintaining insurer 24 The Notice of the CBIRC on Issuing the Guiding Opinions on the Implementation of Comprehensive Reform of Motor Vehicle Insurance, s.12.The Notice was issued on 2 September 2020 and came into force on 19 September 2020 (see accessed on 13 October 2020). 25 Ibid. 26 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance 2016, art.10 (see accessed on 20 September 2020). 27 Ibid., art.6.

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solvency where a motor vehicle insurer is compelled to accept too many poor risks, the ISRA takes the steps to review annually the compulsory motor vehicle insurance business of the insurance companies and may require or allow insurance companies to adjust premium rates according to the profit or loss in general of the compulsory motor vehicle insurance business of the insurance companies.28 The social role of agriculture insurance is even more important in China. Agriculture plays a fundamental role in China’s national economy and social stability. To maintain a sufficient supply of food to about 1.4 billion people is an enormous challenge and the most important task of the government. Agriculture faces a variety of natural disasters such as floods, droughts, hailstones, and hurricanes. Occurrence of these events will devastate crops and livestock and give rise to large-scale economic loss. In order to support sustained, rapid, and sound development of China’s agricultural economy and to maintain the stability of the society, China has been striving to provide sufficient protection for the development of agriculture and the rural economy by enhancing the role of agriculture insurance. The role of government in agriculture insurance is both regulatory and supportive. Premium subsidy by the central and local government is the major measure to support the agriculture insurance. Because of the fact that insurers offering crop insurance face a systematic risk about 20 to 50 times higher than the risk for the insurers offering other ordinary insurance,29 agriculture insurance which is provided on a full commercial basis without government financial support would suffer sustained underwriting losses. For example, between 1982 and 1993, the agriculture premium income of the People’s Insurance Company of China (PICC) totalled ¥2.967 billion yuan, while its total amount of payout for losses reached ¥2.877 billion yuan. Taking 15% of the premium as operating costs, the company suffered a loss of ¥355 million yuan. Thus, the enthusiasm of insurance companies to offer agriculture insurance was very low in the past. Beginning in 2004 the government subsidized the premium rates for agriculture insurance, and the extent of the subsidy has been increasing. Consequently, agriculture insurance has increased significantly in China (see chapter 18 of this book). For the promotion of social goals, the insurance industry needs to be regulated; the regulation for this purpose is carried out more in the way of direction and support and less in the way of intervention and control. 1.4 The outline of this book The rules of insurance regulation are provided at the following four levels: the provisions of the Insurance Law, the regulations enacted by the State Council, the regulations developed by the insurance supervision and regulation authority, and self-regulation by insurance associations. These rules of regulation may be broken down into three types of conditions or requirements: first, the conditions that have to be fulfilled before a company is authorized to operate; second, the conditions 28 Ibid., art.7. 29 Mario J. Miranda and Joseph W. Glauber, “Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets” (1997) Amer. J. Agr Econ. 79, 206–215.

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which have to be observed during the company’s operation; and third, the conditions that have to be observed if the company goes into liquidation or ceases operation from any other cause. All these rules of regulation for the life cycle of an insurance company are considered in this book, but there is a focus on the rules to be observed during a company’s operation. This book gives a systematic analysis of the rules of law and administrative regulations and presents a whole picture of Chinese insurance regulation with the scope and coverage of regulatory requirements in most aspects of the regulatory structure in China, such as formation of an insurance company, its internal controls and risk management, corporate governance, operation of business, solvency, insurance fund investment, the role of intermediaries in the market, the regulation of some special important types of insurance, regulation of mutual insurance institutions, protection of policyholders, and industrial self-regulation. The insurance regulation system varies from one jurisdiction to another because of the differences in the level of development or sophistication of the insurance markets and the types of insurance products and service, but general core principles of insurance supervision and regulation are applicable to all jurisdictions. China’s insurance industry and market have a relatively short history of development. The insurance supervision and regulation authority of the State Council has attempted to make the regulatory system and rules tailored to fit the actual situations in China in accordance with the nature, scale, and complexity of the insurance market at the different stages of its development so as to meet regulatory objectives. To better understand the regulatory system and the rules for a newly emerging insurance market, it is necessary to look at the development of China’s insurance industry and market for which the regulatory rules are developed and applied and at the legal system within which the regulatory system operates. Therefore, the first three chapters (chapters 1 to 3) of this book present an introduction to insurance regulation, the insurance industry, and the legal system and insurance regulatory system in China. Chapter 1 considers the nature of insurance and the reasons for and objectives of insurance regulation, and also the development of China’s insurance industry. Chapter 2 gives an overview of the Chinese legal system and the legislative and judicial sources of insurance law and discusses the birth, amendments, and judicial interpretations of the Insurance Law. Having laid down the industrial and legal backgrounds of insurance regulation in chapters 1 and 2, chapter 3 sketches out an overall picture of the structure, the function, and the responsibilities of the insurance supervision and regulation authority and regulatory system in China, From chapter 4 to chapter 15, the regulations of the insurer’s business and the conduct of the business by insurers and their intermediaries are considered. Chapter 4 is concerned with the regulations in respect of formation and dissolution of insurance companies and the market access and exit of the companies. Chapter 5 discusses the regulatory rules in relation to administration of foreign-funded insurance companies and representative offices of foreign insurers in China’s insurance market. Insurance institutions that intend to engage in insurance activities in China must be licensed before they can operate; chapter 6 considers the regulations with regard to requirements and procedures for insurance licensing and business permits. 12

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The modern system of insurance regulation is made up of three pillars: the regulation of corporate governance, the regulation of market behaviour, and the regulation of solvency. A sound system of corporate governance of an insurance company is necessary for the success of the company. Chapter 7 considers the pillar of corporate governance of insurers. Equities regulation is a key and special area of the regulatory system regarding corporate governance and thus deserves a separate treatment from the general regulatory framework for corporate governance; therefore, chapter 8 is devoted to the regulatory rules in relation to equities of insurance companies. In chapters 9, 10, and 11, the other two pillars of insurance regulation are considered, that is, insurers’ market behaviour (including the insurance business and the conduct of insurance companies) and solvency. Chapter 9 considers the regulation of the insurance business, focusing on the aspects of the scope of the insurance business, the regulatory requirements for insurance clauses and premium rates, the regulation of insurance products, information disclosure of insurance products, premium rate adjustment of long-term medical insurance products, the regulation of actuaries, and the regulation of the reinsurance business. Chapter 10 analyzes the regulation of the conduct of insurance companies. The key requirement of the regulation of the conduct of insurers is that insurers must, in their conduct of the insurance business, treat customers fairly throughout the insurance life cycle, from the time when a contract is entered into and through to the point at which all obligations under a contract have been satisfied. The fair treatment of customers encompasses concepts such as ethical behaviour, acting in good faith, and the prohibition of misconduct and abusive practices. In chapter 10, the questions of how insurers’ conduct of business throughout the insurance life cycle is regulated and how the aim of fair treatment of customers is achieved through the formulation and implementation of the regulatory requirements in China are examined. Chapter 11 examines the regulation on insurers’ solvency. At the heart of modern insurance regulation is the regulation of solvency of insurance companies. To ensure that the insurer is finally able to meet its obligation of paying insurance proceeds to its insureds is the ultimate purpose of insurance regulation. The regulatory authority requires an insurer to maintain adequate solvency capability. In China, the solvency regulation has experienced a change from the first-generation solvency system to the second-generation system, that is, from a scale-oriented solvency system to the China Risk-Oriented Solvency System (C-ROSS). This second-generation system introduces risk-based solvency regulation to the Chinese regulatory framework. The new C-ROSS has absorbed some characteristics from the European Solvency II system and at the same time developed new, unique features to suit the Chinese situation. Chapter 11 discusses the solvency regulation system in China with a particular focus on the examination of the C-ROSS. Other statutory and regulatory requirements in relation to the solvency of insurance companies are also considered. Insurance funds utilization is a complex subject with multiple facets of economics, finance, business operation, and regulatory requirements. Chapter 12 examines the regulatory requirements for insurance funds investment through diversified 13

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channels such as bank deposit, bonds, stocks, equity, securities, insurance asset management products, infrastructure investment, and real estate investment. The regulatory rules for each of these investment vehicles and for the two modes of investment (self-managed investment and entrusted investment) are considered. The internal control on insurance funds investment and risk-based insurance assets classification are also examined in this chapter. Chapters 13, 14, and 15 discuss the rules regarding insurance intermediaries, namely, insurance agents, brokers, and adjusters. Insurance intermediaries have been playing an increasingly important role in China’s insurance market. For example, insurance intermediary channels realized premium income of ¥3.37 trillion yuan, accounting for 87.4% of China’s total premium income in 2018. In the past five years, the insurance intermediary channel has always accounted for more than 80% of premiums and is an important channel for insurance sales.30 The general agency principles are applicable to all three types of insurance intermediaries, and some specific rules are applicable to each of these three types. Thus, it is appropriate to consider the general agency principles first and then the regulatory rules on insurance agents in chapter 13. The specific rules on insurance brokers and insurance adjusters are then analyzed in chapter 14 and chapter 15, respectively. From chapters 16 to 20, the regulatory rules in relation to some special lines of the insurance business are examined, that is, health insurance (chapter 16), pension insurance (chapter 17), agriculture insurance (chapter 18), catastrophe insurance (chapter 19), and motor vehicle insurance (chapter 20). These special types of insurance have important roles to play in promoting the social objectives of the insurance industry, such as safeguarding the social and economic order and the social and public interest and welfare. Many pieces of legislation have been in place to regulate and support these special types of insurance. The regulatory rules and industrial practices are examined for each type of these special insurance products in chapters 16 to 20. Chapter 21 deals with Internet insurance. Unlike the face-to-face insurance business, Internet insurance runs the whole life cycle of an insurance contract via the Internet, including sales, underwriting, claim settlement, surrender, handling of complaints, and customer service. Such an arrangement necessitates a special set of rules for the regulation of the operation of the Internet business and for the protection of consumers. For example, where an insurance proposer applies for insurance on the Internet, questions arise as to how the proposer can perform his or her pre-contract duty of disclosure of information31 and how the insurer can perform its duty of explanation of the content of insurance policies and clearly explain the exclusion clauses to the proposer.32 An additional question is “Where a dispute occurs on the matters of the insurer’s explanation of the exclusion clauses, how can the insurer prove that it has performed the duty?” There are also other issues such as information privacy and the security of the Internet itself. It is therefore 30 See Financial News, 8 May 2019 (see accessed on 25 September 2020). 31 The Insurance Law, art.16. 32 Ibid., art.17.

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necessary and important to standardize the conduct of online business and also manage Internet insurance sales activities retrospectively. Chapter 21 discusses the question of how Internet insurance is regulated to deal with these issues. Chapter 22 considers the regulation of mutual insurance institutions. In China, the development of mutual insurance organizations is currently in its preliminary stage. The domestic market share of mutual insurance accounts for only 0.2% of the total market share.33 This is much lower than the global average market share of mutual and cooperative insurance, which was 26.7% in 2017.34 In some welldeveloped insurance markets, market share of cooperative and mutual insurance has been as high as 51.8% in France, 47.3% in Germany, 42.2% in Japan, 39.9% in the USA, and 10.6% in the UK.35 China has a huge potential for the development of cooperative and mutual insurance. As the market economy develops and people’s risk prevention needs increase, the desire of various social entities to develop mutual insurance is becoming stronger. The State Council encourages the development of various forms of cooperative and mutual insurance.36 Chapter 23 discusses rules regarding consumer protection. The primary objective and function for insurance regulation is to protect the legitimate rights and interests of the insurance consumers. Protecting insurance consumers is a prerequisite and foundation of the survival and development of the insurance industry. In chapters 9, 10, and 11, we consider the regulatory measures for insurers to follow to improve protection of insurance consumers. In addition, further mechanisms are also in place to safeguard policyholders’ interests and are considered in chapter 23, with particular focus on three topics: the insurance security fund for the situation where the insurer becomes insolvent, the mechanism in respect of consumers’ complaint handling and dispute resolution, and the recent guidelines developed by the CBIRC for building working systems and mechanisms for the protection of insurance consumers. Finally, chapter 24 considers self-regulation of the insurance industry by insurance associations. The insurance industry is regulated at four levels in China. We examined the first three levels of regulation in the previous chapters of this book. In chapter 24, we consider the fourth level of regulation, namely, insurance industry self-regulation. The major nationwide self-regulatory institution in China is the Insurance Association of China (IAC). Its main function is to assist the CBIRC as an additional channel of regulatory control of China’s insurance industry and insurance market. Another nationwide self-regulation institution is the Insurance Asset Management Association of China (IAMAC), which specializes in the self-regulation

33 The latest report published by International Cooperative and Mutual Insurance Federation (ICMIF) in February 2019. Globally, over 5,100 mutual insurers collectively wrote US$1.3 trillion in insurance premiums in 2017 (see accessed on 25 September 2020). 34 The ICMIF Report, Global Mutual Market Share 10, February 2019. 35 Ibid. 36 Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry (the State Council No. 29 [2014]), issued on 10 August 2014 and became effective on the same day (see accessed on 25 September 2020).

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of insurance asset management. As to the self-regulation of insurance intermediaries, there has so far been no nationwide insurance intermediary association created, but there are insurance intermediary associations in many provinces and municipal cities in China. Chapter 24 looks at how the IAC operates as a self-regulation institution, how the IAMAC plays its role as a specialized self-regulation institution for insurance asset management, and how insurance intermediary associations function in self-regulation of the insurance intermediary sector. Having considered the nature of insurance, the reasons for and objectives of insurance regulation, and the structure of this book, it is now appropriate to have a look at the historical development of China’s insurance industry to gain some background information for our later endeavour in examining the substantive legislation on insurance regulation in China. 1.5 The development of China’s insurance industry The origin of China’s insurance industry can be traced back to more than 100 years ago, but the development of the industry was not significant until 1978, when China initiated economic reform and the open-door policy.37 The experience of the world insurance industry demonstrates that the emergence and the development of the modern insurance industry are based on the development of productive forces and a commodity economy. In ancient China, the economy was primarily agrarian – in many ways it was a ‘natural economy’ or ‘self-sufficiency’ economy with a relatively low degree of commercialization. Its insurance industry under that economic condition and environment was impossible to develop. Thus, the emergence and development of modern insurance in China lagged behind that of developed countries. After the foundation of the People’s Republic of China on 1 October 1949, China’s insurance industry began to develop but experienced a twisted path of growth. It has experienced the initial growth period (1949 to 1959), the suspension of the insurance business for 20 years (1959 to 1978), and the fast growth period after the initiation and implementation of the economic reform and open-door policy (since 1978). In this section, we consider the development of the insurance industry in China, including its slow and twisted path of development in the early years and the rapid growth after the economic reform in 1978. 1.5.1 The period of initial starting up of the insurance industry (1949 to 1959) After the foundation of the People’s Republic of China on 1 October 1949, the People’s Insurance Company of China (the PICC) was established on 20 October

37 For more on the history and development of the Chinese insurance industry, see Zhen Jing, The History and the Future of China’s Insurance Industry (1995) MPhil thesis, University of Wales Swansea.The thesis considered the emergence, history, and development of China’s insurance industry and market from 1875 to 1994. It demonstrated the close relationship between the development of the insurance industry, the growth of a commodity economy, and political decision-making in China.The study provides insight into the potential of the insurance industry and further development of the insurance market.

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1949 by the People’s Bank of China (PBC). It was a united, centrally controlled, and state-owned insurance company with branches and sub-branches in every province.38 During the period of the rehabilitation of China’s economy (1950–1952), the PICC grew greatly in terms of its scope, number of employees, and volume of business. During that period, the PICC mainly transacted compulsory insurance for state-owned units and enterprises according to the orders of the government. In urban areas, the PICC transacted fire insurance, life insurance, transportation insurance, and motor vehicle insurance. In rural areas, the PICC also offered crop insurance, animal insurance, and cotton harvest insurance. It also transacted export and import of goods, ocean marine cargo transportation insurance, and war risks. By the end of 1952, the PICC had about 1,300 branches and sub-branches all over the country and over 40,000 employees and 3,000 agencies.39 The PICC’s expansion, however, was too rapid and in some ways it did not conform to the actual needs of the people in urban and rural areas during the period in which the country’s economy was recovering from war. Paying the insurance premiums was a heavy burden on enterprises, and especially for individuals. Under this circumstance, the PICC adopted some steps to readjust, to reduce its business, and to rationalize its institutions and the numbers of its employees. 1.5.2 The period of suspension of the insurance business (1959 to 1979) During the period of the Great Leap Forward (GLF, 1958–1960) and the People’s Commune,40 the People’s Commune led directly to a cessation of domestic insurance business. It was thought that China had achieved communism, and all property belonged to the state and commune, so everybody had a right to share the commune’s property. Thus, even if some catastrophe or accident happened, the state and commune would give emergency assistance to, or appropriate a sum of money to, the unit or the people who suffered loss or damage. So it was believed that the role of insurance had already disappeared and that the domestic insurance business should be stopped immediately.41 It was decided at the Seventh National Insurance Meeting in January 1959 to stop the domestic insurance business. Soon after, apart from limited foreign-related insurance business, most branches of the PICC, except Shanghai, Guangzhou, and Harbin, stopped domestic insurance.42 During the tenyear Cultural Revolution (1966–1976), the domestic business ceased completely, and the small amount of foreign-related insurance business almost ceased.43

38 The statistical report of the PICC of 1950, PICC, Beijing, China. 39 The Insurance Institute of China, “The Record of the Important Events of China’s Insurance during 1949–66” (1982) Selected Insurance Articles, p. 108. 40 The Great Leap Forward meant that in a short time an explosive “great leap” in production in all sectors of the economy should be made. 41 In 1958, at the National Financial Meeting, it was decided that “with the appearance of the People’s Commune, the role of insurance does not exist anymore, domestic insurance business should stop immediately and only small foreign insurance business would be retained”. 42 Shanghai, Guangzhou, and Harbin maintained some domestic business until 1966. 43 See Jiang Yunting, “The Recollection of a Foreign Related Insurance Business Group during the Cultural Revolution” (1989) Insurance Studies, No. 3, pp. 16–18.

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The existence of a highly centrally planned economy eliminated the objective basis for the existence and development of the national insurance industry. The history of the world insurance industry shows that the emergence and the development of the modern insurance industry are based on the economic fortunes of a commodity market economy. However, China’s insurance industry had since its beginning lacked such an economic environment. It was, after all, born and developed in the circumstances of a centrally planned economy. This hampered the development of China’s national insurance industry. 1.5.3 Economic reform and open-door policy in China since 1978 The deterioration in economic performance during the Cultural Revolution pointed to a need for some types of reform. The new leadership, under the direction of Deng Xiaoping, led the whole country into economic reform. Deng elevated the need for socialist construction based on Four Modernizations.44 He thought that China was lamentably backward and that major reforms of the economy and administration were needed to raise production and to get goods and products to the people. A policy of economic reform and opening the door to the outside world was announced in December 1978 at the Third Plenum of the Eleventh Congress of the Chinese Communist Party, which marked a watershed in the economic development of China. Since then, China has undertaken very drastic economic reforms, many of which are unprecedented in the history of socialist economic development. As a result of the economic reform and the opening of the door to the outside world, China’s economic growth has been dramatic. The rapid growth of the economy and the establishment of the market economy have created the necessary conditions and environment for the rapid development of China’s insurance industry. 1.5.4 The reopening and the rapid development of the PICC’s insurance business (1980–1990) Economic reforms and the open-door policy promoted the development of China’s insurance industry and revived its domestic insurance. In 1980, the PICC reinstated domestic insurance under the instructions of State Council’s Document of 1979 No. 99.45 Since then, China’s insurance industry has been growing rapidly. 44 Modern industry, modern agriculture, modern national defence, and modern science and technology. 45 In April 1979, the State Council issued the document 1979 No. 99, in which it was stated that the PICC was to run an insurance business to accumulate funds for the state and to provide economic compensation for state and collective properties. From then on, all imported equipment would be covered by insurance. The profit secured by the insurance companies would not be handed over to the Ministry of Finance but would remain with the companies themselves as an insurance reserve in order to enable the enterprises and the peasants to get indemnity immediately when they suffered losses or damages from accidents or natural calamities, and the PICC was to reinstate domestic insurance business step by step after experiments and set up branches in every province, municipality, autonomous region, and some cities. All branches should be under the control of the PICC and the PBC. The PICC should play a dominant role in running the businesses.

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At first, when the domestic insurance business was reinstated in 1980, the PICC mainly transacted property insurance business.46 Enterprise property insurance occupied a dominant position before 1986. After 1986, motor vehicle insurance became the most important class of domestic insurance. At the same time, household property insurance and business and goods transport insurance expanded rapidly between 1980 and 1985.47 From 1982, when life insurance and agricultural insurance began to be opened up, the percentage of property insurance in the total domestic business began to decline. Following the great development of the economy, people’s living standards had been greatly improved, so people were increasingly thinking about life insurance. The pace of growth of life insurance was very fast, at an average rate of 554.2% per year between 1982 and 1985. However, the growth of life insurance declined under the influence of high inflation which occurred between 1987 and 1989. From 1988 to 1991, the growth rate of life insurance was 35.67%.48 Economic reform and the open-door policy made the PICC’s existing foreignrelated insurance business expand.49 Meanwhile, its international inward reinsurance business continued to expand. In order to meet the needs of the rapid expansion of economic relations and technical cooperation with other countries and diversified forms of foreign trade, the PICC made great progress in exploiting new types of coverage of the foreign-related insurance business.50 Along with the increase of new types of coverage, the structure of the foreign insurance business was changing. The percentage of the traditional type of cargo transportation insurance in foreign business was decreasing year by year – 90% in the 1960s, 68% in 1981, and only 52% in 1988.51 Other coverages, such as non-marine insurance, oil exploration insurance, marine hull insurance, aviation insurance and projects contracted for abroad, as well as satellite-launch insurance, became increasingly important.52 With 46 Between 1980 and 1981, almost 100% of the domestic insurance business was property insurance (it included enterprise property insurance, 97%; household property insurance, 0.0024%; motor vehicle insurance, 2.71%; cargo transportation insurance, 0.017%; and others, 0.18%). See Li Jiahua and the PICC Group, The Development of China’s Insurance Industry, p. 150, 1990. 47 Between 1980 and 1985, the growth rate of different type of property insurance were: enterprise property insurance, 30%; vehicle insurance, 196.46%; household property insurance, 983%; and transportation insurance, 202.64%. See the PICC’s Statistical Yearbooks, various issues, the PICC, Beijing, China. 48 Ibid. 49 In 1979, the PICC made satisfactory progress in its foreign-related insurance business. Overall premium income from its direct underwriting amounted to ¥171.16 million, a 24.84% increase over the previous year. See the PICC’s Annual Report for 1979, reported by the General President Song Guohua in September 1980, Beijing, China. 50 For instance, in 1984, the PICC signed insurance contracts with 23 oil companies owned by 12 oil exploration groups in seven countries to cover property, comprehensive third-party liability, blowing out, oil pollution, cargo transportation, and all risks, in respect of drilling and supply ships, labour, and employer’s liability. There was also coverage of property, data processing, cash, cargo transportation, motor vehicle, and employee’s fidelity. Also covered were machinery breakdown and loss of profit; travellers’ liability and employer’s liability have been extended to Sino-foreign joint ventures and cooperative enterprises. See PICC’s Annual Report for 1984, reported by the PICC’s President Qin Daofu in 1985, Beijing, China. 51 Foreign-related insurance, published by the PICC in 1990, Beijing, China. 52 The classes of foreign-related insurance underwritten by the PICC increased from 20 in 1980 to 90 in 1990. By the end of 1990, the PICC was virtually able to provide all types of foreign insurance

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regard to the reinsurance business, the PICC continued to build up links with its counterparts in foreign countries and regions throughout the world. By the end of 1990, the PICC maintained business relationships with all the leading insurance and reinsurance companies and broker firms all over the world.53 The PICC also established insurance offices in Western Europe, the United States, Canada, and Japan in addition to ones in Hong Kong, Singapore, and Macao. By the end of 1990, the PICC’s overseas offices increased from 11 in 1979 to 60 in 1990. The number of employees working in overseas offices rose from 388 in 1979 to more than 800 in 1990. Between 1980 and 1985, the domestic insurance business grew at an average rate of 55.06% per annum. The average rate was still 31.29% per annum from 1986 to 1991.54 This growth rate was unprecedented in China’s insurance history and in world insurance history. By the end of 1991, PICC had over 3,000 branches and sub-branches with nearly 90,000 personnel.The types of coverage available reached nearly 400, of which more than 300 types were domestic insurance coverage and more than 80 types were foreign insurance coverage.55 For the period from 1980 to 1990, the premium income increased 36 times, from ¥0.49 billion yuan in 1980 to ¥17.85 billion yuan in 1990, at an average annual rate of 47.2%. 1.5.5 The break-up of the PICC insurance market monopoly Before 1986, the PICC was the only insurance company and had monopolised China’s insurance market. Since 1986, an increasing number of insurance companies appeared that broke down the monopolistic system and introduced competition in China’s insurance market. In 1986, the Agriculture and Animal Husbandry Insurance Company was established by the Productive Construction Army Crops in Xinjiang Autonomous Region. In May 1988, the Ping An Insurance Company was established in Shenzhen special economic zone. Its branches soon spread to every city in the country.56 In 1988, the Communication Bank of China set up an insurance department in Shanghai which was reorganized into the Pacific Insurance Company in 1991, with its head office in Shanghai and branches in provinces countrywide. But these companies were newly established, the business scope was small, and the insurance market was still dominated by the PICC, with market shares of 99.3% and 97.57% in 1990 and 1991, respectively.57

obtainable in the international insurance market. The premium income for foreign insurance business reached US$438 million in 1990, an increase of US$338 million over 1980, when it was US$100 million. See the PICC’s Annual Report of 1990, Beijing, China. 53 Foreign-related insurance, published by the PICC in 1990, Beijing, China. 54 The PICC’s Year Report and Accounting, 1985 and 1992, Beijing, China. 55 The PICC’s Statistical Book of 1991, PICC, Beijing, China. 56 This company is a joint-stock insurance company invested in by the Bureau of Commerce Shekou Industrial District Authority and the Shenzhen Credit and Investment Corporation of the Industrial and Commercial Bank of China. 57 Insurance Association of China, Annual Report of China’s Insurance Industry Development 2018 (Economic Science Press, Beijing, China 2018), p. 5.

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1.5.6 The competition of China’s insurance market (1992 to 2001) Many new domestic insurance companies emerged from 1992 to 2001. In 1994 and 1995, Tianan Insurance Company and Da Zhong Insurance Company were established in Shanghai. In 1996, three nationwide insurance companies (i.e. Xinhua Life Insurance Company, Huatai Insurance Company, and Kangtai Insurance Company) and two reginal insurance companies (Huaan Property Insurance Company and Yingan Property Insurance Company) were established. In December 2001, China Export & Credit Insurance Corporation was officially opened. It is a state-funded and policy-oriented insurance company established and supported by the state to promote China’s foreign economic and trade development and cooperation. Its service network now covers the whole country. Under the open-door policy, foreign insurance companies were also allowed to enter China’s insurance market. Since 1988, many foreign insurance companies have opened up liaison offices in China. In November 1992, the American International Assurance Co., Ltd. (AIA) set up a branch in Shanghai, which was the first foreign insurance company to open an insurance business in China since 1980.58 Later, Sedgwick Insurance and Risk Management and Consultation (China) Company, the first foreign-invested insurance broker company, was founded in Beijing 1993. In 1994, Tokyo Marine Fire Insurance Company entered into the Shanghai market. The Manulife-Sinochem Life Insurance Company, the first Sino-foreign joint venture insurance company, was established in 1996. The premium income by foreign-funded insurance companies increased dramatically from ¥0.295 million yuan in 1992 to ¥3.28 billion yuan in 2001.59 Before the enactment of the Insurance Law in 1995, an insurance company was allowed to run both property insurance and life insurance. Article 91 of the Insurance Law 1995 requires the separate operation of property and life insurance businesses by insurance companies. In accordance with the Insurance Law 1995, insurance companies began to carry out reform of separate operation of property and life insurance businesses, which was completed in 2001. The separation of the operation of property and life insurance businesses resulted in a surge of reshaping of insurance companies. In October 1995, the PICC was transformed to the People’s Insurance Company (Group) of China, which had three subsidiaries, namely, the People’s Property Insurance Company of China Limited, the People’s Life Insurance Company of China Limited, and the People’s Reinsurance Company of China Limited. In 1996, the People’s Insurance Company (Group) of China was withdrawn, but the three subsidiaries were renamed by the State Council. The People’s Property Insurance Company of China Limited was renamed as the People’s Insurance Company of China (the PICC), which overtook the brand of the former Group; the People’s Life Insurance Company of China Limited was renamed as China Life Insurance Company; and the People’s Reinsurance Company of China Limited was renamed as China Reinsurance Corporation.

58 Lin Zengyu, “The Potential of China’s Insurance Market” (1996) Insurance Studies, No. 1, p. 7. 59 Insurance Association of China, Annual Report of China’s Insurance Industry Development 2018 (Economic Science Press, Beijing, China 2018), p. 6.

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In November 2000, the Agriculture and Animal Husbandry Insurance Company established by the Xinjiang Productive Construction Military Crops was reshaped to form Xinjiang Military Group Property Insurance Company. In April 2001, the Pacific Insurance Company was transformed to China Pacific Insurance (Group) Company Limited, China Pacific Property Insurance Company Limited, and China Pacific Life Insurance Company Limited. In April 2002, Ping An Insurance Company completed its restructuring and established Ping An Insurance (Group) Company of China, Ping An Property Insurance Company of China Limited, and Ping An Life Insurance Company of China Limited. By then the top three insurers in China completed their restructuring and separation of the operation of property and life insurance businesses. At the end of 2001, there were 52 insurance companies in China, of which five companies were state-owned, 15 were joint-stock companies, 19 were joint-venture companies, and 13 were foreign insurance branches. China’s insurance industry entered into a competitive market period that had an increasing number of market players. From 1991 to 1996, the market share of the PICC decreased from 97.57% in 1991 to 74.89% in 1996. The market shares of the Pacific Insurance Company and Ping An Insurance Company increased from 1.37% and 0.66% in 1991 to 10.94% and 12.76%, respectively, in 1996. In 2001, for property insurance, the PICC took 73.72% of market share, other domestic insurers accounted for 25.56%, and foreign-funded companies accounted for 0.72%; for life insurance, the China Life Insurance Company took 57.10% of market share, other domestic insurers accounted for 41.25%, and foreign-funded companies accounted for 1.65%.60 The major regulatory focus in the period 1992 to 2001 was the supervision and regulation of market behaviour of insurance companies in order to maintain fair and orderly competition in the insurance market. 1.5.7 The reform and opening up of China’s insurance market (2002 to 2011) China joined the World Trade Organization (WTO) in December 2001, the insurance market opened to foreign insurers, and the speed of the growth of the insurance industry increased. Insurance premium income increased from ¥305.3 billion yuan in 2002 to ¥1,433.9 billion yuan in 2011, with an average annual rate of increase of 18.75%. China’s rank in the world insurance market rose from No. 11 in 2002 to No.6 in 2011. There were several significant features of the reform of the insurance industry during this period. The first significant feature was the shareholding reform of insurance companies and establishment of the modern enterprise system. In July 2003, the PICC was reorganized and formed three companies, namely, the People Insurance Shareholding Company of China, the People’s Property Insurance Company of China Limited, and the People’s Insurance Asset Management Company of China. On 6 November 2003, the People’s Property Insurance Company of China Limited was listed as H-share on the main-board market of the Hong Kong

60 Ibid.

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exchange. With this, the company became the first state-owned financial institution that finished shareholding reform in mainland China and the first insurance institution that was listed outside mainland China. The company issued 3.455 billion H-shares and was capitalized at 6.22 billion HK dollars. The total shares were 11 billion shares, with 8 billion state-owned shares, about 72% of the total.61 In later years, many other insurance companies carried out shareholding reform. The second significant feature was the improvement of corporate governance of insurance companies. On 5 January 2006, the China Insurance Regulatory Commission (the CIRC) issued the Guiding Opinion on Regulating the Insurance Company Corporate Governance Structure.62 In compliance with this regulation, insurance companies carried out reform on boards of directors and established internal control and information disclosure, as well as other reforms. Gradually, the enterprise management mechanism was established and improved in the insurance companies. The third significant feature was the practice of compulsory motor vehicle insurance. In March 2006, the State Council enacted the Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance.63 All motor vehicles must be covered under compulsory motor vehicle insurance. The practice of compulsory insurance greatly stimulated the development of motor vehicle insurance. From 2002 to 2011, the premium income for motor vehicle insurance increased from ¥47.2 billion yuan in 2002 to ¥350.5 billion yuan in 2011, at an average annual rate of 24.95%. The motor vehicle insurance premium income accounted for about 70% of the total property insurance premiums for these 10 years.64 The fourth significant feature was the practice of financial subsidy to agriculture insurance by central and local governments. From 1982 to 2004, agriculture insurance operated at a loss. In 2004 the governments started to subsidize insurance premiums for agriculture insurance, which significantly promoted the development of agriculture insurance. By the end of 2011, agriculture insurance premium income reached ¥17.38 billion yuan, providing insurance coverage for agriculture in every province of the country.65 The fifth significant feature was the widening of investment channels for insurance funds. On 24 October 2004, the CIRC and the China Securities Regulatory Commission jointly issued the Interim Measures for the Administration of Stock Investments of Insurance Institutional Investors.66 This marked the beginning of insurance funds investment directly in stock market. From 2005 to 2011, banking deposit of the insurance funds decreased from 34.4% of the total assets to 29.4%, 61 Daoxu Zhou, China’s Insurance and Its Regulation (China Financial Publishing House, Beijing, China 2010) p. 16. 62 Bao Jian Fa No.2 [2006] (see accessed on 27 September 2020). 63 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance, adopted at the No. 127 executive meeting of the State Council on 1 March 2006, came into force on 1 July 2006. 64 Insurance Association of China, Annual Report of China’s Insurance Industry Development 2018 (Economic Science Press, Beijing, China 2018), p. 12. 65 Ibid. 66 The CIRC and the CSRC No. 12 [2004] see accessed on 4 October 2020).

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while insurance funds investment through other channels increased from 58.4% to 66.7% of the total assets. Insurance funds started to invest via channels, such as, securities investment, equities investment, real property investment, and so on.67 The sixth significant feature was the introduction of investment-linked life insurance products. Life insurers designed new life insurance products, such as, investment-linked insurance product,68 participating insurance product,69 and universal insurance product.70 Because of the introduction of the new insurance products, premium income in life insurance increased dramatically from ¥227.5 billion yuan in 2002 to ¥972.1 billion yuan in 2011 at an annual rate of 17.51%. Particularly, at the maximum the participating insurance accounted for 80% of the total premium income for life insurance. At the same time, the fast growth of investment types of insurance products also increased the operational risk and solvency risk.71 The seventh significant feature was the establishment of specialized insurance companies. In 2004, five pension insurance companies were established, namely, Ping An Pension Insurance Company, Taiping Pension Insurance Company, Changjiang pension Insurance Company, China Life Pension Insurance Company, and Kangtai Pension Insurance Company. In September 2004, the first agriculture insurance company, Shanghai Anxin Agriculture Insurance Company, was established. In April 2005, the first health insurance company, China Life Health Insurance Company was established. By the end of 2011, there were five specialized pension insurance companies, four specialized health insurance companies, five specialized agriculture insurance companies, one specialized motor vehicle

67 Insurance Association of China, Annual Report of China’s Insurance Industry Development 2018 (Economic Science Press, Beijing, China 2018), p. 13. 68 An investment-linked (or unit-linked) insurance policy is a life insurance product that unlike a pure insurance policy gives investors both insurance and investment under a single integrated policy. A unitlinked insurance policy is essentially a combination of insurance and an investment vehicle. A portion of the premium paid by the policyholder is utilized to provide insurance coverage to the policyholder, and the remaining portion is invested in equity and debt instruments. The aggregate premiums collected by the insurance company are pooled and invested in varying proportions of debt and equity securities in a manner similar to that of mutual funds. Each policyholder has the option to select a personalized investment mix based on his or her investment needs and risk appetite. Like mutual funds, each policyholder’s unit-linked insurance policy holds a certain number of fund units, each of which has a net asset value (NAV) that is declared on a daily basis. The NAV is the value upon which net rates of return are determined. The NAV varies from one unit-linked insurance policy to another based on market conditions and fund performance. 69 A participating policy pays dividends to the policyholder. Dividends are generated from the profits of the insurance company that sold the policy and are typically paid out on an annual basis over the life of the policy. Most policies also include a final or terminal payment that is paid out when the contract matures. Some participating policies may include a guaranteed dividend amount, which is determined at the onset of the policy. A participating policy is also referred to as a with-profits policy. 70 Universal insurance is a hybrid life insurance policy which combines elements of term life insurance with an investment savings option. Universal life combines the ability to build savings at the same time as providing a life insurance policy. This allows flexibility in what you can do with the savings or investment portion of the premium. Universal life insurance also contains an element of long-term investment strategy because it requires policyholders to build the value in the investment portion through part of the amount paid monthly. 71 Insurance Association of China, Annual Report of China’s Insurance Industry Development 2018 (Economic Science Press, Beijing, China 2018), p. 13.

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insurance company, and one specialized liability insurance company in China’s insurance market.72 The eighth significant feature was the further opening up of the insurance market to foreign insurers. After China’s joining of the WTO, more foreign insurers entered into China’s insurance market, the number of foreign-funded insurance companies increased from 16 companies in 2001 to 46 companies in 2011, and the total premium income by these insurers grew from ¥3.3 billion yuan in 2001 to ¥43.9 billion yuan in 2011.73 As far as the regulation of the insurance industry is concerned during the period from 2002 to 2011, in addition of the strengthening of the regulation of market behaviour of the insurance companies, the insurance supervision and regulation authority of the State Council placed great emphasis on the regulation of corporate governance and solvency of insurance companies in China. 1.5.8 Standardised development of insurance market (2012 to present) From 2012, the insurance industry entered into a period of standardised development. A series event took place, such as, the reform on commercial motor vehicle insurance, life insurance premium rate reform, the establishment of some socially important lines of insurance (health insurance, catastrophe insurance, critical illness insurance, and tax-deferred pension insurance), the continuous increase of number of insurance companies, and the reform of insurance funds utilization and so on. From 2012 to 2017, the premium income increased from ¥1,550 billion yuan to ¥3,660 billion yuan, at an average annual rate of 18.76%.74 A particularly important event was the reform of the premium rate of ordinary personal insurance.75 In August 2013, the CIRC for the first time relaxed the 2.5% of the assumed interest rate of ordinary personal insurance, which was used for 14 years (from 1999 to 2013). In the Notice of the CIRC on Relevant Matters Concerning the Policy Reform of Premium Rates of Ordinary Personal Insurance,76 insurance companies were/are permitted to determine the assumed interest rates of ordinary personal insurance in accordance with the principle of prudence.77 The purpose of the reform was to establish a premium rate formation mechanism that was in compliance with the socialist market economy, to promote the business management of insurance companies and the innovation of insurance regulatory system, and to promote the sustained, stable, and sound development of the personal insurance industry. This reform marked the beginning of the mechanism for the formulation and adjustment of premium rates by market forces and promoted the

72 Ibid., p. 14. 73 Ibid., p. 15. 74 Ibid., p. 18. 75 Ordinary personal insurance refers to the personal insurance whose premiums and policy interest are determined upon the issuance of policies. 76 Bao Jian Fa No. 62 [2013] (see accessed on 4 October 2020). 77 The Notice of the CIRC on Relevant Matters Concerning the Policy Reform of Premium Rates of Ordinary Personal Insurance 2013, s.1(2).

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innovation of personal insurance products and services. This reform sped up the growth of the personal insurance business. From 2012 to 2017, premium income for life insurance increased from ¥1,015.7 billion yuan to ¥2,674.6 billion yuan at an annual rate of 21.37%.78 Another significant event was the cancellation of the qualification examination of insurance sales personnel in August 2015. As a result, insurance salespersons increased from four million to eight million for the next two years.79 This greatly contributed to the increase of life insurance premiums, but the conduct of some salespeople fell below the required standard. That led to the strengthening of the regulation of insurance sales personnel by the insurance supervision and regulation authority of the State Council.80 In this period, the insurance supervision and regulation authority of the State Council strengthened the regulation on solvency of insurance companies. On 29 March 2012, the Notice of the CIRC on Issuing the Plan for the Building of China’s Second-Generation Solvency Supervision System was released,81 which marked the official launching of the construction of the China Risk-Oriented Solvency System. 1.6 The present insurance market in China Since 1980, when domestic insurance was resumed, China’s insurance industry has grown dramatically. From 1980 to 2019, the premium income increased from ¥0.46 billion yuan to ¥4,264.5 billion yuan (US$617 billion); the total assets of insurance companies in China increased from ¥1.5 billion yuan to ¥20,564.5 billion yuan. In 2019, China’s insurance penetration and insurance density reached 4.3% of the GDP and ¥3,052 yuan per capita, compared with the insurance penetration of 0.1% of the GDP and insurance density of ¥0.47 yuan per capita in 1980.82 The socially and economically important types of insurance, such as agriculture insurance, health insurance, pension insurance, catastrophe insurance, and liability insurance, have grown significantly. In 2018, the global premium income surpassed the US$5 trillion mark for the first time ever, reaching US$5,193 billion (6.1% of global GDP). China’s share of the global insurance market went up from virtual 0% in 1980 to 11% in 2018. China consolidated its position as the second largest insurance market globally in 2018, with total premiums written of US$575 billion in 2018. The United States was the first (28% market share), Japan the third (8.5% market share), and the UK the fourth (6.5% market share).83 78 Insurance Association of China, Annual Report of China’s Insurance Industry Development 2018 (Economic Science Press, Beijing, China 2018), p. 20. 79 Ibid., p. 21. 80 The Notice of the General Office of CBIRC on the implementation of the Main Responsibility of Insurance Companies to Strengthen the Administration of Insurance Sales Personnel (Yin Bao Jian Ban Fa No. 41 [2020]) was issued and implemented on 12 May 2020 (see accessed on 13 October 2020). 81 Bao Jian Fa No.24 [2012] (see accessed on 4 October 2020). 82 The CIRC Annual Report of the Chinese Insurance Market 2015, p73. 83 Swiss Re Institute, Sigma, World insurance: the great pivot east continues, No 3 / 2019.

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According to the Insurance Association of China annual report 2018, as of the end of 2017, there were 221 insurance companies in China, of which 85 were property insurance companies, 86 were life insurance companies, 11 were reinsurance companies, 12 were insurance groups companies, 24 were insurance asset management companies, 3 were mutual insurance organizations. These companies employed 9.3 million people.84 Of the 86 life insurance companies, eight were specialized pension insurance companies and six were specialized health insurance companies. These insurance companies offer a large variety of insurance products. At the end of 2017, property insurance products which were filed with the insurance regulatory authority had 17 large classes of insurance products, with 173,940 different types of products. Life insurance products covered four big classes, with 23,920 different types of products, of which health insurance products increased from 72 in 1992 to 3,553 types of products in 2017. Commercial pension insurance covered 170 million people. Agriculture insurance insured 213 million agricultural households.85 1.6.1 Property insurance market In 2019, property insurance companies achieved premium income of ¥1,301.6 billion yuan. The top six lines of property insurance premium income were motor vehicle insurance (¥818.8 billion yuan, 62.9% of the total premium), guarantee insurance (¥84.4 billion yuan, 6.5% of the total premium), liability insurance (¥75.3 billion yuan, 5.8% of the total premium), agricultural insurance (¥67.2 billion yuan, 5.2% of the total premium), accident insurance (¥52.7 billion yuan, 4.0% of the total premium), and enterprise property insurance (¥46.4 billion yuan, 3.6% of the total premium). The total amount of payment for claims amounted to ¥727.9 billion yuan. The total assets of the property insurance companies amounted to ¥2,294 billion yuan.86 1.6.2 Personal insurance market In 2019, personal insurance companies achieved premium income of ¥2,962.8 billion yuan, of which the premium income of life insurance was ¥2,275.4 billion yuan (76.8% of the total), the premium income of health insurance was ¥622.6 billion yuan (21.0% of the total), and the premium income of accident insurance was ¥64.9 billion yuan (2.2% of the total). The total amount of payment for claims amounted to ¥561.5 billion yuan. The total assets of the personal insurance companies reached ¥19,957.5 billion yuan87

84 Insurance Association of China, Annual Report of China’s Insurance Industry Development 2018 (Economic Science Press, Beijing, China 2018), p. 13. 85 Ibid., p. 26. 86 The statistical date from the CBIRC (see http://www.cbirc.gov.cn/cn/view/pages/ItemDetail.html? docId=887994&itemId=954&generaltype=0> accessed on 2 October 2020). 87 The statistical date from the CBIRC (see http://www.cbirc.gov.cn/cn/view/pages/ItemDetail.html? docId=887995&itemId=954&generaltype=0> accessed on 2 October 2020).

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1.6.3 Insurance intermediaries’ market Insurance intermediaries play a very important role in China’s insurance market. As of the end of 2018, there were five insurance intermediary group companies nationwide, 240 national insurance agency companies, 1,550 regional insurance agency companies, 499 insurance brokerage companies, 353 registered insurance adjustment companies, and 8.71 million personal insurance agents. There are 32,000 concurrent insurance agencies and more than 220,000 agency outlets. In 2018, insurance intermediary channels realized premium income of ¥3,370 billion yuan, accounting for 87.4% of China’s total premium income. In the past five years, the insurance intermediary channel has always accounted for more than 80% of premiums and is an important channel for insurance sales.88 1.6.4 Insurance funds utilization At the end of April 2020, the balance of fund utilization was ¥19.61 trillion yuan, an increase of 5.82% over the beginning of the year. Of this amount, bank deposits were ¥2.80 trillion yuan, accounting for 14.28%; bonds were ¥6.71 trillion yuan, accounting for 34.22%; stocks and securities investment funds were ¥2.66 trillion yuan, accounting for 13.56%; and other investments were ¥7.44 trillion yuan, accounting for 37.94%.89 1.6.5 Solvency of insurance companies According to the latest statistical data of the CBIRC,90 in the first quarter in 2020 the three indicators for assessing the solvency status of insurance companies (i.e. the composite solvency ratio, the core solvency ratio, and the composite risk rating) show that solvency of the insurance companies in the current market is very strong. Of the 178 insurance companies in the statistics, the composite solvency adequacy ratios,91 were 288.1% for property insurers, 237.3% for life insurers, and 290.3% for reinsurers. The core solvency adequacy ratios,92 were 255.5% for property insurers, 229.3% for life insurers, and 273.9% for reinsurers. Both the composite solvency adequacy ratio and the core solvency adequacy ratio are significantly

88 See Financial News, 8 May 2019 (see accessed on 5 October 2020). 89 The statistical report from the CBIRC (see accessed on 5 October 2020). 90 The CBIRC website, (see accessed on 3 October 2020). 91 The composite solvency adequacy ratio is the ratio of the aggregate actual capital of insurance institutions to the minimum aggregate capital within the statistical scope, which measures the average capital adequacy of insurance companies. 92 The core solvency adequacy ratio is the ratio of the aggregate figure of core capital of insurance institutions within the statistical scope to the minimum aggregate number of capital, which measures the average high-quality capital adequacy of insurance companies. The calculation of the composite solvency adequacy ratio, the core solvency adequacy ratio, and the specific standards and procedures for the composite risk rating are based on the “Insurance Company Solvency Supervision Rules” and other regulations.

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higher than the regulatory minimums of 100% and 50% respectively. The composite risk rating93 shows that 102 insurance companies were type A companies,94 72 type B companies,95 3 type C companies,96 and 1 type D company.97 1.6.6 Foreign-funded insurance companies in the market According to the Insurance Association of China annual report 2018,98 as of the end of 2017, there were 57 foreign-funded insurance companies, of which 23 were property insurers, 28 were life insurers, and 6 were reinsurers. Foreign-funded property insurance companies in China took about 2% of the market share with a premium income of ¥21 billion yuan in 2017. In terms of business structure, motor vehicles, commercial property, liability, cargo, agriculture, and accident insurance made up the major source of premium income of foreignfunded property insurers. Foreign-funded life insurance companies in China accounted for about 6% of the total premium income of life insurance companies nationwide, with a premium income of ¥160 billion yuan in 2017.99 For the first 11 months of 2018, the 28 foreign-funded insurance companies realized life insurance premiums of ¥191.1 billion yuan, accounting for 7.7% of the market share.100 Foreign-funded reinsurance companies accounted for about 20% of the reinsurance market share in 2018.101 1.7 The further development of the insurance industry In China, a modern insurance industry is now in place to provide comprehensive protection and perform functions needed for economic development and social progress. China’s insurance industry has become an effective stabilizer of the society and a booster of the economy. The insurance industry is now standing at a new historic point and will continue to serve economic and social development. There 93 The composite risk rating is the evaluation of the composite risk of the solvency of an insurance company by the regulatory authority, which measures the overall solvency risk of the insurance company and is divided into four categories: A, B, C, and D. 94 Type A companies: companies that meet the solvency adequacy ratio and have low operational risk, strategic risk, reputation risk, and liquidity risk. 95 Type B companies: companies with solvency adequacy ratios up to the standard and with low operational risk, strategic risk, reputation risk, and liquidity risk. 96 Type C companies: companies with a solvency adequacy ratio that does not meet the standard or a company with greater risks of one or more types of operational risk, strategic risk, reputation risk, and liquidity risk, although the solvency adequacy ratio meets the standard. 97 Type D companies: Companies that do not meet the solvency adequacy ratio or have serious risks of one or more of the operational risks, strategic risks, reputation risks, and liquidity risks despite the solvency adequacy ratio. 98 Insurance Association of China, Annual Report of China’s Insurance Industry Development 2018 (Economic Science Press, Beijing, China 2018), p. 71, p. 93. 99 Ibid., p. 93. 100 “China opens the door to welcome foreign-funded insurers”, The Financial Time Newspaper, 16 January 2019 (see accessed on 3 October 2020). 101 Lanjing Finance and Economics, on 15 August 2019 (see accessed on 3 October 2020).

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are still large potentials for further development of the insurance industry in the long run. These potentials can be seen in three indicators when the current market is compared to developed markets: relatively lower insurance penetration, lower insurance density, and large population. First, the insurance penetration (the ratio of premiums to GDP) is low. In 2019, China’s insurance penetration reached 4.3%, being much lower than the 9.6% in developed insurance markets.102 This indicates the relatively small size of the insurance industry in the Chinese economy but a big potential for China’s insurance to further development in the years to come. It is forecasted by the Swiss Re Institute that in 2030, China’s premium income would amount to US$1,777 billion (as compared with US$617 billion in 2019), accounting for about 18% of the world insurance market share at that time.103 In 2019, China’s life insurance penetration rate was 2.2%, and non-life was 2.1%; while in the developed insurance markets life insurance penetration rate was 4.1%, and non-life was 5.5%.104 The non-life insurance penetration was higher than that for life insurance in the developed markets, but the non-life insurance penetration was lower than that for life insurance in China’s market, indicating that the non-life insurance business has a large potential for further growth in China, particularly for home insurance, property and fire, liability, trade credit, business interruption, and other lines. Second, the insurance density (Renminbi yuan per capita) is low. It was ¥3,052 yuan (US$438) per capita in 2019, indicating a much lower density compared with the advanced markets in the world, where the average per capita spending on insurance was US$4664 in 2019.105 The low density suggests that market expansion could be immense as insurance awareness and disposable income per capita grow closer to those of the developed markets. Assuming that China is to reach the lower level of developed markets density (say, US$2,000), the insurance premiums would reach US$2800 billion, an increase of about 4.5 times of the premium income (US$617 billion) of 2019. Third, China has the largest steadily growing population in the world, with about 1.4 billion inhabitants in 2019. In comparison, Europe’s population was 815 million, North America’s 348 million, and Latin America’s 598 million.106 In addition, the population of China is ageing faster than that of Europe or North America. An ageing population will boost the demand for new products and services, such as pension insurance and health insurance products, to meet the new needs. Fourth, China has been leading the world’s economic growth by the size and the speed of its development. The sustainability of growth is a matter of concern not only for the Chinese authorities but also globally. Though economic growth

102 Swiss Re Institute, Sigma extra, No 4 / 2020 (see accessed on 5 October 2020). Over the past decade, overall insurance penetration in the advanced markets has remained relatively stable. 103 Swiss Re Institute, Sigma, No 4 / 2020. 104 Swiss Re Institute, Sigma extra, No 4 / 2020. 105 Ibid. 106 Swiss Re Sigma No. 3, 2013.

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is slowing down due to the Covid-19 pandemic, it will recover in 2021 and will be sufficient to stimulate insurance sector expansion. Fifth, the government’s policy is focused on maintaining economic growth and moving towards a more “market driven” economy to maintain wealth creation in the country.The opening, development, and regulation of China’s insurance market are highly dependent on the government’s policy direction and its predictability. It is expected that economic policy will have a positive impact and will aid further development of the insurance market. Finally, social development in China is picking up pace, driven by a rapidly growing middle class and its evolving needs, including a strong need for more financial security and predictability of the future. The society is highly tech-savvy, and the technology penetration is high and still growing. As an example, China had 854 million netizens and its Internet penetration had reached 61.2% in 2019.107 The number of mobile internet users reached 847 million, and the proportion of Internet users using mobile phones to access the internet was as high as 99.1% in 2019. The rapid development of internet technology has made it convenient for people to carry out all kinds of business on the internet platform. Among such businesses, the internet insurance business in China has been developing significantly. It is expected that this development will fuel insurance product innovation and push insurers to approach target audiences in more innovative, cost-efficient, and faster ways. The Chinese people have become increasingly aware of risks and of insurance; the insurance industry thus enjoys a favourable environment for further development. The role of insurance has been raised to the national governance level, which implies that insurance will become one of people’s living necessities. For this underinsured country, with its large population and GDP, the next ten years will be a golden period for the development of the insurance industry. It is reasonable to believe that the insurance industry will maintain its momentum of steady, rapid, and profitable growth and deliver more benefits to Chinese society in the years to come. 1.8 Conclusion This chapter considered the nature of insurance and reasons for and objectives of insurance regulation. It also gave an outline of this book and presented a brief account of China’s insurance history, the current insurance market, and potentials for further development of China’s insurance industry. The modern insurance industry has a relatively short history in China.The insurance industry developed very slowly for the period from 1949 to 1978 because of political movements and the backward economy of the country. Since 1978, when the economic reform and the open-door policy were initiated, China’s insurance industry has been developing very rapidly at an unprecedented speed. China now

107 The 44th Statistical Report of Internet Development in China, by China Internet Network Information Centre (see accessed on 5 September 2020).

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stands as the second largest insurance market in the world. An open, balanced, and vigorous modern insurance market system has basically been formed. With the relatively high growth rate of the GDP, there are still large potentials for further development of the insurance industry in the long run in China. The Insurance Law was enacted under this background in 1995 and amended three times to keep pace with the rapid development of the insurance industry. Having considered the industrial background under which the Insurance Law was enacted and for which the insurance regulatory rules are developed and applied, the legal background within which the insurance regulatory system operates will be considered in chapter 2 of this book.

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CHAPTER 2

The Chinese legal system and insurance legislation

2.1 Introduction This chapter describes the legal background of the Chinese system of insurance regulation. It explains both how the system was shaped and how it operates. It presents an overview of the legal framework and sources of law relating to insurance regulation. It is hoped that this chapter can serve as a bridge from the introductory part of the book to the examination of substantive legislation in the following chapters. 2.2 Philosophical traditions of Chinese law It is often said that Chinese society is a socialist society with Chinese characters. The Chinese characters are reflected in its legal system. Chinese jurisprudence is built on two major philosophical traditions which oppose and interact with each other: Confucianism and Legalist thought.1 These philosophical views have strongly influenced the Chinese way of life and its legal development. The influence has permeated the whole of Chinese history. The essence of Confucianism is the belief that desirable behaviour and societal harmony can be obtained by the rule of good men whose virtuous examples are the most effective form of persuasion, not by strict regulation or severe punishment. Confucianism stresses the virtue of yielding and compromise so as to avoid friction. It also emphasizes an ideal universe of harmony in which nature and human society assume their proper places and in which virtue and propriety in ruler and ruled follow traditional, hierarchical pathways. Each person fulfils a preordained and class-based function in society and is collectively responsible with others in reforming bad behaviour through willed social conformity. Confucianism is basically a philosophy of harmony, peace, and conciliation. In contrast, the Legalist tradition insists that society can achieve harmony only by using strict and firm punishment for transgressions. The Legalists argued that human beings are fundamentally amoral and that they cannot be moved by moral example. The only way to make them behave correctly is by a strong legal system which enforces correct behaviour through rewards and punishments.

1 For more, see Zhen Jing, Fundamental Principles of Insurance Law and Practice in the Peoples’ Republic of China:A Comparative Study with English and Australian Counterparts (2001) PhD thesis, Department of Law, Queen Mary, University of London, 44–46.

DOI: 10.4324/9781351122863-2

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If even minor infractions are ruthlessly punished, then nobody will dare to commit serious crimes. The Legalists stress state power and control rather than morality. They think only the enforcement of the powerful and forceful written law could curb crime and keep society in order. By reflection of these philosophical senses in law, the purpose of law in China is basically, and has always been, twofold. On the one hand, the authorities have tried to make the enforcement of law flexible and adaptable to circumstances. Education, mediation, and the reform of offenders have always played a large role and still do so today. This can be seen as a continuation of Confucian ideas. On the other hand, law is and has always been also regarded as a deterrent and is used to suppress offenders. This is in conformity with Legalist thinking. The model behaviour (Li) central to Confucian legality and the written law (Fa) of the Legalists have existed side by side, although the Confucian has more influence throughout Chinese history.2 So the Chinese legal system and laws have been characterized by having two sides, namely, to reform the offenders by education and mediation on the one hand and to punish them on the other hand. The Chinese legislative system and judicial system are built on these fundamental philosophical traditions. 2.3 The legislative system The Chinese legislative system is shaped at three levels,3 namely, the central legislative body (the National People’s Congress and its Standing Committee), the central government (the State Council),4 and the regional legislative bodies (local people’s congresses and standing committees). The principal lawmaking institution in China is the National People’s Congress (NPC) and its Standing Committee.5 The NPC has the power to enact and amend statutory laws, such as Criminal Law, Civil Law, Laws of State Organs, and other Organic Laws.6 The Standing Committee of the NPC has substantial lawmaking powers and may enact or amend all laws other than those which are reserved for the NPC.7 As there is usually a substantial interval between the meetings of the NPC, the NPC Standing Committee plays an important lawmaking role when the NPC is not sitting. The

2 Confucians philosophized that: If the people are guided by Fa, and order among them is enforced by means of punishment, they will try to evade punishment and have no sense of shame, but if they are guided by virtue, and order among them is enforced by Li, they will have a sense of shame and also be reformed. The dominance of Li over Fa has continued from imperial China through the Nationalist Government era and to the People’s Republic of China (PRC). For example, in the Chinese Constitution, the concepts of Li were reflected. (The Constitution of the PRC adopted by the 5th session of the 5th National People’s Congress on 4 December 1982, and was amended in 1988, 1993, 1999, 2004, and 2018). Article 111 of the Constitution stipulates that neighbourhood and municipal people’s mediation committees are established to resolve civil disputes. 3 The Legislation Law of China, which was adopted at the 3rd Session of the 9th National People’s Congress on 15 March 2000 and became effective on 1 July 2000 and was amended on 15 March 2015 4 The State Council, that is, the Central People’s Government of the PRC is the executive body of the highest organ of state power; it is the highest organ of state administration. 5 The Legislation Law, art.7 states: “The NPC and its Standing Committee exercise the legislative power of the State.” 6 Ibid. 7 Ibid.

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Standing Committee is also vested with the power to make supplementation and amendment for the laws which are enacted by the NPC during an interval of the meetings of the NPC, but such supplementation and amendment must not conflict with the fundamental principles of the corresponding laws.8 The State Council has rule-making powers and may make administrative regulations in accordance with the Constitution and statutes.9 These regulations shall include matters (1) with respect to the necessities of enacting administrative regulations in order to implement the provisions of a statute; and (2) within the functions and powers of the State Council’s administration.10 The people’s congresses and their standing committees of provinces, autonomous regions, and municipalities may enact local regulations in accordance with the local special situations, and these regulations must not conflict with the Constitution, statutes, and administrative regulations.11 Also, by virtue of the Legislation Law, ministries and commissions of the State Council, such as the Ministry of Finance, the China Banking and Insurance Regulatory Commission (CBIRC), the Auditorial Office and institutions with administrative functions which are under direct leadership of the State Council may, according to the State Council’s administrative regulations, decisions, and orders, enact regulations within their respective authorizations.12 These regulations shall deal with the matters related to the implementation of the laws of the NPC or the State Council’s administrative regulations and decisions or orders.13 In accordance with the hierarchy of the lawmaking power, Chinese law can be divided into four levels: (1) the Constitution;14 (2) laws adopted by the NPC and its Standing Committee; (3) administrative regulations adopted by the State Council; and (4) local regulations by the people’s congresses of provinces, autonomous regions and cities, and rules or regulations issued by the ministries and commissions of the State Council. As provided by the Constitution and the Legislation Law, legal superiority descends according to the level of lawmaking authority. The Constitution is the highest and fundamental law in China,15 and is supreme over all other laws, so any law which contravenes the Constitution is void.16 The second level is the laws enacted by the NPC and its Standing Committee. These laws are usually supplemented by more detailed rules and regulations promulgated by the State Council or its affiliated ministries. Local people’s congresses and their standing committees at various levels are permitted to enact regulations suitable to local conditions, provided that such regulations do not contravene the Constitution, the laws or regulations adopted by the NPC and its Standing Committee, or the

8 9 10 11 12 13 14 15 16

Ibid. The Legislation Law, art. 65. Ibid. Ibid., art.72. Ibid., art.80. Ibid. The Constitution was enacted in 1982 and was amended in 1988, 1993, and 1999. The Constitution, art.5 and the Legislation Law, art.78. Ibid., see also the Preamble of the Constitution.

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State Council. The insurance supervision and regulation authority under the State Council is authorized by the Insurance Law (art.134) to enact legislation regulating the insurance industry in China. 2.4 The judicial system Under the Chinese Constitution, the people’s courts of the PRC are the judicial institutions of the State.17 The people’s courts of the State are created by the people’s congresses to which they are responsible and by which they are supervised.18 Under the Organic Law of the People’s Court,19 the hierarchy of the people’s courts is divided into four levels: (1) the Supreme People’s Court (SPC); (2) the high people’s courts (HPC); (3) intermediate people’s courts; and (4) the basic people’s courts. At the top of the hierarchy is the SPC in Beijing; the other three levels are generally referred to as “local people’s courts”. The high people’s courts include centrally administered cities like Beijing and Shanghai and autonomous regions like Tibet and Xingjiang, in addition to each of China’s provinces. Intermediate people’s courts are courts at prefectures of a province or autonomous region or municipalities directly under the Central Government or directly under jurisdiction of a province or autonomous region or autonomous prefecture. At the lowest level, there are the basic courts of rural counties and urban districts. There are also some special courts such as military courts, maritime courts, and railway courts. In China, courts, except the SPC, have no power to interpret laws; neither the Constitution nor the Legislation Law authorizes the courts to interpret the laws.The power of law interpretation is mainly exercised by the legislature. The Constitution and the Legislation Law entrust the NPC Standing Committee with the power to interpret the Constitution and Laws.20 Such interpretation is called “legislative interpretation” in jurisprudence. It is said that the basis of legislative interpretation is that those who make the law know the meaning of the law and are in the best position to interpret it. According to this theory, in addition to the NPC and its Standing Committee, other law-making bodies, including the State Council and the standing committees of local people’s congresses, should also have the power to interpret the administrative regulations and local laws and regulations. The theory of legislative interpretation requires restraints of the judicial power in relation to interpreting laws and regulations. So in China, the courts, except the SPC, have no power to interpret the law but only to implement it. Without ascertaining the meaning of law, however, the power of implementation can hardly be exercised. In this regard, the more detailed an interpretation (ascertaining meaning) is given by the legislature, the easier it becomes for the court to apply the law. However, in practice, the NPC Standing Committee has not yet given

17 18 19 20

The Constitution, art.123. Ibid., art. 3. The Organic Law of the People’s Court was adopted in 1954 and was amended in 1979 and 1983. The Constitution, art.67 and the Legislation Law, art.45.

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any formal interpretation of any law.21 Instead, it has authorized the judiciary and administrative organs certain powers to interpret laws and regulations. The Resolution of the NPC Standing Committee on Strengthening the Work of Law Interpretation22 prescribes: (1) all articles in laws requiring further definition or supplemental stipulations shall be interpreted or stipulated by law by the NPC Standing Committee; (2) all questions arising from court trials concerning the specific application of laws and decrees shall be interpreted by the Supreme People’s Court. All questions relating to the specific application of laws and decrees in the procuratorial work of the procuratorate shall be interpreted by the Supreme People’s Procuratorate. In case there is a difference in principle between the interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate, the NPC Standing Committee shall be asked to give an interpretation or decision; (3) all questions on the specific application of laws or decrees that do not come under judicial or procuratorate work shall be interpreted by the State Council and the responsible department; (4) all articles of law of local character requiring further definition or supplemental stipulations shall be interpreted or stipulated by the respective standing committees of provinces, autonomous regions and municipalities that formulated those regulations. All questions concerning the specific application of laws and regulations of a local character shall be interpreted by responsible departments under the people’s governments of provinces, autonomous regions and municipalities. Having the power vested by the Resolution of the NPC Standing Committee, the SPC, since the beginning of the 1980s, has often given its opinions regarding how a given statute or provision should be enforced. Such opinions of the SPC have been widely regarded as interpretations of the law. In practice, judicial interpretation by the SPC has emerged as the most frequent and important form of legal interpretation in China.The SPC is empowered to issue interpretations of questions of law arising out of concreate application. The SPC has often issued an interpretation of a specific law soon after it is enacted for the purpose of further elaborating on the law. For instance, since the Insurance Law was amended in 2009, the SPC has so far enacted four sets of judicial interpretations concerning issues as to the application of that law (which are considered in a subsequent section). 2.5 Insurance legislation in China In China, the Insurance Law (statutory law), the Interpretations of the SPC on Certain Issues Concerning the Application of the Insurance Law, the relevant 21 See Wang Guiguo & John Mo, Chinese Law (Butterworths 1999) 20. 22 It was adopted at the 19th Meeting of the Standing Committee of the 5th NPC on 10 June 1981.

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regulations of the State Council, and the regulations of the former China Insurance Regulatory Commission (the CIRC) and currently the China Banking and Insurance Regulatory Commission (the CBIRC) constitute the legal framework governing the insurance activities, insurance market, and insurance industry. 2.5.1 Before the enactment of the Insurance Law 1995 Prior to the enactment of the Insurance Law 1995, there were mainly four pieces of laws and regulations relating to insurance contracts and insurance companies. These were the Economic Contract Law of the PRC 1981,23 the Regulation of the PRC on Contract of Property Insurance 1983,24 the Interim Regulations on the Administration of Insurance Enterprises 1985,25 and the Maritime Code of the PRC 1992.26 The Economic Contract Law 1981, articles 25 and 46, dealt with the matters of insurance. This was the first time since the foundation of the People’s Republic of China in 1949 that the insurance industry was guided by law other than administrative orders and regulations. On this basis, in 1983, the State Council issued the Regulations on Property Insurance, which provided more detailed rules about property insurance contracts,. It was the first regulation to govern the activities involved with insurance contracts since the foundation of the People’s Republic of China. To furnish a basic regulatory framework for the insurance industry, the State Council issued the Interim Regulations of the Administration of Insurance Enterprise in March 1985. The Interim Regulations was the first comprehensive set of insurance enterprise regulations in China which played an important role in insurance operations before the enactment of the Insurance Law 1995. In November 1992, the Maritime Code, by which marine insurance is regulated, was promulgated.27 2.5.2 The enactment of the Insurance Law 1995 The three sets of laws and regulations relating to insurance enacted in the 1980s (mentioned in the previous section) and the Maritime Code 1992 played an active role in the transformation of the Chinese economic system from a centrally planned economy to a market economy and in the formation of China’s insurance market. 23 It was adopted by the 4th Session of the 5th National People’s Congress (NPC) on 13 December 1981. Arts.25 and 46 deal with matters of insurance contract.The Economic Contract Law was repealed by the Contract Law 1999 (PRC). 24 It was promulgated by the State Council on 1 September 1983.This Regulation may still have effect where not repealed by the Insurance Law 1995. 25 It was enacted by the State Council on the 3 March 1985. 26 It was adopted at the 28th Meeting of the Standing Committee of the 7th NPC on 7 November 1992 and became effective on 1 July 1993. Chapter 12 (arts.216–256) of the Maritime Code deals with the matters on marine insurance. 27 Chapter 12 of the Maritime Code contains six sections: section 1, basic principles; section 2, conclusion, termination, and assignment of contract; section 3, obligations of the insured; section 4, liability of the insurer; section 5, loss of or damage to the subject matter insured and abandonment; and section 6, payment of indemnity. The Marine Insurance Contract Law included in the Maritime Code of the PRC is still in force.

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However, these fragmentary pieces of the law and regulation with respect to insurance were unable to meet the considerable changes in the insurance industry and insurance market. Beginning in 1990, China’s insurance industry began to grow rapidly. For example, the number of insured people under personal insurance increased from 0.1 million in 1982 to 217.35 million in 1991 (the year when the drafting of the Insurance Law was started). The premium income for personal insurance rose from ¥1.59 million in 1982 to ¥8,340.14 million in 1991, and the types of personal insurance coverage increased to 50 in 1991 compared to 20 in 1982.28 However, there had been no law or regulation guiding personal insurance which was transacted only according to personal insurance policies.29 As to the regulations on property insurance, there were still lots of gaps to be filled. There was a lack of insurance contract law to balance the parties’ rights and obligations and deal with matters of insurance contracts. In addition, the Interim Regulations of the Administration of Insurance Enterprise in March 1985 were unable to cope with the real situation of the rapid development of the insurance industry. The main problems were as follows: First, the People’s Bank of China (PBC) was nominated in 1985 by the government as the Financial Supervision and Control Department for the insurance business,30 but the range of its functions was not clearly defined, and it did not provide competent administration and supervision for the insurance business. This problem caused, to a certain extent, some disorder in the insurance market. Second, there was a lack of an environment for fair competition among the insurance companies. For example, the income tax rates for different companies were quite different. The state then collected 55% of income tax from the state owned insurance company − the People’s Insurance Company of China (the PICC), 35% from Pacific Insurance Company and Ping An Insurance Company (company limited by shares), and 15% from the branches of foreign insurance companies.31 Third, some insurance companies tried very hard to keep their customers and attract more new customers by inappropriately reducing the premium rate and applying other undue means. Consequently, the compensation ability of the insurance companies was weakened. Fourth, some enterprises began to run, directly or indirectly, an insurance business without approval of the Financial Supervision and Control Department. Such enterprises, in fact, had neither strong capital nor insurance-managing experience, and so the interest of insurance consumers could not really be protected. Under these circumstances, it was imperative to draw up a comprehensive insurance law.32 In October 1991, authorized by the State Council, the People’s Bank of China (it then played the role of the insurance supervision and regulation authority in China) set up an insurance law drafting group to prepare the new legislation for 28 The PICC’s Year Report of 1991. 29 These policies were drafted by the PICC. 30 The Interim Regulations on the Administration of Insurance Enterprises 1985, art.4. 31 See the Explanation on the Draft of the Insurance Law of the PRC, by Zhou Zhengqing, the vicepresident of the People’s Bank of China, February 1995. 32 For more, see Zhen Jing, Fundamental Principles of Insurance Law and Practice in the Peoples’ Republic of China:A Comparative Study with English and Australian Counterparts (2001) PhD thesis, Department of Law, Queen Mary, University of London, 44–58.

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insurance law.33 After two years of hard work, the draft of the Insurance Law was completed and submitted to the State Council for consideration in September 1993. After several corrections, the draft was eventually passed at the 29th Meeting of the Standing Committee of the State Council and then introduced as the Insurance Bill to the NPC for consideration. The Bill consisted of five chapters and 145 articles. The Legal Committee of the NPC examined the Bill carefully. The revised Bill was adopted on 30 June 1995 by the 14th Session of the Standing Committee of the 8th NPC and was put into effect on 1 October 1995. The Insurance Law 1995 consists of 152 articles in eight parts, including general provisions, insurance contracts, insurance companies, insurance business rules, supervision and administration of the insurance industry, insurance agents and insurance liability, legal liabilities, and supplementary provisions. The Insurance Law 1995 is the first comprehensive set of insurance laws since the establishment of the PRC in 1949. In combination with other pertinent statutory provisions, it represented a basic legal framework for insurance operations and was playing a significant role in the development of China’s insurance industry and the growth of China’s insurance market. The Insurance Law 1995 has several features, as follows: (1) Most insurance laws in other jurisdictions of the world have not contained the objectives of legislation on insurance law. The Insurance Law, however, expressly stipulated the objective of the legislation. Article 1 of the Insurance Law states: This law is formulated in order to regulate insurance activities, protect the lawful rights and interests of the parties in insurance activities, strengthen the supervision and control of the insurance industry and promote the healthy development of the insurance business.

This article makes it very clear that the Insurance Law aims to provide legal protection for the healthy development of the insurance industry and the insurance market and to promote the growth of a socialist market economy. (2) The Insurance Law 1995 combines the insurance contract law and insurance company law into one statute. Thus the Insurance Law regulates not only the relations between the two parties of an insurance contract but also the relations between the State and insurance companies and the behaviours of the insurance companies in the insurance market; it also governs the activities of insurance intermediaries (insurance agents and brokers). 33 The law drafting group consisted of ten persons (4 from PBC, 4 from PICC, 1 from the Pacific Insurance Company, and 1 from Ping An Insurance Company). The drafters collected, translated, and studied insurance laws of 16 countries and regions, including Great Britain, the United States, Japan, Hong Kong, and Taiwan, and so on. During the process of drafting, the group investigated the attitudes and opinions of the PICC and its branches on the Interim Regulations of Insurance Company and other existing insurance regulations and asked them for suggestions on the drafting of the new insurance law. The drafting group also invited experts, legal scholars, and leaders from universities, relevant ministries of the State Council, the Bureau of Legislative Affairs, the Bureau of Judicial Affairs, and the PBC, as well as the PICC to discuss the possible contents of the Insurance Law of the PRC.The group also contacted some foreign insurance law experts for their opinions and suggestions.

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(3) The Insurance Law 1995 reflects the legislative principle of tailoring the law to China’s own circumstances. This principle means that the legislation on insurance not only is in accordance with the aims of the State regarding reforms of the insurance structures but also gives consideration to the actual situation34 that insurance companies were being transformed from old system to new one. (4) The Insurance Law 1995 also reflects the efforts of the lawmakers to keep the law in line with international practice. During the process of the preparing and drafting of the Insurance Law, the law drafters collected, translated, consulted, and referred to 16 countries’ and regions’ insurance laws and regulations. The Insurance Law adopted many internationally accepted principles and concepts regarding insurance contracts and insurance business, for the purpose of the incorporation of China’s insurance market into the international insurance market in the near future. 2.5.3 The amendments of the Insurance Law The Insurance Law 1995 has so far been amended three times – in 2002, 2009, and 2015. (a) 2002 amendment of the Insurance Law The Insurance Law 1995 was amended for the first time at the 30th meeting of the Standing Committee of the 9th NPC of China on 28 October 2002. This amendment was made in response to China’s commitments in relation to the accession to the WTO at the end of 2001. Thus, it focused mainly on the amendment of openness and regulation of the insurance market. The part relating to insurance contracts was almost untouched, although it had been recognized that certain articles were unclear or ambiguous and in need of clarification and amendment. The first amendment was thus regarded as an interim measure for the purpose of meeting the requirements for China’s accession to the WTO. Thus, the second amendment was necessary in order to reform the law relating to insurance contracts. (b) 2009 amendment of the Insurance Law In October 2004, the CIRC and other relevant government departments started the task of amending the 2002 version of the Insurance Law. At the end of 2005, the Draft of the amended Insurance Law was submitted to the Legislative Affairs Office of the State Council. The State Council made further changes after consultation with the general public and relevant bodies and submitted the Insurance Bill 2009 to the NPC of China on 1 August 2008.

34 In other words, China’s insurance companies were then on the way to establish a modern enterprise system characterized by operating independently, assuming their own responsibility for their profits and losses, and developing business of their own accord.

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On 28 February 2009, the Standing Committee of the NPC China passed the amended version of the Insurance Law, which came into force on 1 October 2009. The 2009 version of the Insurance Law embraces many significant changes relating to both insurance contract law and insurance regulation, reflecting the fast-paced development of China’s insurance industry along with its regulatory regime. In respect of the law of insurance contracts, the 2009 amendment mainly focused on nine areas, namely, (1) formation of insurance contracts; (2) the insured duty of pre-contractual duty of disclosure and representation; (3) the insurer’s precontractual duty of explaining the contents of the insurer contract; (4) construction of insurance clauses; (5) claims handling and settlement; (6) assignment of the subject matter insured; (7) notification of occurrence of the insured event; (8) double insurance; (9) and liability insurance. These amendments will be considered in detail in the relevant chapters in this book. (c) 2015 amendment of the Insurance Law The Insurance Law was amended for the third time in accordance with the Decision on Amending Five Laws Including the Metrology Law of the People’s Republic of China adopted at the 14th Session of the Standing Committee of the 12th NPC of China on 24 April 2015. The third amendment made many changes on the part of regulation of the insurance business and no change at all on the part of the insurance contract law. 2.6 Administrative regulations by the State Council A number of administrative regulations have so far been enacted by the State Council, which governs important areas of insurance, such as compulsory motor vehicle insurance, agricultural insurance, and administration of foreign-funded insurance companies in the insurance market in China. 2.6.1 The regulation on administration of foreign-funded insurance companies In order to meet the needs of opening up to the outside world and developing the economy, and to strengthen and improve the supervision and administration of foreign-funded insurance companies, the Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies (hereinafter, the RAFFIC) was enacted by the State Council for the first time on 12 December 2001 and amended three times on 30 May 2013, 6 February 2016, and 30 September 2019.35 The RAFFIC is the primary legislation regulating foreign-funded insurance companies in China’s insurance market. 35 The Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies was adopted at the 49th Executive Meeting of the State Council on 5 December 2001, promulgated by Decree No. 336 of the State Council of the People’s Republic of China on 12 December 2001, and became effective on 1 February 2002. It was amended three times, on 30 May 2013 by the Order of the State Council No. 636, on 6 February 2016 by the Order of the State Council No. 666, and on 30 September 2019 by the Order of the State Council No. 720 (see accessed in 6 October 2020).

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The 2019 version of the RAFFIC consists of 42 articles in seven chapters. It provides rules with regard to the establishment of foreign-funded insurance companies in China, the scope of the business, the supervision and administration of the companies, the dissolution of the companies, and the legal liabilities of the companies. Foreign-funded insurance companies must abide by the laws and regulations of China and shall not infringe upon the social and public interests of China. The legitimate business activities and lawful rights and interests of foreignfunded insurance companies are protected by the laws of China.36 The RAFFIC will be discussed further in chapter 5 of this book. 2.6.2 The Regulation of Agriculture Insurance The Regulation of Agriculture Insurance was adopted at the 222nd executive meeting of the State Council on 24 October 2012 and came into force on 1 March 2013. It was amended on 6 February 2016 by the order of the State Council No.666.37 It is the primary legislation to regulate agriculture insurance activities, protect the legitimate rights and interests of the parties engaged in agricultural insurance activities, improve farmers with the capacity to withstand risks, and promote the healthy development of the agricultural insurance business. “Agriculture insurance” means the insurance activities by which an insurance institution38 is obligated, under the agricultural insurance contract, to pay the insurance money to the insured for the property loss suffered due to specified insurance accidents such as natural disasters, fortuitous accidents, epidemics or diseases incurred to the subject matter in the production of planting, forestry, animal husbandry, and fishery.39 The state supports the development of various forms of agriculture insurance and the improvement of a policy-based agriculture insurance system. Agriculture insurance practice sticks to the principles of government guidance, market operation, free will, and concerted efforts.The people’s government of a province, autonomous region, or municipality directly under the Central Government may establish an agricultural insurance business model that is adapted to the local situations. Any entity or individual shall not force or restrict a farmer or an agricultural production and operation organization to participate in agriculture insurance.40 Where the subject matter of agriculture insurance purchased by farmers or agricultural production and operation organizations falls within the scope of premium subsidies offered by public finance, the public finance department shall offer premium subsidies. The State encourages the local governments to support the development of agriculture insurance by taking such measures as offering premium subsidies by the public finance department of the local government.41 36 The RAFFIC, art.3. 37 See accessed on 6 October 2020. 38 An insurance institution means an insurance company or an agricultural mutual insurance organization legally established. 39 The Regulation of Agriculture Insurance 2016, art.2. 40 Ibid., art.3. 41 Ibid., art.7.

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The State shall establish an agriculture insurance catastrophe risk dispersion mechanism supported by the local public finance department. The State encourages the local governments to establish an agriculture insurance catastrophe risk dispersion mechanism supported by the local public finance department.42 Insurance institutions engaged in the agriculture insurance business enjoy tax preference in accordance with the law. The State favours the establishment of a grassroots service system by insurance institutions that features adaptation to the development needs of the agriculture insurance business. The State encourages financial institutions to enhance the credit support for farmers and agricultural production and operation organizations that purchase agriculture insurance.43 The Regulation of Agriculture Insurance will be further considered in chapter 18 of this book. 2.6.3 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance Specific measures for the scheme of compulsory motor vehicle insurance are formulated by the State Council and contained in the Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance.44 This Regulation was amended for the first time on 30 March 2012,45 for the second time on 17 December 2012,46 and for the third time on 6 February 2016. It is the major legislation governing the scheme of compulsory motor vehicle insurance in China. The Regulation consists of 47 articles in five chapters: chapter 1 concerns general provisions; chapter 2 deals with the purchase of compulsory insurance; chapter 3 is related to claims; chapter 4 is concerned with penalties in the case of contravention of the provisions of the Regulation; and chapter 5 provides definitions of the terms in the Regulation. This Regulation will be discussed in detail in chapter 20 of this book. 2.6.4 The Deposit Insurance Regulation The State Council developed the Deposit Insurance Regulation in 200347 in order to establish and regulate the deposit insurance system, protect the lawful rights 42 Ibid., art.8. 43 Ibid., art.9. 44 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance was adopted at the No. 127 executive meeting of the State Council on 1 March 2006, came into force on 1 July 2006. 45 Article 5 of the 2006 version of the Regulation only permitted the Chinese-funded insurance company to engage in compulsory motor vehicle liability insurance. Art.5 of the first amendment of the Regulation (30 March 2012) allows any insurance company to undertake such business upon the approval by the CIRC. 46 A new article (art.43) was added into the second amendment of the Regulation (17 December 2012). It concerns the insurance liability between a trailer and the tractor. The trailer is not required to be covered under a compulsory motor policy. Where a road accident causes losses to the third party, the insurance on the tractor shall be liable for the loss. 47 The Deposit Insurance Regulation (the State Council Order No. 660 [2003]), as adopted at the 67th executive meeting of the State Council on 29 October 2014, came into force on 1 May 2015 (see accessed on 12 October 2020).

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and interests of depositors according to the law, prevent and eliminate financial risks in a timely manner, and maintain financial stability. The Deposit Insurance Regulation consists of 23 articles that provide detailed rules for deposit insurance. Commercial banks, rural cooperative banks, rural credit cooperatives, and other deposit-taking banking financial institutions formed within the territory of China (hereinafter collectively referred to as “institutional policyholders”) must buy deposit insurance under the Regulation 2003.48 The term “deposit insurance” means the system under which institutional policyholders pay insurance premiums to the deposit insurance fund management institution, forming a deposit insurance fund, and the deposit insurance fund management institution will pay the insured deposits to the depositors where the institutional policyholder is financially unable to pay the depositors and take necessary measures to maintain the safety of deposits and the deposit insurance fund.49 The sources of the deposit insurance fund include50 (1) insurance premiums paid by institutional policyholders; (2) property distributed in the liquidation of institutional policyholders; (3) proceeds gained in the use of the deposit insurance fund by the deposit insurance fund management institution; and (4) other legal income. Under any of the following circumstances, a depositor shall have the right to request the deposit insurance fund management institution to, within the limit set by the Regulation 2003 (¥500,000 yuan),51 use the deposit insurance fund to pay the depositor’s insured deposits:52 (1) the deposit insurance fund management institution serves as the organization to take over institutional policyholders; (2) the deposit insurance fund management institution conducts liquidation of cancelled institutional policyholders; (3) the people’s court decides on and accepts the bankruptcy applications of institutional policyholders; (4) other circumstances approved by the State Council. 2.6.5 The State Council’s opinions on the development of the insurance industry and on certain specific lines of insurance The State Council has in recent years published a number of regulations regarding the development of the insurance industry and on some specific lines of the insurance business such as health insurance and pension insurance. These regulations are usually in the form of “Opinions”. It must be noted that the “Opinions” means in essence “requirements” or “directives”.The relevant Ministries, the insurance supervision and regulatory authority and the insurance industry must implement the “Opinions”. The State Council enacted the Several Opinions on Accelerating the Development of the Modern Insurance Service Industry on 10 August 2014 (hereinafter, the Opinions 2014).53 As a great milestone for the development of the modern 48 The Deposit Insurance Regulation, art.2. 49 Ibid., art.3. 50 Ibid., art.6. 51 Ibid., art.5. 52 Ibid., art.19. 53 The State Council No. 29 [2014]; it came into force on 10 August 2014 (see accessed on 21 September 2020).

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insurance industry, the Opinions 2014, consisting of 10 aspects and 32 items, proposed a series of strategic measures for the reform and development of the insurance industry. The Opinions elevated the position of the insurance industry as an important industry of modern economy for the first time and gave a topdown design of how the growth of the modern insurance service industry can be further boosted to play its part in the state governance system and governance modernization. The Opinions defined the strategic objectives: By 2020, insurance should be an essential means of risk management and financial management for government, enterprises, and residents, with insurance penetration (the ratio of premium to GDP) of 5% and insurance density (premium per capita) of ¥3,500 yuan. To achieve this goal, the Opinions developed a comprehensive plan for the reform, development, and regulation of the insurance industry and set explicit requirements on improving the insurance legal system to ensure orderly development. The Opinions also upgraded supportive polices for the insurance industry, including taxation incentives and fiscal and land use policies. In 2019, China’s insurance penetration and insurance density reached 4.3% and ¥3,052 yuan per capita, respectively, as compared with the insurance penetration of 3.2% and insurance density of ¥1,479 yuan per capita in 2014.54 The strategic objectives of the Opinions 2014 have basically been achieved. The State Council has also published a series of specific regulations for health insurance and pension insurance, as these types of insurance are so important to the welfare of society. Three pieces of regulation are for health insurance: (1) Several Opinions of the State Council on Promoting the Development of Health Services 2013;55 (2) Several Opinions of the General Office of the State Council on Accelerating the Development of Commercial Health Insurance 2014;56 and (3) Opinions of the General Office of the State Council on the Comprehensive Implementation of Critical Illness Insurance for Urban and Rural Residents 2015.57 Three pieces of regulation are formulated for pension insurance: (1) Several Opinions of the State Council on Accelerating the Development of Pension Services 2013;58 (2) Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry 2014;59 and (3) Several Opinions of the General Office of the State Council on Accelerating the Development of Commercial Pension Insurance 2017.60 54 The CIRC Annual Report of the Chinese Insurance Market 2015, p. 73. 55 The State Council No. 40 [2013]; It was issued on 28 September 2013 and came into force on the same day (see accessed on 6 October 2020). 56 The General Office of the State Council No. 50 [2014] (see accessed on 17 August 2020). 57 The General Office of the State Council No. 57 [2015]; it was issued on 28 July 2015 and came into force on the same day (see accessed on 6 October 2020). 58 The State Council No. 35 [2013]; it was issued on 6 September 2013 and came into force on the same day (see accessed on 6 October 2020). 59 The State Council No. 29 [2014]; it was issued on 10 August 2014 and came into force on the same day (see accessed on 6 October 2020). 60 The General Office of the State Council No. 59 [2017]; it was issued on 29 June 2017 and came into force on the same day (see accessed on 6 October 2020).

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These regulations will be considered in detail in chapter 16 for health insurance and chapter 17 for pension insurance, respectively. 2.7 The judicial interpretations of statutory law by the Supreme People’s Court (SPC) China has a civil law system; thus the written law is the major source of law. However, pursuant to the Resolution of the NPC Standing Committee on Strengthening the Work of Law Interpretation,61 the SPC is authorized by the NPC to enact judicial interpretations in respect of all questions arising from court trials concerning the specific application of laws and decrees.62 The SPC’s judicial interpretations on written laws have legal force.63 Especially where a written law is a skeleton or with ambiguities, the SPC’s judicial interpretations on the written law play a very important role for interpreting provisions of the laws, clarifying ambiguities in the laws, filling gaps of the laws, and introducing new approaches for further development of the laws. Since 2009, when the Insurance Law was amended for the second time, the SPC has published four sets of Interpretations on some provisions of the Insurance Law for the purpose of providing rules for correctly trying cases about disputes over insurance contracts and protecting the legitimate rights and interests of the parties concerned. 2.7.1 The SPC Interpretation I 2009 The Interpretation I of the SPC on Certain Issues Concerning the Application of the Insurance Law of the PRC was published on 14 September 2009 and came into force on 1 October 2009. The Interstation I 2009 mainly concerns the circumstances where the 2002 version of the Law should be applied and where the 2009 version of the Law should be applied. 2.7.2 The SPC Interpretation II 2013 The Interpretation II of the SPC on Certain Issues Concerning the Application of the Insurance Law of the PRC was published on 6 May 2013 and came into force on 8 June 2013. The Interpretation II includes 21 articles which give judicial interpretations and clarify some ambiguities and fill the gaps in the Insurance Law 61 It was adopted at the 19th Meeting of the Standing Committee of the 5th NPC on 10 June 1981. 62 Ibid., art.2 (see accessed on 6 October 2020). 63 According to articles 5 and 6 of the Stipulation of the Supreme People’s Court on the Judicial Explanation (2007 No. 12), the Supreme People’s Court stipulation, judicial explanation, or decision have legal force. This means that the Supreme People’s Court stipulations, judicial interpretations, decisions, or replies are of the legal sources in China. However, there are doubts as to whether the SPC’s interpretations shall have the same legal effect as those issued by the NPC (see C. Wang, “Studies on the effectiveness of the judicial interpretation by the Supreme People’s Court of China” (2016) Peking University Law Journal, 28(1), 263–279) Nevertheless, the SPC’s interpretations play a significant role in judicial practice.

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2009, mainly on matters of insurable interest, duty of disclosure, exclusion clause, subrogation, and exclusion clauses.64 2.7.3 The SPC Interpretation III 2015 The third Interpretation of the SPC on Certain Issues Concerning the Application of the Insurance Law of the PRC was published on 25 November 2015 and came into force on 1 December 2015. The Interpretation III is concerned with issues on provisions of the Insurance Law in life insurance with a particular focus on aspects of insurable interest and beneficiaries.65 The Interpretation III consists of 26 articles which are concerned with matters on life insurance. It has clarified some long-disputed issues in the following areas: the life insured’s consent as a condition for the validity of a death policy, the time when insurable interest must exist, the life insured’s medical examination and the proposer’s pre-contractual duty of disclosure, limitation of a life policy on a minor child, reinstatement of a suspended life policy, beneficiaries, and medical insurance. The Interpretation III is useful for the understanding of relevant provisions of the Insurance Law.66 2.7.4 The SPC Interpretation IV 2018 The Interpretation IV was issued on 14 May 2014 and became effective on 1 September 2018.67 It consists of 21 articles concerning matters on indemnity insurance (i.e. property insurance and liability insurance) in respect of issues relating to insurable interest,68 assignment,69 increase of risk upon assignment of subject matter insured or during insurance period,70 mitigation of loss,71 subrogation,72 and liability insurance.73 64 For more, see Wenhao Han, “Judicial Interpretations on Chinese Insurance Act 2009 from its Highest Court” (2013) the Journal of BILA, No. 126, 189. 65 For more on insurable interest and beneficiaries in life insurance in China, see Zhen Jing, “Insurable Interest in Life Insurance: A Chinese Perspective” [2014] Journal of Business Law (J.B.L.) 337–360; and Zhen Jing, “Beneficiaries in Life Insurance in Chinese Law and Practice” [2013] J.B.L., 463–486. 66 Zhen Jing, “The Latest Development of the Insurance Law in Life Insurance in China: The Third Judicial Interpretation on the Insurance Law by the Supreme People’s Court of China” [2016] Journal of BILA, No. 129, 76-105. 67 It was adopted at the 1738th session of the Judicial Committee of the Supreme People’s Court on 14 May 2018. 68 The Interpretation IV, art.1. 69 The Interpretation IV, arts.1–5. 70 The Interpretation IV, art.4. For more on this topic, see Zhen Jing, “The Insured’s Post-Contract Duty of Notification of Increase of Risk: A Comparative Perspective” (2013) J.B.L., 842–867. 71 The Interpretation IV, art.6. For more on mitigation, see Zhen Jing, Chinese Insurance Contracts: Law and Practice (1st edn., Informa Law from Routledge 2017), 413–430. 72 The Interpretation IV, arts.7–13. For more on insurance subrogation in China, see Zhen Jing “The Insured’s Duties under Subrogation: a Comparative Analysis of Chinese, English and Australian law” (2013) Insurance Law Journal, 25(1), 70–89; Zhen Jing “Restriction on the Insurer’s Rights of Subrogation in Chinese Law” (2013) Journal of BILA, No. 126, 107–129; and Zhen Jing “The Confusion between Subrogation and Assignment in the Insurance Law of the People’s Republic of China 1995 – A Critical Analysis on Article 44 of the Insurance Law” (2002) J.B.L., 608–626. 73 The Interpretation IV, arts.14–20. For more on liability insurance in China, see Zhen Jing, Chinese Insurance Contracts: Law and Practice (1st edn., Informa Law from Routledge 2016), 639–663.

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2.7.5 The SPC Interpretation on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damages in Road Traffic Accidents In relation to compensation for damages in traffic accidents, the SPC promulgated the Interpretation on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damages in Road Traffic Accidents.74 This Interpretation was formulated in accordance with the Tort Law of the Civil Code, the Contract Law of the Civil Code, the Road Traffic Safety Law, the Insurance Law, the Civil Procedure Law, and other relevant laws, and taking the judicial practice into consideration. This Interpretation consists of 29 articles in four parts. The relevant articles will be discussed in chapter 20 of this book. 2.8 Regulations enacted by the insurance supervision and regulation authority of the State Council and other relevant regulatory authorities According to art.9 of the Insurance Law, the Insurance Supervision and Regulation Authority of the State Council (the ISRA) is responsible for the supervision and regulation of the insurance industry in China. For the period from November 1998 to March 2018, the China Insurance Regulatory Commission (the CIRC) played the role of the ISRA. Since March 2018, the China Banking and Insurance Regulatory Commission (the CBIRC) has played the role of the ISRA.75 The CBIRC was established on 17 March 2018 by combining two former regulatory commissions: the China Banking Regulatory Commission and the China Insurance Regulatory Commission.The functions and responsibilities of the CIRC and the CBIRC will be further discussed in chapter 3. The ISRA is authorized by the Insurance Law (art.134) to formulate and promulgate administrative regulations and rules concerning the supervision and regulation of the insurance industry in China. During the period from November 1998 to March 2018, China’s insurance industry grew very fast, and the CIRC developed a large body of regulations and rules for the supervision and regulation of the insurance industry; most of these regulations and rules formulated by the CIRC are still effective. After taking over the role of ISRA from the CIRC after March 2018, the CBIRC has formulated many new regulations and rules. The regulations enacted by CIRC/CBIRC can be classified into three levels: the first and top level is in the form of “Provisions”, for example, the Provisions on the Administration of Insurance Companies (the CIRC Order No. 3 [2015]) and the Provisions on the Supervision and Administration of Insurance Brokers (the CIRC Order No. 3 [2018]). The second level is in the form of “Measures” or “Interim 74 The Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damage in Road Traffic Accidents was adopted at the 1556th session of the Judicial Committee of the Supreme People’s Court on 17 September 2012 and came into force on 21 December 2012. 75 See the CBIRC website accessed on 17 August 2020.

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Measures”, for instance, the Measures for the Administration of Utilization of Insurance Funds (the CIRC Order No.1 [2018]), the Measures for the Administration of Handling Complaints of Banking and Insurance Consumers (the CBIRC Order No. 3 [2020]), and the Interim Measures for the Administration of the Underwriting and Claims Settlement of Agriculture Insurance (Bao Jian Fa No. 31 [2015]). The third and the lowest level is usually in the form of “Guidelines”, “Guiding Opinions”, “Standards”, “Decisions”, “Opinions”, “Notice”, or in any other forms, for example, the Guidelines for the Determination of Misleading Sales of Personal Insurance (Bao Jian Fa No.87 [2012]) and the Guidelines on Strengthening the Development of Consumer Rights and Interests Protection System and Mechanisms in Banking and Insurance Institutions (Yin Bao Jian Fa No. 38 [2019]). For some special lines of insurance, such as agriculture insurance, health insurance, pension insurance, and catastrophe insurance, which are financially supported by the central and local governments, other regulatory authorities are also involved. For example, the Ministry of Finance, Ministry of Agriculture and Rural Affairs, and the National Forestry and Grassland Administration issued regulatory rules for agriculture insurance, such as the Measures for the Administration of Agriculture Insurance Premium Subsidies by the Central Treasury (the Ministry of Finance No.123 [2016]) and the Guiding Opinions on Accelerating the High-Quality Development of Agriculture Insurance (the Ministry of Finance No.102 [2019]), which was jointly issued by the Ministry of Finance, Ministry of Agriculture and Rural Affairs, the CBIRC, and the National Forestry and Grassland Administration. For health insurance, the Ministry of Finance, the State Administration of Taxation, and the CIRC jointly issued the Notice on the Promotion of the Pilot Policy for Commercial Health Insurance with Individual Tax Preference to Nationwide Implementation (the Ministry of Finance No. 39 [2017]). The National Development and Reform Commission issued the Guiding Opinions on Carrying Out the Work of Critical Illness Insurance for Urban and Rural Residents (National Development and Reform Commission No. 2605 [2012]). For pension insurance, the Ministry of Finance, the State Administration of Taxation, the Ministry of Human Resources and Social Securities, the CBIRC, the China Securities Regulatory Commission jointly issued the Notice on Carrying out the Pilot Project of Individual Tax-Deferred Commercial Pension Insurance (the Ministry of Finance No. 22 [2018]). For catastrophe insurance, the Ministry of Finance issued the Measures for the Administration of the Special Reserve Fund for Urban and Rural Residents’ Earthquake Catastrophe Insurance (the Ministry of Finance No. 38 [2017]). The regulations and rules of the CIRC/CBIRC and of other regulatory authorities cover all aspects of insurance industry; we will examine these regulations and rules from chapter 4–chapter 24 of this book. 2.9 Self-regulation rules Self-regulation with respect to the transaction of the insurance business has mainly been achieved through the Insurance Association of China (IAC). The IAC is not a regulator, but it does seek to engage closely with the CBIRC to ensure that 50

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China has a regulatory framework that provides safety, stability, and fairness for customers while also ensuring insurers are able to offer affordable products, to innovate, and to invest in the economy to help China develop. The IAC has formulated self-disciplinary rules and enforced these rules in its members. The industrial standards are formulated by the IAC and followed by its members. The IAC plays an important role in the development and regulation of the insurance industry. This topic will be further considered in chapter 24. 2.10 The insurance regulatory hierarchy in China In summary, China’s insurance industry and insurance market are regulated at four levels. On the top of the regulatory hierarchy is the statutory regulation by the National People’s Congress (the highest legislative body in China). The rules of law at this level come from the Insurance Law, which provides rules governing insurance contracts, insurance companies, insurance business operation, insurance agents and brokers, supervision and regulation of insurance industry, legal liability, and so on. The second level is the administrative regulation by the State Council, which promulgates rules for certain important areas of insurance, such as Administration of Foreign-funded Insurance Companies in China’s Insurance Market, Agriculture Insurance, and Compulsory Motor Vehicle Insurance. The third level is the departmental regulation by the insurance supervision and regulation authority of the State Council (the CIRC/CBIRC), which is the regulatory authority responsible for regulating and supervising the insurance industry and the insurance market in China. It regularly enacts administrative rules for the regulation of insurance in China. The fourth level is self-regulation. The Insurance Association of China (IAC) is the major self-regulatory institution in China. The main function of the IAC is to assist the ISRA as an additional channel for the regulation of China’s insurance industry and insurance market. All these legislative and regulatory mechanisms constitute the legal and administrative framework for the regulation and supervision of China’s insurance industry and insurance market. The framework’s purpose is to maintain a fair, safe, and stable insurance industry in order to protect the rights and interests of insurance consumers, to prevent and mitigating market risks, and to promote a sustainable and healthy development of the insurance industry. Ultimately, the framework is designed to contribute to the stability of the entire financial system of China. 2.11 Conclusion This chapter presents an overview of the Chinese legal system, the legislative and judicial sources of law applying to the insurance industry, the administrative regulations by the State Council, and the major sources of regulations developed by the insurance supervision and regulation authority of the State Council (the CIRC/ CBIRC). In the next chapter we will look at the role of the insurance supervision and regulation authority and the regulatory system in China. 51

CHAPTER 3

Insurance supervision and regulation authority and system

3.1 Introduction The Insurance Law (art.9) provides that: [t]he insurance supervision and regulation authority of the State Council is responsible for the supervision and regulation of the insurance industry according to law. The insurance supervision and regulation authority of the State Council sets up local branches according to the needs for performing its responsibilities. The local offices shall perform the responsibilities for supervision and regulation according to the authorization of the insurance supervision and regulation authority of the State Council.

The current insurance supervision and regulation authority of the State Council (the ISRA) is the China Banking and Insurance Regulatory Commission (the CBIRC). In this chapter we will sketch out an overall picture of the insurance supervision and regulation authority and the regulatory system in China, covering the following topics: historical consideration of the development of insurance regulatory authority, statutory functions and responsibilities of the ISRA, the China Banking and Insurance Regulatory Commission, the functions and responsibilities of local offices of the CBIRC, the duty of the local offices of the CBIRC to implement certain administrative licensing matters, the allocation of responsibilities between the CBIRC and its local offices for the supervision and regulation of property insurance companies and reinsurance companies, methods of insurance supervision and regulation, and corrective measures and administrative penalties. 3.2 A historical consideration of the development of insurance regulatory authority China’s modern insurance industry has a short history. At different stages of the development of insurance industry, the insurance regulatory authority was changed from one authority to another.1 After the foundation of the People’s Republic of China in 1949, the People’s Insurance Company of China (the PICC), a centrally controlled and state-owned insurance company, was established by the People’s Bank of China (the PBC) 1 Daoxu Zhou, China’s Insurance and Its Regulation (China Financial Publishing House, Beijing 2010) pp. 99–101.

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in October 1949. The PICC was then the only insurance company in China. Its insurance business was regulated by the Department of Finance Management of the People’s Bank of China until 1952, when the Ministry of Finance took over the role of the insurance regulatory authority in China. In 1959, the domestic insurance business in the whole country was suspended; the PICC became an Insurance Department of the PBC, running a small amount of foreign-related insurance business in a few cities. From 1965 to 1980, a very small amount of domestic insurance was regulated by the Ministry of Finance. The foreign-related insurance business was regulated by the PBC. In April 1979, the State Council made the decision of resuming the domestic insurance business. In April 1981, the PICC became independent from the PBC in the operation of the insurance business but stayed under the leadership of the PBC. In September 1983, the State Council issued the Decisions of Making the People’s Bank of China Exercise the Functions as the Central Bank. It was stipulated in the Decisions that the PICC (and other banks) were elevated to be independent economic entities under the direct leadership of the State Council, but their business operations were subject to the co-ordination, direction, supervision, and inspection by the PBC and its branches. The PBC acted as the insurance supervisor until 1998, when the China Insurance Regulatory Commission (the CIRC) was established and took over the role of insurance supervision and regulation authority. When the Insurance Law was for the first time enacted in 1995, art.8 of the Law stipulated that “the financial supervision and control department of the State Council shall be responsible for supervision and control of the insurance industry in accordance with this Law”. The PBC then played the role of the financial supervision and control department of the State Council. In July 1995, The PBC set up a special department, the Department of Insurance, to supervise and regulate domestic insurance companies. The supervision of foreign insurance companies and foreign insurers’ representative offices in China was performed by the Administrative Department of Foreign Financial Institutions within the PBC. At the early stage of the development of the insurance industry in China, the PBC played an important role for the supervision and regulation of the insurance industry, but with the rapid development of the insurance industry and the access of foreign insurance institutions to Chins’ insurance market, the supervision and regulation of insurance became more important and complex. The major task of the PBC was to formulate and implement monetary policies of the country. It became increasingly difficult for the PBC to focus on the supervision and regulation of the rapidly growing insurance market. After the outbreak of the financial crisis in South East Asia in July 1997, the Central Government of China took lessons from the crisis and paid great attention to prevent the occurrence of a financial crisis. They convened a national meeting on financial work and decided to accelerate financial reform and to safeguard and defuse any financial crisis. One of the major decisions was to adopt the administrative strategy of separate operation and separate regulation of financial and insurance institutions and to strengthen the supervision and regulation of the insurance industry. Upon the approval of the Central Committee and the State Council, the China Insurance Regulatory Commission was officially opened on 53

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18 November 1998 to act as the insurance supervision and regulation authority of the State Council. The CIRC was authorized by the State Council to conduct administration, supervision, and regulation of the Chinese insurance market and to ensure that the insurance industry operated stably, in compliance with law. In 2003, the State Council upgraded the CIRC from a semi-ministerial institution to a ministerial institution directly under the State Council and expanded the size of the CIRC in terms of staff, internal setup, and local offices. The head office of the CIRC was located in Beijing. It was led by a Chairman, four Vice-Chairmen, a secretary of discipline, and an assistant chairman. It had 16 internal departments, including: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16)

General Office Development and Reform Department Policy Research Department Finance and Accounting Department Insurance Consumer Interests Protection Bureau Property Insurance Regulatory Department Life Insurance Regulatory Department Insurance Intermediaries Regulatory Department Insurance Fund Management Regulatory Department International Department Legal Affairs Department Statistics and IT Department Inspection Bureau Human Resources and Education Department Disciplinary Inspection Department Party Committee of the CIRC Head Office

In addition, the CIRC had 36 branches (local offices) with one branch (local office) at each province, autonomous region, or municipal cities, and five subbranches in Tangshan of Hebei Province, Suzhou of Jiangsu Province, Wenzhou of Zhejiang Province, Yantai of Shandong Province, and Shantou of Guangdong Province. Based on the authorized administrative functions, these branches and subbranches under the direct leadership of the CIRC head office regulated the insurance markets within their respective jurisdictions, maintained the steady operation of local insurance markets, and promoted the sustainable and healthy development of the insurance industry in line with laws, regulations, guidelines, and policies. The CIRC had about 2,800 employees, 99% of whom held bachelor degrees or above.2 For the 20 years from 1998 to 2018, the CIRC developed and enacted many regulations, forming the bulk of the current regulations which are still effective. These regulations will be examined on different topics or areas of insurance regulation from chapter 4 to chapter 24 of this book. The term “CIRC” in these regulations issued by the CIRC will be changed to “CBIRC” in the content of the regulations. For example, the Provisions on the Administration of Insurance 2 The Annual Report of the Chinese Insurance Market 2015 (see accessed on 13 October 2020).

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Companies (the CIRC Order No. 3 [2015]) were issued by the CIRC and are still effective. When we consider this piece of Provisions enacted by the CIRC, any name of CIRC in the content of the Provisions will be replaced by the name of CBIRC, because it is now the CBIRC (not the CIRC) that is playing the role of insurance regulatory authority. The insurance companies need to report to or get permits from the CBIRC (not the CIRC). On 17 March 2018, at the First Session of the 13th National People’s Congress, the Plan for the Institutional Reform of the State Council was adopted.3 Section 2(3) of the Plan stipulates that “the China Banking and Insurance Regulatory Commission shall be formed by integrating the functions of the China Banking Regulatory Commission and the China Insurance Regulatory Commission”. In accordance with the Plan, the CBIRC was officially opened on 8 April 2018. Since then, the CBIRC has been playing the role of the insurance supervision and regulation authority of the State Council (in addition to the role of banking regulatory authority). 3.3 Statutory functions and responsibilities of the insurance supervision and regulation authority of the State Council The Insurance Law vests in the ISRA the power and responsibilities to supervise and regulate the insurance industry, safeguard the order of the insurance market, and protect the lawful rights and interests of the proposers, the insureds, and the beneficiaries in accordance with the Insurance Law and its duties prescribed by the State Council and in line with the principles of conformity with law, openness, and fairness.4 The Insurance Law specifically imposes on the ISRA the following main responsibilities: (1) The ISRA formulates policies, strategies, and plans regarding the development of the insurance industry; drafts relevant laws and regulations regarding insurance supervision and regulation; and makes relevant rules for the insurance industry.5 (2) It examines and approves the establishment of insurance companies and their branches, insurance groups, and insurance holding companies;6 approves the establishment of insurance asset management companies in conjunction with relevant authorities;7 examines and approves the establishment of representative offices by overseas insurance organizations within the territory of China;8 examines and approves the establishment of 3 See accessed on 13 October 2020. 4 The Insurance Law, art.133. 5 This is in accordance with art.134 of the Insurance Law, which provides that “[t]he insurance supervision and regulation authority of the State Council formulates and promulgates administrative rules concerning the supervision and regulation of the insurance industry in accordance with laws and administrative regulations”. 6 The Insurance Law, art.67, art.74. 7 Ibid., art.107. 8 Ibid., art.80.

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(3) (4)

(5)

(6)

(7)

(8)

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

insurance intermediaries such as agencies, brokerages, loss-adjusting companies, and their branches;9 examines and approves the establishment of overseas insurance organizations by domestic insurance and non-insurance organizations;10 examines and approves the merge, split, alteration, and dissolution of insurance organizations;11 decides whether or not to take over an insurance company or designates an organization to take it over;12 organizes or participates in the bankruptcy and liquidation process of insurance companies.13 It examines and confirms the qualifications of the senior managerial personnel in all insurance-related organizations; establishes the basic qualification standards for insurance practitioners.14 It examines and approves the clauses and premium rates of insurance lines related to the public interests, statutory insurance lines and newly developed life insurance lines; files the insurance clauses and premium rates of the other insurance lines.15 It supervises the solvency16 and market conduct of insurance companies according to law;17 manages the insurance security fund, and monitors the insurance guarantee deposits;18 formulates rules and regulations on insurance fund management on the basis of laws and relevant policies of the State, and supervises insurance fund management according to law.19 It supervises the business operation of public-policy-oriented insurance and statutory insurance;20 supervises organizational forms and operations such as captive insurance and mutual insurance; conducts administration of societies and organizations such as Insurance Association of China and Insurance Society of China.21 It conducts investigation into the following irregularities and imposes penalties accordingly: unfair competition and other irregularities by insurance organizations and practitioners, direct engagement or disguised engagement in insurance business by non-insurance organizations.22 It supervises overseas insurance organizations established by domestic insurance and non-insurance organizations according to law.23

Ibid., art.119. Ibid., art.79. Ibid., art.89. Ibid., art.92. Ibid., art.90. Ibid., arts.81–83. Ibid., art.114. Ibid., art.137. Ibid., art.95. Ibid., arts.98–100. Ibid., art.106. Ibid., art.135. Ibid., art.180. Ibid., chapter 7 Legal Liabilities. Ibid., art.79.

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(9) It sets up a supervision and administration information sharing mechanism together with the People’s Bank of China and other financial regulatory authorities under the State Council.24 (10) It takes on other duties commissioned by the State Council. 3.4 The China Banking and Insurance Regulatory Commission (CBIRC) The CBIRC is now playing the role of ISRA in China. The functions, responsibilities, and structures of the CBIRC are set out by the State Council in the Provisions on the Functions, Structure and Staffing of the China Banking and Insurance Regulatory Commission 2018.25 3.4.1 Organizational structure of the CBIRC The CBIRC is a public institution directly under the State Council at the ministerial level.26 The head office of the CBIRC is located in Beijing. Its management team has one Chairman, five Vice-Chairmen and one chief inspector. It also has 107 director-level leadership positions (including one full-time deputy secretary of the party committee; one secretary of the disciplinary committee; one chief risk officer, chief prosecutor, chief lawyer, and chief accountant each); and 925 employees.27 The CBIRC currently has 27 internal departments, as follows:28 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)

General Office Policy Research Bureau Law and Regulation Department Statistics, IT & Risk Surveillance Department Finance and Accounting Department (Solvency Regulation Department) Financial Inclusion Department Corporate Governance Supervision Department Banking Institution Examination Bureau Non-bank Financial Institution Examination Bureau Major Risk Event and Case Resolution Bureau (Banking & Insurance Safety & Security Bureau) Financial Innovation Supervision Department Financial Rights Protection Bureau Anti-Illegal Financial Activities Bureau Policy Bank Supervision Department Large Commercial Bank Supervision Department

24 Ibid., art.157. 25 It was officially issued by the General Office of the CPC Central Committee and General Office of the State Council on 31 December 2018 and was effective on 14 August 2018 (backdated) (see accessed on 13 October 2020). 26 The Provisions on the Functions, Structure and Staffing of the China Banking and Insurance Regulatory Commission 2018, art.2. 27 Ibid., art.5. 28 Ibid., art.4.

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(16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27)

National Joint-Stock Commercial Bank Supervision Department City Commercial Bank Supervision Department Rural Small & Medium-sized Banking Institution Supervision Department International Cooperation & Foreign Institution Supervision Department (Office of Hong Kong, Macau & Taiwan Affairs) Property and Casualty Insurance Supervision Department (Reinsurance Supervision Department) Life Insurance Supervision Department Insurance Intermediary Supervision Department Insurance Fund Investment Supervision Department Trust Institution Supervision Department Other Non-bank Financial Institution Supervision Department Human Resources Department CBIRC Headquarters CPC Party Affairs Department

The CBIRC also has 36 local offices, with one local office at each province, autonomous region, or municipal city directly under the Central Government. Of the 36 local offices, nine local offices of the CBIRC are at city level: Beijing, Shanghai,Tianjin, Dalian, Ningbo, Xiamen, Qingdao, Shenzhen, Chongqing, and 27 local offices are at provincial level: Hebei, Shanxi, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi, Shandong, Henan, Hubei, Hunan, Guangdong, Guangxi, Hainan, Sichuan, Guizhou, Yunnan, Xizang, Shanxi, Gansu, Qinghai, Ningxia, and Xinjiang. These local offices are under the direct leadership of the CBIRC head office. They regulate the insurance markets within their respective jurisdictions, maintain the steady operation of local insurance markets, and promote the sustainable and healthy development of the insurance industry in line with laws, regulations, guidelines, and policies. Gradually, the CBIRC will transfer more regulation and service functions to its local offices.29 3.4.2 The mandates of the CBIRC The mandates of the CBIRC are to regulate and supervise banking and insurance institutions in China and their market conduct, to maintain fair competition in the banking and insurance sectors, and to protect the legitimate rights and interests of stakeholders, including depositors and insurance policyholders. 3.4.3 Main functions and responsibilities of the CBIRC The CBIRC implements the principles, policies, decisions and arrangements of the central government. In terms of regulation of the insurance industry, the CBIRC is responsible for performing the statutory functions and responsibility

29 Ibid., art.3(14).

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of the ISRA as mentioned later in section 3.3. The CBIRC’s main functions are as follows:30 (1) Regulate and supervise the banking and insurance sectors in China in accordance with laws and regulations; ensure the legal and stable operation of banking and insurance institutions. (2) Conduct systematic research on the reform and opening up as well as supervisory effectiveness of the banking and insurance sectors; engage in strategic planning for financial reform and development, drafting of laws and regulations of the banking and insurance sectors, and the establishment of prudential regulation framework and financial consumer protection framework; formulate relevant rules and regulations of the banking and insurance sectors, and make recommendations for the formulation and amendment of these rules and regulations. (3) Formulate supervisory rules for prudential regulation and financial consumer protection in accordance with the framework of prudential regulation and financial consumer protection; develop operational rules and supervisory rules for microfinance companies, financing guarantee companies, pawnshops, leasing companies, commercial factoring companies, local asset management companies and other institutions; and establish supervisory framework for the business activities of online lending institutions. (4) License banking and insurance institutions and their business scope in accordance with laws and regulations; review and approve the qualification of senior management of relevant institutions; and formulate codes of conduct for banking and insurance employees. (5) Conduct supervision on banking and insurance institutions in terms of corporate governance, risk management, internal control, capital adequacy, solvency, business operation, and information disclosure, etc. (6) Conduct on-site inspection and off-site monitoring on banking and insurance institutions, carry out risk and compliance assessment, protect the legitimate rights of financial consumers, and penalize illegal acts and misconducts. (7) Compile and publish statistical reports of the banking and insurance sectors, make due disclosure in accordance with requirements and perform the duty of financial statistical work. (8) Establish risk monitoring, control, assessment and early warning mechanisms for the banking and insurance sectors; track, analyze, monitor and forecast the banking and insurance operations. (9) Make recommendations for and oversee the implementation of the contingent risk resolution plans of depository financial institutions and insurance institutions. (10) Crack down on illegal financial activities in accordance with laws and regulations, including identifying, punishing and banning illegal fund-raising activities and conducting relevant coordination work. 30 Ibid., art.3.

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(11) Provide guidance for and monitor the work of local financial regulatory authorities. (12) Engage in the activities of international banking and insurance organizations, including the international regulatory standard-setting work for banking and insurance sectors; facilitate international cooperation of the banking and insurance sectors. (13) Carry out routine administrative work of the supervisory boards of stateowned major banks. (14) Perform other responsibilities assigned by the central government. (15) Transformation of functions. By focusing on the guidelines and tasks of the national financial work, further specifying the functional positioning, strengthening the regulation responsibilities, strengthening micro-prudential regulation, conducting regulation and protection of financial consumers, and guarding the bottom line of non-occurrence of systemic and regional financial risks. In accordance with the requirements for simplification of administrative procedures and delegation of powers to lower levels, gradually reducing and lawfully regulating pre-approval, optimizing financial services, appropriately transferring regulation and service functions to local offices, and promoting the assignment of the business and services of the banking and insurance institutions to lower levels in order to more effectively maximize the function of finance in serving the real economy. 3.5 The functions and responsibilities of local offices of the CBIRC The local offices of the CBIRC are referred to as the Banking and Insurance Regulatory Bureaus. For example, the local office in Shanghai is called Shanghai City Banking and Insurance Regulatory Bureau. The local office at Zhejiang Province is called Zhejiang Province Banking and Insurance Regulatory Bureau. The local offices are authorized by the CBIRC to perform regulatory duties within their jurisdictions in the cities or provinces where they are located. In order to clarify the regulatory duties of the local offices and improve the regulation of the insurance industry, the CIRC developed, in accordance with the Insurance Law and other laws and administrative regulations, the Provisions on the Regulatory Duties of the Local Offices of the CIRC 201631 (hereinafter, the Provisions 2016). Although the CBIRC has replaced the CIRC, the regulatory duties of local offices of the CIRC as stipulated in the Provision 2016 are still applicable to the local offices of CBIRC in terms of supervision and regulation for the insurance industry. In implementing art.3(15) of the State Council Provisions on the Functions, Structure and Staffing of the China Banking and Insurance Regulatory Commission 2018, the CBIRC is gradually transferring regulation and service functions

31 The CIRC Order No. 1 [2016]; it was issued by the CIRC on 11 January 2016 and became effective on 1 March 2016 (see accessed on 13 October 2020).

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to its local offices. The CBIRC has conferred upon its local offices more powers on licensing and supervision of property insurers and reinsurers. These new duties of local offices will be considered later in sections 3.6 and 3.7. In this section, we consider the general duties and responsibilities of the local offices of the CBIRC. The CBIRC conducts vertical leadership and unified administration of its local offices. All local offices shall be directly responsible to the CBIRC and perform their regulatory duties as authorized by the CBIRC.32 The CBIRC and all its local offices in provinces, autonomous regions, and municipalities directly under the Central Government may authorize regulatory sub-offices to perform the regulatory duties, and the regulatory sub-offices shall be directly responsible to the local offices of the provinces, autonomous regions, and municipalities directly under the Central Government where they are located.33 The local offices perform their regulatory duties under the principle of legality, openness, and fairness so as to maintain the order of the insurance market and protect the lawful rights and interests of the proposers, the insured, beneficiaries, and other insurance consumers.34 The local offices are in charge of (1) the market access and exit and institutional regulation of the branch offices of insurance companies and insurance intermediary institutions within their respective jurisdictions;35 (2) the issuance, service, and replacement of the insurance licenses of the branch offices of insurance companies36 and insurance intermediary institutions37 within their respective jurisdictions;38 (3) the confirmation and regulation of the office qualifications of senior executives of the branch offices of insurance companies within their respective jurisdictions, and the regulation of the persons in charge of the marketing service departments of insurance companies within their respective jurisdictions;39 and (4) the confirmation and regulation of the office qualifications of the chairmen, executive directors, and senior executives of insurance intermediary institutions within their respective jurisdictions, and the regulation of insurance sales personnel, insurance brokerage practitioners and insurance adjustment practitioners.40 The local offices regulate the sale, claim settlement, and other services in respect of insurance products within their respective jurisdictions and regulate the implementation of insurance clauses and premium rates and the disclosure of information on insurance products by the branch offices of insurance companies within their respective jurisdictions.41

32 The Provisions on the Regulatory Duties of the Local Offices of the CIRC 2016, art.3. 33 Ibid. 34 Ibid., art.4. 35 Ibid., art.5. 36 “Branch offices of insurance companies” means the branches, central sub-branches, sub-branches, business departments, marketing service departments, and various special-purpose institutions legally formed by insurance companies. 37 “Insurance intermediary institutions” means insurance agents, insurance brokers, and insurance adjustment firms and their branch offices. 38 The Provisions on the Regulatory Duties of the Local Offices of the CIRC 2016, art.6. 39 Ibid., art.7. 40 Ibid., art.8. 41 Ibid., art.9.

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The local offices regulate the business, finance, product information disclosure, and deposits of, and the purchase of professional liability insurance by, insurance intermediary institutions within their respective jurisdictions.42 The local offices are also responsible for the following regulatory tasks within their respective jurisdictions:43 (1) protection of consumers’ rights and interests; (2) handling of letters and visits and tip-offs, and government information disclosure; (3) anti-money laundering, anti-insurance fraud, anti-illegal fundraising and case risk management; (4) investigating and punishing the acts of illegally operating a commercial insurance business or illegally engaging in an insurance agency or brokerage business; (5) insurance information security management; and (6) building of the credit system of the insurance industry. The local offices take charge of the verification and management of insurance statistical information within their respective jurisdictions and of conducting investigation and research on the operating conditions and development trends of the local insurance markets. They report all major events that may affect the normal operation of the local insurance markets to the CBIRC in a timely manner.44 The local offices, in accordance with the provisions of the CBIRC, perform the relevant duties on solvency regulation.45 The local offices conduct on-site inspection and off-site monitoring of the following institutions within their respective jurisdictions:46 (1) branch offices of insurance companies and insurance intermediary institutions; (2) other institutions of which the local offices may conduct on-site inspection and off-site monitoring in accordance with the law; and (3) other institutions of which the local offices may conduct on-site inspection and off-site monitoring as authorized or entrusted by the CBIRC. The local offices, in accordance with the relevant provisions of the CBIRC, regulate the relevant matters of the incorporated insurance companies within their respective jurisdictions47 and impose administrative penalties or take other regulatory measures.48 The local offices that have regulatory sub-offices within their respective jurisdictions shall perform the following regulatory duties:49 (1) accepting the administrative reconsideration applications in which the respondents are the regulatory sub-offices within their respective jurisdictions: (2) accepting the re-examination requests lodged against the settlement decision of the regulatory sub-offices within their respective jurisdictions regarding complaints by letter or visit; and (3) accepting the verification applications filed against the settlement decisions on complaints by insurance consumers made by the regulatory sub-offices within their respective jurisdictions. 42 43 44 45 46 47 48 49

Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17.

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The local offices establish a coordination mechanism featuring division of labour and cooperation together with other financial regulatory institutions and the relevant government departments within their respective jurisdictions.50 The local offices guide and supervise, in accordance with the law, the training of the senior executives of branch offices of insurance companies and insurance intermediary institutions within their respective jurisdictions.The local offices guide and supervise, in accordance with the law, the insurance associations, insurance intermediary associations, insurance societies, and other industry social groups and organizations.51 Where the regulatory duties of the local offices are otherwise provided for by the CBIRC, such provisions apply.52 3.6 The new duty of the local offices of the CBIRC to implement certain administrative licensing matters In order to implement the State Council’s requirements on institutional reform, further streamline administration and delegate powers, optimize the supervision process, and improve the quality and efficiency of supervision, the General Office of the CBIRC issued the Notice Concerning the Matter of Authorizing its Local Offices to Approve Certain Administrative Licensing on 11 March 2019.53 By this Notice, the CBIRC authorizes its local offices to implement some administrative licensing matters as follows: (1) Administrative licensing matters authorized to local offices include (i) approval of changes of business premises of insurance companies within the jurisdictions of the local offices; (ii) examination and approval of the opening of provincial branches of insurance companies; and (iii) except for the chairman and the general manager (including the deputy general manager in charge of the work) of the insurance company, the qualification approval of other directors, supervisors, and senior management personnel. The aforementioned insurance companies do not include policy insurance companies, reinsurance companies, mutual insurance organizations, self-insurance companies, Internet insurance companies, health insurance companies, pension insurance companies, and other insurance companies recognized by the CBIRC. (2) The administrative licensing matters implemented by the authorized local offices shall be to accept, review, and decide by the local offices where the insurance company is located or where the provincial branch of the insurance company is to be established.

50 Ibid., art.18. 51 Ibid., art.19. 52 Ibid., art.20. 53 Yin Bao Jian Ban Fa No. 69 [2019] (see accessed on 22 August 2020).

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(3) The relevant departments of the CBIRC shall strengthen the guidance and supervision of the market access work of the local offices. All local offices shall perform the duty in the examination and approval of relevant administrative licensing matters in strict accordance with laws and regulations. 3.7 The allocation of responsibilities between the CBIRC and its local offices for the supervision and regulation of property insurance companies and reinsurance companies For the supervision and regulation of property insurance companies and reinsurance companies, the CBIRC has recently allocated the responsibilities between the CBIRC and its local offices in the Notice of the CBIRC on Issuing the Reform Plan for Responsibilities of the Supervisory Authorities for Property Insurance Companies and Reinsurance Companies (the Plan 2020),54 which was issued on 16 July 2020 and came into force on 1 August 2020. The formulation of the Plan 2020 is to further coordinate property insurance supervision resources, improve the supervision work system and mechanism of property insurance companies and reinsurance companies, and improve the effectiveness of supervision. 3.7.1 Property insurance companies supervised by the CBIRC or its local offices In China, the 87 property insurance companies and 13 reinsurance companies are classified into two categories in terms of supervision: the companies directly supervised by the CBIRC and the companies territorially supervised by the local offices of the CBIRC. Among them, the CBIRC directly supervises 36 companies, and the local offices of the CBIRC supervise 64 companies in their jurisdictions.55 3.7.2 Allocation of supervisory responsibilities56 The CBIRC and the local offices have different responsibilities, as follows: (1) The CBIRC coordinates the overall supervision policy, including putting forward the planning and work priorities of the supervision work, coordinating institutional regulation, coordinating supervisory standards, supervisory data, supervisory reports, supervisory consultation and interaction and cooperation mechanisms; and 54 See accessed on 13 October 2020. 55 The Notice of the CBIRC on Issuing the Reform Plan for Responsibilities of the Supervisory Authorities for Property Insurance Companies and Reinsurance Companies 2020, s.3. The list of the property insurance companies directly supervised by the CBIRC or those supervised by the local offices of the CBIRC can be seen in appendix 1 of the Plan 2020 at accessed on 13 October 2020. 56 The Notice of the CBIRC on Issuing the Reform Plan for Responsibilities of the Supervisory Authorities for Property Insurance Companies and Reinsurance Companies 2020, s.4.

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(2) The CBIRC and the local offices are responsible for supervising insurance companies under their respective responsibilities as mentioned earlier. Regulatory responsibilities include market access and exit regulation,57 off-site monitoring and risk analysis, solvency supervision, corporate governance supervision, reserve supervision, product supervision, insurance fund use supervision, market behaviour supervision, petition and complaints handling, on-site investigations, on-site inspections, implementation of administrative penalties, case supervision, case risk monitoring and disposal, market exit measures, and the organization and implementation of specific tasks.58 3.7.3 Coordination of supervision59 The CBIRC and its local offices shall establish an effective mechanism for horizontal and vertical linkage to achieve the overall goal of information sharing, division of responsibilities, and coordination. A supervisory coordination linkage meeting mechanism shall be established, which is participated in by the CBIRC and its local offices. Regularly, the CBIRC or one of its local offices will take the lead in convening joint meetings to unify supervision ideas, share supervision information, report risk issues, promote the deployment of the next supervision work, and form a joint supervisory force. An information sharing mechanism shall be established and improved among the CBIRC and its local offices to build a comprehensive information sharing platform, clarify the scope, content, frequency, and procedures of information sharing, realize the timeliness and effectiveness of information sharing, and maintain supervision policy consistency and authority. A special work assignment mechanism shall be established. The advantages of the local offices of the CBIRC in being close to the market and more familiar with the actual situation of the market shall be given full play to optimize the allocation of regulatory resources and establish a special work assignment mechanism. The CBIRC may, according to the actual situation, hand over the relevant supervision work to one of its local offices or coordinate with the local office to undertake the supervisory duties. 3.8 Methods of insurance supervision and regulation The CBIRC uses the methods of off-site monitoring and on-site inspections to examine the business of each insurance institution; evaluate its solvency status, conduct of business, corporate governance framework, the use of insurance funds, 57 The list of the detailed responsibilities in respect of market access and exit can be seen in appendix 2 of the Plan 2020 at accessed on 13 October 2020. 58 The list of the detailed responsibilities other than market access and exit can be seen in the appendix 3 of the Plan 2020 at accessed on 13 October 2020. 59 The Notice of the CBIRC on Issuing the Reform Plan for Responsibilities of the Supervisory Authorities for Property Insurance Companies and Reinsurance Companies 2020, s.5.

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and overall risk profile; and assess its compliance with relevant legislation and regulatory requirements. The CBIRC obtains the necessary information to conduct effective supervision and regulation of insurers and evaluate the insurance market. 3.8.1 On-site inspection On-site inspections can enable the CBIRC to identify strengths and weaknesses within an insurer and to assess and analyze the risks to which an insurer and its customers are exposed. On-site inspections may supplement the analysis from offsite monitoring and provide the supervisor with the opportunity to verify information it has received. On-site inspection may also help detect problems that may not be apparent through off-site monitoring. It is important that on-site inspections are coordinated with off-site monitoring to increase efficiency and avoid duplication of work. For the effective management of on-site inspections, the CBIRC has developed the On-site Inspection Measures of the CBIRC (for Trial Implementation) 2019.60 The Measures were issued on 24 December 2019 and became effective on 28 January 2020. The Measures contain 68 articles in eight chapters: setting out detailed rules on the matters of allocation of on-site inspection duties between the CBIRC and its local offices, initiation of on-site inspection projects, the inspection process, inspection methods, handling of the inspection results, and quality control and an evaluation mechanism for on-site inspection. “On-site inspection” means any administrative law enforcement activities of supervision and inspection conducted by the CBIRC and its local offices as to the operation and management of banking and insurance institutions.61 As an important part of the supervision and administration of the CBIRC and its local offices, on-site inspection can supervise banking and insurance institutions in implementing the state’s macro policies and regulatory policies, improving the level of operations and management to achieve lawful and sound operations, implementing such institutions’ primary responsibilities in risk prevention and control, and safeguarding the security of the banking and insurance industries through error check and malpractice correction, verification, evaluation and guidance, and warning and deterrence, thus better serving the development of the real economy.62 The CBIRC and its local offices shall conduct an on-site inspection in accordance with law, whereas the institution under inspection and its employees shall cooperate with them and ensure that the relevant documents and materials are provided in a true, accurate, complete, and timely manner. If an institution under inspection and its employees refuse to cooperate on inspection or to truthfully report the situation, or refuse or obstruct the inspection, the CBIRC and its local 60 The CBIRC Order No. 7 [2019] (see accessed on 13 October 2020). 61 On-site Inspection Measures of the CBIRC (for Trial Implementation) 2019, art.2. 62 Ibid., art.3.

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offices may, according to the seriousness of the case, take regulatory measures and impose administrative penalties on the relevant institution and individuals.63 (a) Types of on-site inspection and plan for inspection The On-site Inspection Measures 2019 set out three basic types of inspection: regular inspection, temporary inspection, and audit investigation, and so on. Regular inspection is any of the inspections included in the annual on-site inspection plan. According to the scope of inspection, it can be subdivided into (1) comprehensive inspection, which is conducted for risk management and effectiveness of internal control; (2) special inspection, which is targeted at some business areas or regions; and (3) subsequent inspection, which is carried out for the rectification of the major problems discovered in on-site inspection of institutions under inspection. Temporary inspection is any of the inspections conducted according to major work arrangements or temporary work assignments in addition to the annual on-site inspection plan. Audit investigation is an activity in which a specific matter is investigated for the purpose of simplifying the on-site inspection process.64 The CBIRC shall develop an on-site inspection plan on an annual basis, and the on-site inspection plan shall not be modified in principle once it is confirmed. If an individual project included in the annual plans really needs to be adjusted, the adjustment opinions and reasons shall be explained and adjustment shall be made once in a centralized manner in the middle of each year. At the time of adjustment, the projects subject to inspection by the CBIRC shall be approved by the person in charge of the CBIRC, and the projects subject to inspection by local offices of the CBIRC shall be approved by the persons in charge of local offices; the projects of local offices of the CBIRC shall, as required, be reported to the CBIRC with the approval of the persons in charge of the local offices.65 An audit investigation may be included in the annual on-site inspection plan, and the procedures for the initiation of temporary inspection projects may also be included in the on-site plan.66 (b) Division of duties The CBIRC and its local offices shall, according to the division of regulatory duties, adopt project initiation and implementation by level as to on-site inspection. Specifically, they shall, according to the working mechanism of “anyone who initiates a project shall organize and be responsible for it”, carry out an on-site inspection.67 The CBIRC shall be responsible for coordinating the on-site inspections within the whole sector. It shall organize the on-site inspection of relevant insurance institutions and the major special inspections, temporary inspections, and audit investigations within the whole sector according to the division of regulatory duties

63 64 65 66 67

Ibid., art.6. Ibid., art.7. Ibid., art.21. Ibid., art.23. Ibid., art.12.

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and conduct overall guidance and evaluation of the on-site inspections of its local offices.68 Each local office shall be responsible for coordinating the on-site inspections within its jurisdiction. It shall organize the on-site inspections of the insurance institutions within its jurisdiction according to the division of supervisory duties and complete the on-site inspections assigned by the superior departments. It shall also guide, assess, and evaluate the on-site inspections of subordinate departments.69 As needed, the CBIRC may carry out an on-site inspection of the institutions which are under the supervision of its local offices, and its local offices may carry out an on-site inspection of the institutions which are under the supervision of the sub-offices within their jurisdictions.70 The CBIRC and its local offices shall, according to the division of regulatory duties, implement project initiation by level. The CBIRC and its local offices shall strengthen the administration of on-site inspection project initiation and determine the frequency and scope of on-site inspection based on the compliance, rating, importance, risk profile, and past inspection of the insurance institutions – and in light of the directory of entities subject to random inspection and the list of items subject to random inspection, thereby ensuring that inspection projects are scientific, reasonable, and feasible. Without the procedures of approval for project initiation, no on-site inspection shall be carried out.71 (c) Inspection process On-site inspection falls into five stages: inspection preparation, inspection implementation, inspection reporting, inspection processing, and inspection filing.72 The CBIRC and its local offices may adopt the following methods to organize an on-site inspection: (1) The on-site inspection is organized by the entity initiating the project; (2) The on-site inspection is implemented by a subordinate department assigned by the superior department; (3) With respect to highly professional fields, insurance institutions may be required to employ a qualified third-party institution to conduct an inspection and report the inspection results to the regulators; (4) When necessary, they may engage an eligible accounting firm with good credit standing or any other third-party institution to participate in the inspection, and the specific measures shall be separately developed by the CBIRC; (5) The on-site inspection is implemented in other ways in conformity with the provisions of laws, regulations, and rules.73 When the CBIRC and its local offices organize an on-site inspection, inspectors shall not be fewer than two persons, and they must show their legal certificates such as enforcement certificates or work permits and inspection notices. If inspectors are fewer than two in number or fail to show legal certificates and inspection

68 69 70 71 72 73

Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.19. Ibid., art.24. Ibid., art.25.

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notices, an institution or individual under inspection shall have the power to refuse the inspection.74 An inspection team shall, as needed by the inspection project, carry out preinspection investigation, collect information about the inspection issues of institutions to be inspected, mainly including the internal and external audit reports of institutions to be inspected and their rectification and punishment of internal and external inspection and audit, the business development and operation management of institutions, and other information about institutions. It shall conduct inspection analysis and model analysis and develop inspection plans in an attempt to effectively prepare for the inspection.75 An inspection team shall issue a written inspection notice to the institution to be inspected in advance or when it enters the site, organize and convene a meeting on entering the site, and require the institution to cooperate with the inspection. At the same time, the leader of the inspection team shall announce the work discipline and relevant provisions on on-site inspection and instruct the institution under inspection to supervise the inspectors’ performance of supervisory duties.76 An inspection team shall fully exchange views with the institution under inspection on the problems found during the inspection through confirmation of facts, facts inspected, evaluation of the problems and by any other way, and the institution shall provide feedback in a timely and careful manner. The department taking responsibility for on-site inspection shall strengthen communication with the relevant departments over the inspection.77 After the completion of inspection, the inspection team shall make a report about on-site inspection and issue to the inspected institution a written opinion on the on-site inspection. When necessary, the inspection team may notify the superior management department of the inspected institution or its board of directors, board of supervisors, senior management, or major shareholders of the inspection opinion.78 (d) Inspection methods During the inspection process, inspectors shall have the power to consult the documents and information systems related to the inspection matters, examine the business and management sites, collect data and information, test related system equipment and facilities and interview or inquire relevant personnel, and may, as needed, collect the original documents and copy and record them through audio and video recording or photography. Documents and materials that may be transferred, concealed, or destroyed may be sealed in accordance with relevant laws and regulations. As needed, new inspection methods, such as online inspection and correspondence audits, may be adopted. Online inspection is a penetration inspection implemented by using information technology and network technology

74 75 76 77 78

Ibid., art.26. Ibid., art.29. Ibid., art.30. Ibid., art.33. Ibid., art.34.

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to analyze and screen suspected businesses and institutions. A correspondence audit is an activity of checking and verifying major risks or problems by issuing letters of inquiry or using other means.79 When inspectors carry out relevant investigations according to law, the entities and individuals investigated shall cooperate with them, truthfully explain relevant information, and provide relevant documents and materials. They shall not refuse, hinder, or hide such items. If anyone hinders the implementation of the investigation tasks by the employees of the CBIRC and its local offices according to law, the CBIRC and its local offices shall request the public security organ to impose public security administration penalties according to law. Those suspected of committing crimes shall be transferred to judicial institutions and other departments according to law.80 (e) Handling of the inspection outcome The CBIRC and its local offices may notify the superior department or the main shareholders of the institution under inspection of the outcome of the on-site inspection and may also have supervision interviews with the directors, supervisors, and senior management of the institution under inspection, requesting them to make explanation and commitment for the problems found in the inspection. The CBIRC and its local offices may also hold admonitory talks with and criticize and educate relevant responsible persons or order them to conduct a written self-criticism.81 The regulatory feedback and follow-up of on-site inspection will be further considered later in section 3.9. 3.8.2 Off-site monitoring The off-site monitoring is an important regulatory method for routine supervision and regulation of insurance institutions. The CBIRC monitors and supervises insurers on an ongoing basis, based on regular communication with the insurer and analysis of information obtained through supervisory reporting as well as market and other relevant information. The CBIRC requires the insurance institutions to regularly submit reports of business operation, corporate governance, and solvency status and other matters and analyzes the information received from the insurance institutions in a timely manner. The CBIRC uses the information to evaluate the effectiveness of the insurer’s corporate governance framework and its risk management and internal control systems in order to analyze the nature of the insurer’s activities and its relationships with external entities, to evaluate the insurer’s financial condition, and to assess the insurer’s fair treatment of customers, and so on. Analysis by the CBIRC can provide a deeper understanding of developing trends affecting an insurer and its customers. Analysis by business lines, customer 79 Ibid., art.38. 80 Ibid., art.46. 81 Ibid., art.47.

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grouping, and/or distribution channels may provide insights into the insurer’s overall risk profile. The results of off-site monitoring are taken by the CBIRC to formulate the regulatory plan and determine the content, nature, timing, and frequency of on-site inspections. Off-site monitoring may also enable the early detection of problems so that prompt and appropriate regulatory responses can be taken before such problems become more serious. 3.8.3 Classified supervision and regulation A distinctive method of classified supervision and regulation has been developed by the ISRA. It has so far developed a number of regulations for classified supervision and regulation of insurance institutions with regard to corporate governance,82 administration of equities of insurance companies,83 insurance business operation,84 insurance funds utilization,85 and so on.These classified regulations will be discussed at the relevant sections respectively. This section presents a brief account of classified supervision and regulation for corporate governance of insurance institutions that shows an example of how the classified method of supervision and regulation operates. The first regulation for the classified evaluation of corporate governance of insurance companies was the Measures for the Corporate Governance Evaluation of Insurance Institutions with Legal Person Status (for Trial Implementation) issued by the CIRC on 6 December 2015.86 It rated insurers according to their corporate governance and linked the rating result to the remuneration supervision, branch establishment application, and business inspection of the company to make the evaluation more binding. The 2015 Measures has been replaced by the Notice of the CBIRC on Issuing the Measures for the Regulatory Assessment of Corporate Governance of Banking and Insurance Institutions (for Trial Implementation) on 25 November 2019.87 (a) Assessment content and methods The regulatory assessment of corporate governance of insurance institutions mainly includes leadership of the Communist Party of China, governance of shareholders, governance of the board of directors, governance of the board of supervisors and senior management, internal control of risks, governance of related-party transactions, market constraints, governance of other stakeholders, and other aspects.88

82 See chapter 7 of this book, s.7.15. 83 See chapter 8 of this book, s.8.2 and s.8.3. 84 See chapter 10 of this book, s.10.13 and s.10.14. 85 See chapter 12 of this book, s.12.26 and s.12.27. 86 Bao Jian Fa No. 112 [2015]. 87 Yin Bao Jian Fa No. 43 [2019] (see accessed on 13 October 2020). 88 The Notice of the CBIRC on Issuing the Measures for the Regulatory Assessment of Corporate Governance of Banking and Insurance Institutions (for Trial Implementation) 2019, art.5.

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The regulatory assessment of corporate governance includes three steps: compliance evaluation, effectiveness evaluation, and downgrading due to major events. Compliance evaluation: 100 points at maximum, mainly examining whether the corporate governance of an insurance institution complies with laws, regulations, and regulatory provisions. The regulatory authority shall give scores upon the evaluation of the relevant indicators item by item.89 Effectiveness evaluation: focusing on examining the actual effects of the corporate governance mechanism of an insurance institution and paying more attention to the existing prominent problems and risks. The regulatory authority shall deduct points in light of the effectiveness evaluation indicators on the basis of compliance evaluation and may add extra points in terms of the good practice of a banking or insurance institution in improving the effectiveness of corporate governance. Downgrading due to major events: if an institution has any major deficiencies or even failure in its corporate governance, the regulatory authority shall downgrade the preceding two comprehensive scores and their corresponding assessment grades and form the result of regulatory assessment of corporate governance. Where the problems existing in its compliance indicators or effectiveness indicators fail to be rectified for several consecutive years, more points may be deducted, depending on the circumstances. If no rectification is made in the second year, points equivalent to two times the indicator score may be deducted; if no rectification is made in the third year, points equivalent to four times the indicator score may be deducted, and if no rectification is made in the fourth year, points equivalent to eight times the indicator score may be deducted, and so on. The full score of regulatory assessment of corporate governance is 100 points, and the assessment level is divided into five grades: Grade A for above 90 points, Grade B for above 80 points but below 90 points, Grade C for above 70 points but below 80 points, Grade D for above 60 points but below 70 points, and Grade E for below 60 points.90 (b) Assessment procedures and division of work The regulatory assessment of corporate governance, which mainly evaluates the corporate governance status of the previous year, is carried out once a year. In the process of regulatory assessment of corporate governance, the regulatory authority can, in accordance with the actual situation, carry out the assessment retrospectively or prospectively when it is appropriate.91 The office of regulatory assessment of corporate governance is located in the Corporate Governance Supervision Department of the CBIRC; it coordinates and supervises the regulatory assessment of corporate governance of insurance institutions. The supervision department at each institution and each bank and insurance supervision bureau shall carry out the work of the regulatory assessment of corporate governance.92 89 90 91 92

Ibid., art.6. Ibid., art.7. Ibid., art.10. Ibid., art.11.

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The corporate governance regulatory assessment process mainly includes institutional self-assessment, regulatory assessment, results feedback, and supervision and rectification.93 The regulatory assessment adopts a combination of off-site evaluation and onsite evaluation. In principle, the institutions subject to annual on-site assessment shall not be less than 30% of the same type of all the institutions.94 (c) Assessment result and its regulatory application The results of regulatory assessment of corporate governance are important standards for measuring the level of corporate governance of banking and insurance institutions.95 The Grade A (excellent) means that the relevant institutions have sound corporate governance, no obvious compliance and effectiveness issues have been found, and the corporate governance mechanism is operating effectively. The Grade B (good) means that the relevant institutions have basically sound corporate governance, and there are some weaknesses. The relevant institutions can actively take measures to rectify and improve. The Grade C (qualified) means that there are certain defects in the corporate governance of the relevant institutions, and the compliance or effectiveness of corporate governance needs to be improved. The Grade D (weak) means that there are more outstanding problems in corporate governance of the relevant institutions, poor compliance, insufficient effectiveness, and weak corporate governance foundation. The Grade E (poor) means that there are serious problems in the corporate governance of the relevant institutions, poor compliance, severely insufficient effectiveness, and overall corporate governance failure. The CBIRC uses the results of regulatory assessment of corporate governance as an important basis for the regulatory authority to allocate supervision resources, take supervisory measures and actions, and strengthen the application of the assessment results in market access, on-site inspection and approval, regulatory rating, regulatory notification, and so on.96 According to the results of the regulatory assessment of corporate governance, the CBIRC adopts different supervisory measures for insurance institutions according to law:97 (1) For Grade A institutions, no special supervisory measures shall be taken. (2) For Grade B institutions, it shall pay attention to the changes in corporate governance risks, and guide the institutions to gradually improve corporate governance through window guidance and regulatory talks. (3) For Grade C institutions, in addition to adopting regulatory measures for Grade B institutions, it may also take the measures, such as risk warning 93 94 95 96 97

Ibid., art.12. Ibid., art.14. Ibid., art.19. Ibid., art.20. Ibid., art.21.

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letter, decisions of regulatory measures, and regulatory notifications according to the situation, order the institution to hold the responsible person accountable, and require the institution to rectify within a time limit and other measures. (4) For Grade D institutions, in addition to adopting the regulatory measures for Grade C institutions, the institution may be deemed to have failed to meet good standards for market access. At the same time, in accordance with the Banking Supervision and Administration Law of China, the Insurance Law and other laws and regulations, it can take orders to adjust the relevant responsible persons, order to suspend some businesses, stop approving new businesses, stop approving the establishment of branches, and restrict distribution of dividends and other income, and other regulatory measures. (5) For Grade E institutions, in addition to adopting the regulatory measures for Grade D institutions, it can also punish the institutions and responsible persons in accordance with laws and regulations such as the Banking Supervision and Administration Law of China and the Insurance Law. We have seen here the examples of different regulatory measures taken by the CBIRC for the different grades in terms of corporate governance of insurance institutions. On the basis of the off-site monitoring, on-site inspection, and the grading of performance of the insurance institutions, where a problem is found, the CBIRC takes a variety of regulatory approaches to resolve the problem in accordance with the Insurance Law and regulatory rules. The two basic approaches are corrective measures and administrative penalties 3.9 Corrective measures and administrative penalties Where an insurance institution fails to meet statutory or regulatory requirements or enters into unsound business practices and the regulator detects vulnerability in the insurer’s ability to protect policyholders, the CBIRC requires and enforces corrective measures and imposes sanctions which are timely, necessary to achieve the objectives of insurance supervision, and based on clear, objective, consistent, and publicly disclosed general criteria. The CBIRC has adequate tools to supervise insurers according to the nature, scale, and complexity of their activities, including activities that could pose systemic risk. These tools include restrictions on the insurer’s business activities, directions to reinforce the insurer’s financial position, introduction of liquidity requirements or large exposure limits, and so on. The CBIRC may progressively initiate escalating measures to prevent a breach of regulatory requirements by an insurer, respond to a breach of regulatory requirements by an insurer, and enforce those measures to ensure that the insurer responds to the CBIRC’s concerns. Preventive measures are used to prevent a breach of regulatory requirements and corrective measures are used to respond to a breach of regulatory requirements. Functionally, the CBIRC may take similar or identical actions as preventive or corrective measures. In addition, where a statutory or regulatory requirement has been violated, the CBIRC may impose sanctions against the insurer. 74

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3.9.1 Corrective measures In most circumstances, the CBIRC takes corrective measures first when a problem is identified with an insurer by off-site monitoring and on-site inspection. An insurance institution is required to report to the CBIRC regularly in respect of its business operation, risk management, internal control, solvency status, insurance funds investment, and so on. The CBIRC may find problems from inspecting the reports. For example, an insurance company is required to submit an annual risk assessment report. The CBIRC shall inspect the risk management work conducted by insurance companies and their branches on a regular basis. The contents to be inspected mainly include (1) soundness of risk management organizations and their performance of duties; (2) completeness and operability of risk management flow, and the actual situation on its operation; and (3) timeliness and efficacy of the disposal of major risks. The CBIRC may, on the basis of inspection results, issue a risk warning letter to an insurance company which has grave defects in risk management. The insurance company shall submit a rectification plan as required by the risk warning letter in a timely manner, adopt measures to rectify, and submit a report on the situation of rectification. Problems with insurers can also be identified by on-site inspection. The CBIRC will take actions for the problems found. The regulatory feedback and follow-up actions of on-site inspection are set out in the On-site Inspection Measures of the CBIRC (for Trial Implementation) 2019. For any problem found in the inspection, the CBIRC and its local offices shall, in the inspection opinion, order the institution under inspection to make correction within a prescribed time limit. The institution under inspection shall submit a rectification report within the prescribed time.98 The CBIRC and its local offices that discover during the inspection that there is any circumstance where the insurance institution under inspection violates laws and regulations, prudent operation rules, and solvency supervision rules shall take the supervision measures as prescribed in the Insurance Law.99 The CBIRC and its local offices shall initiate the procedures for filing an investigation of administrative penalty for any violation of laws and regulations involving administrative penalty discovered during on-site inspection and handle the case in accordance with the Insurance Law and the relevant provisions on administrative penalty of the CBIRC.100 If the evidential materials that have been obtained according to law during on-site inspection before filing the case meet the requirements for evidence of administrative penalty, they may be used as evidence for ascertaining the facts of violation of laws and regulations. If the supplementation of evidential materials is required during the review, a supplementary investigation shall be initiated in accordance with the relevant provisions.101 98 99 100 101

On-site Inspection Measures of the CBIRC (for Trial Implementation) 2019, art.48. Ibid., art.50. Ibid., art.51. Ibid., art.52.

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If the CBIRC and its local offices discover during on-site inspection that an insurance institution or its employee, customer, or any other relevant organization or individual is suspected of committing crimes, it, he, or she shall, in accordance with the relevant provisions, be transferred to judicial institutions and other departments according to law.102 After the completion of the inspection, the department of the regulatory authority conducting an on-site inspection shall send a copy of the on-site inspection opinion to the regulatory department and other relevant departments of the authority in a timely manner. The regulatory department shall, according to the inspection opinions, supervise the inspected institution in implementing the rectification requirements. If necessary, a certain observation period of rectification may be set up.103 The department of the regulatory authority conducting an on-site inspection shall be responsible for evaluating the rectification of the institution under inspection. During the evaluation, the team conducting on-site inspection may consult the rectification report of the institution under inspection, require the institution under inspection to supplement relevant materials, interview the relevant personnel of the institution under inspection, listen to the opinions from the regulatory department and other relevant departments of the authority, and conduct follow-up inspection, audit, and investigation, if necessary.104 If the institution under inspection fails to make rectification as required, the CBIRC and its local offices may take further regulatory measures or impose administrative penalties in accordance with the provisions of the Insurance Law.105 The CBIRC and its local offices shall strengthen the statistical analysis of the inspection and the rectification, and establish an information feedback and sharing mechanism for on-site inspection. For the universal and typical risks and problems found in the inspection, supervision notification, risk warning, and other measures shall be taken in a timely manner. Any sign of systemic risks found in the inspection shall, as a special topic, be reported in a timely manner. For the problems of supervision mechanisms and systems found in the inspection, suggestions on revising and improving the supervision mechanism and system shall be offered in a timely manner.106 The CBIRC and its local offices shall reflect the situations and problems found during on-site inspection in the regulatory rating and risk assessment of the institution under inspection and adjust the regulatory rating and risk assessment of the institution under inspection when necessary and take them into consideration in market access according to the relevant regulations.107 The CBIRC and its local offices shall have the power to disclose relevant inspection information in accordance with relevant regulations, except those that involve state secrets, business secrets and personal privacy and that may endanger national security, public security, economic security, and social stability after publication.108

102 103 104 105 106 107 108

Ibid., art.53. Ibid., art.54. Ibid., art.55. Ibid., art.56. Ibid., art.57. Ibid., art.58. Ibid., art.59.

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3.9.2 Taking over an insurance institution The Insurance Law set out rules in articles 144–148 with regard to the matter of takeover of an insurer. The conditions which can trigger the takeover action are stipulated in article 144 of the Insurance Law, which states that: where an insurance company falls under either of the following circumstances, the insurance supervision and regulation authority of the State Council (ISRA) may take it over: (1) the company is seriously insolvent; or (2) the company damages the public interests in violation of this Law, which may seriously endanger or has seriously endangered the solvency of the company. The debtor-creditor relationships of the insurance company shall remain unchanged after it is taken over.109

The measures for the formation of a takeover team and the implementation of takeover shall be determined and announced by the ISRA.110 Upon the expiration of the takeover period, the ISRA may decide to extend the takeover period, but the takeover period shall not exceed two years at most.111 Where an insurance company in takeover resumes its normal business operation capacity upon the expiration of the takeover period, the ISRA shall decide to terminate the takeover and make an announcement thereon.112 Where an insurance company in rectification or takeover falls under the circumstances prescribed in article 2 of the Enterprise Bankruptcy Law of China,113 the ISRA may apply to the people’s court for subjecting the company to restructuring or bankruptcy liquidation.114 In accordance with articles 144–148 of the Insurance Law as mentioned previously, the CBIRC has the power to take over an insurance company which is seriously insolvent or damages the public interest in violation of the Insurance Law. For example, the CBIRC has recently established a takeover team to take over three insurance companies (Tianan Property Insurance Co., Ltd., Huaxia Life Insurance Co., Ltd., and Tianan Life Insurance Co., Ltd.), which triggered the conditions for being taken over as stipulated in article 144 of the Insurance Law.The takeover team is responsible for managing the three companies for one year from 17 July 2020 to 16 July 2021.115 3.9.3 Administrative penalties The Insurance Law provides a range of rules regarding administrative penalties for the breaches of law and regulations. 109 110 111 112 113

The Insurance Law, art.144. Ibid., art.145. Ibid., art.146. Ibid., art.147. Article 2 the Enterprise Bankruptcy Law of China provides that:

[w]here an enterprise legal person cannot pay off his debts due and his assets are not enough for paying off all the debts, or he apparently lacks the ability to pay off his debts, the debts shall be liquidated according to the provisions of this Law. Where an enterprise legal person is under the circumstances as specified in the preceding paragraph or he has apparently forfeited the ability to pay off his debts, he may undergo reorganization according to the provisions of this Law.

114 The Insurance Law, art.148. 115 See accessed on 13 October 2020.

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The insurance supervision and regulation authority of the State Council shall regard insolvent insurance companies as the key objects of supervision and may take the following measures depending on the circumstances: ordering an increase of capital or reinsurance; limiting the scope of business; restricting the payment of dividends to shareholders; restricting the purchase of fixed assets or the scale of operation costs; restricting the forms and proportion of use of funds; restricting the formation of additional branch offices; ordering an auction of non-performing assets or transfer of the insurance business; restricting the level of salaries of directors, supervisors and senior managers; restricting commercial advertisements; or ordering a stop of accepting new business.116 Where any insurance company, in violation of the Insurance Law, commits any of the following conduct, the insurance supervision and regulation authority shall order it to make correction and impose a fine of ¥50,000 yuan up to ¥300,000 yuan upon it; and, if the circumstances are serious, restrict its scope of business, order it to stop accepting new business or revoke its business operation license: failing to set aside the guarantee fund as required or illegally using the guarantee fund; failing to set aside or carry forward any liability reserve fund as required; failing to pay the insurance security (or protection) fund or draw the provident funds as required; failing to make reinsurance as required; failing to use the capital of an insurance company as required; setting up a branch office without approval; or failing to apply for approval of insurance clauses or premium rates as required.117 The Insurance Law imposes administrative penalties not only on insurance institutions or employees of the insurers that violate laws and regulations but also on any staff member of the insurance supervision and regulation authority who undertakes the supervision and administration work and commits any of the following conduct: approving the formation of any institution in violation of the relevant provisions; examining and approving insurance clauses or premium rates in violation of the relevant provisions; making on-site inspections in violation of the relevant provisions; inquiring about accounts or freezing funds in violation of the relevant provisions; disclosing any trade secret of a relevant entity or individual which he or she has access to; enforcing any administrative punishment in violation of the relevant provisions; or any other conduct of abusing power or neglecting duties.118 The Insurance Law empowers the CBIRC or its local offices to impose administrative sanctions on insurers and individuals proportionate to the breach of statutory and regulatory requirements or other misconduct. The CBIRC has the ability to impose fines, the ability to bar individuals acting in key roles from holding similar roles in future, and the ability to require remediation. The CBIRC and its local offices will not always be able to take a full range of legally binding actions themselves and may need to act in conjunction with, or refer matters to, other authorities, particularly in the case of criminal penalties. For the purpose of effective administration for penalties, the CBIRC has developed the Measures for Administrative Punishments, which were issued on 15 June 116 The Insurance Law, art.138. 117 Ibid., ar.164. 118 Ibid., ar.178.

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2020 and became effective on 1 August 2020.119 The Measures 2020 consists of 104 articles in ten chapters: general provisions, jurisdiction, case docketing and investigation, evidence collection, trial, deliberation, notification of rights and hearing, decision and execution, legal liabilities, and complementary provisions. The Measures 2020 set out procedural rules for administrative sanctions. The detailed sanctions for different types of violations of the laws and regulations are provided in the CIRC/CBIRC regulations which will be considered in chapters 4 to 24. Generally, the following range of administrative penalties has been employed by the CBIRC which are set out in article 3 of the Measures for Administrative Punishments 2020, including: (1) warning; (2) fine; (3) confiscating illegal income; (4) ordering the cessation of business operation for rectification; (5) revoking the financial or business permit; (6) cancelling or revoking office qualifications; (7) restricting the business scope of the insurance institution; (8) ordering the insurance institution to cease the acceptance of new business; (9) revoking the representative office of a foreign bank or revoking a foreign insurance institution’s representative office in China; (10) ordering the replacement of the chief representative of a foreign bank or the chief representative of a foreign insurance institution’s representative office in China; (11) prohibiting the violator from working in the banking sector or entering the insurance sector; and (12) any other administrative punishment prescribed by laws and administrative regulations. One or more of these penalties may be imposed on an insurer, depending on the type and severity of the violation of the laws and regulations. The CBIRC and its local offices impose administrative punishments under principles of fairness, impartiality, and openness. They must follow correct legal procedures and apply appropriate punishments in accordance with the types and severity of violations of law. They combine punishment and education.120 The CBIRC regularly publishes on its website cases of sanctions against insurance institutions or individuals in order for sanctions to have a deterrent effect on other insurers or individuals.121 A party may be given a lighter or mitigated punishment under certain circumstances, such as taking the initiative to eliminate or mitigate the harmful consequences of the violation of law, being coerced by another person into committing any violation of law, performing meritorious service in cooperating with the administrative agency in the investigation and handling of any violation of law, or any other circumstance where a lighter or mitigated punishment shall be given in accordance with the law. Where the violation of law is minor and corrected in a timely manner without any harmful consequences, no administrative punishment shall be imposed on it.122 In contrast, a party falling under any of the following 119 The CBIRC Order No. 8 [2020] (see accessed on 13 October 2020). 120 The Measures for Administrative Punishments 2020, art.4. 121 See the website of the CBIRC for the published cases of administrative penalties. accessed on 13 October 2020. 122 The Measures for Administrative Punishments 2020, art.7.

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circumstances may be given a heavier punishment: committing repeated violations of laws, failing to cooperate in regulatory law enforcement, harmful consequences that cause serious and adverse social effects, any other circumstance where a heavier punishment may be imposed.123 3.10 Conclusion Having seen an overall picture of China’s insurance industry (chapter 1), the Chinese legal system and insurance legislation (chapter 2), the role and functions of the insurance supervision and regulation authority, and the operation of the regulatory system (chapter 3), we are now better prepared to embark on the task of examining the substantive law and regulations with regard to the regulation of the insurance market and insurance business from chapter 4 to chapter 24 of this book. To begin with, we shall look at the formation and dissolution of insurance companies in chapter 4 of this book.

123 Ibid., art.8.

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CHAPTER 4

Formation and dissolution of insurance companies

4.1 Introduction Insurance companies are the major players of the insurance market. Their formation and dissolution are strictly regulated in China. They must be authorized by the Insurance Supervision and Regulation Authority of the State Council to conduct insurance business.1 This chapter is concerned with matters on formation and dissolution of insurance companies and branch offices. The requirements for establishment and dissolution of an insurance company are set out in chapter 3 of the Insurance Law. In accordance with the Insurance Law, the Company Law of China, and other laws and administrative regulations, the China Banking and Insurance Regulatory Commission (the CBIRC) has formulated a number of sets of rules to regulate the operation of insurance companies in China’s insurance market. The principal regulation is the Provisions on the Administration of Insurance Companies (hereinafter, the Insurance Company Provisions).2 The Insurance Company Provisions provide detailed rules governing matters with respect to formation and dissolution of insurance companies for the purpose of strengthening the supervision and administration of insurance companies, maintaining the normal order of the insurance market, protecting the lawful rights and interests of the insured, and promoting the sound development of the insurance sector. The Provisions consist of rules governing the formation of insurance companies,3 formation of branch offices,4 modification or dissolution or abolition of insurance institutions,5 management of branch offices,6 insurance operations,7 and supervision and administration.8 Some of these matters are considered in this chapter, while some others are considered in other chapters.

1 The Insurance Law, art.67. 2 The Provisions on the Administration of Insurance Companies (the CIRC Order No. 3 [2015]) were first promulgated by the CIRC in May 2004 and amended in October 2009 and October 2015 (see

accessed on 13 October 2020). 3 The Provisions on the Administration of Insurance Companies 2015, chapter 2. 4 Ibid., chapter 3. 5 Ibid., chapter 4. 6 Ibid., chapter 5. 7 Ibid., chapter 6. 8 Ibid., chapter 7.

DOI: 10.4324/9781351122863-4

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4.2 Formation of insurance companies 4.2.1 The requirements for the establishment of an insurance company by the Insurance Law According to art.5 of the Insurance Companies Provisions, the insurance business may only be conducted by insurance companies formed in accordance with the Insurance Law and by other insurance organizations specified by laws and administrative regulations, and no other entity or individual may conduct the insurance business or conduct the insurance business in a disguised form.9 The steps to be taken for the establishment of an insurance company are provided in articles 67–78 of the Insurance Law. Six steps shall be followed: First, the applicant must make an application to the CBIRC for the formation of an insurance company.10 Second, the CBIRC shall consider the application and approve it if the applicant has met the requirements for the formation of the company.11 Third, if the CBIRC has approved the application, the applicant can start preparatory work for the formation of the company, which is required to be completed within one year.12 Fourth, upon completion of the preparatory work, the applicant can apply to the CBIRC for commencement of the insurance business.13 Fifth, the CBIRC shall conduct a business commencement check. If the formation preparation has passed the check, the CBIRC shall issue an insurance business permit to the applicant.14 Sixth, the applicant shall register at the Administration for Industry and Commerce on the basis of the insurance business operation permit and obtain a business license.15 In the next section, a more detailed consideration of the requirements for the establishment of an insurance company is presented. The formation of an insurance company shall meet the following requirements: (1) the insurance company’s principal shareholder shall have a sustainable capability to make profits, have a good credit standing, have no record of material violation of law or regulation in the last three years and have a net assets value not less than ¥200 million yuan; (2) the Articles of Association shall be in conformity with the Insurance Law and the Company Law; (3) the insurance company shall have registered capital in compliance with the Insurance Law; (4) the insurance company shall have directors, supervisors, and senior managers who have the expertise and business experience required for their positions; (5) the insurance company shall have a sound organizational structure and management system; (6) the insurance company shall have business premises and other facilities related to business operation in compliance with the relevant requirements; and (7) other requirements as set out by laws, administrative regulations, and by the CBIRC.16

9 10 11 12 13 14 15 16

Ibid., art.5. The Insurance Law, art.70. Ibid., art.71. Ibid., art.72. Ibid., art.73. Ibid. Ibid., art.77. Ibid., art.68.

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The minimum amount of registered capital of an insurance company to be formed shall be ¥200 million yuan in the form of paid-in monetary capital. The CBIRC may adjust the minimum amount of registered capital of an insurance company according to the business scope or scale of the insurance company, but the amount shall not be less than ¥200 million yuan.17 A written application must be submitted to the CBIRC with the following materials: (1) a formation application form, which shall specify the name, registered capital, business scope, and so on, of the insurance company to be formed; (2) a feasibility study report; (3) a formation preparatory plan; (4) the investor’s business license or other background data and the accounting report of the last year which has been audited by an accounting firm; (5) a list of the persons in charge of the formation preparatory group and the proposed chairman of the board of directors and managers who are acknowledged by the investor, and the acknowledgement certificates of such persons; and (6) other materials as specified by the CBIRC.18 The CBIRC shall examine the application and, within six months from the date of receiving the application, make a decision whether or not to approve the application and notify the applicant of the outcome of the application. If disapproving the application, the reasons therefor shall be given in writing.19 Once the CBIRC approves the application, the applicant is given a period of one year to prepare its establishment of the company and shall not carry out any insurance business operation during the formation preparation period.20 After completion of its preparation, the applicant may apply to the CBIRC for conducting business. The CBIRC must make a decision on whether or not the applicant is permitted to conduct the business within 60 working days of receiving the application.21 Once an insurance company has been established with the permission of the CBIRC, it will register with and obtain a business license from the Administration for Industry and Commerce.22 Where an insurance company or a branch office thereof, without any good reasons, fails to conduct the registration formalities at the Administration for Industry and Commerce within six months from the day when it obtains an insurance business operation permit, its insurance business operation permit shall become invalid.23 The requirements for senior management personnel of insurance companies are stipulated in articles 81–83 of the Insurance Law. According to art. 81, the directors, supervisors, and senior managers of insurance companies shall have good conduct, be familiar with laws and administrative regulations on insurance, have the management capability required for performing their duties, and have obtained the corresponding post-holding qualifications approved by the CBIRC before holding posts. The scope of senior managers of insurance companies shall be prescribed by the CBIRC. 17 18 19 20 21 22 23

Ibid., art.69. Ibid., art.70. Ibid., art.71. Ibid., art.72. Ibid., art.73. Ibid., art.77. Ibid., art.78.

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A person under any of the circumstances prescribed in art.146 of the Company Law24 or any of the following circumstances shall not hold a post of director, supervisor, or senior manager in an insurance company: (1) for a former director, supervisor, or senior manager of a financial institution, whose post-holding qualification has been cancelled by the financial regulatory authority for any violation of law or discipline, it has not been five years since the day when he or she was disqualified; or (2) for a former lawyer, certified public accountant, or professional of an institution such as asset assessment institution or verification institution, whose practicing qualification has been revoked for any violation of law or discipline, it has not been five years since the day when he or she was disqualified.25 A director, supervisor, or senior manager of an insurance company who breaks a law or administrative regulations or provisions in the Articles of Association of the company in the process of performing duties for the company and causes any loss to the company shall assume the compensatory liability.26 4.2.2 The requirements for the establishment of an insurance company by the Insurance Companies Provisions In accordance with the Insurance Law as aforementioned, a set of detailed rules for the formation of an insurance company are provided in the Insurance Companies Provisions 2015 (articles 6–14). These rules are considered here. Two principles must be followed for the formation of an insurance company: (1) compliance with laws and administrative regulations; and (2) contributing to the fair competition in and sound development of the insurance sector.27 To form an insurance company, an application for formation preparation shall be submitted to the CBIRC, and the following conditions shall be met: (1) The investors of the insurance company meet the conditions as set out in laws, administrative 24 Article 146 of the Company Law provides that anyone who is under any of the following circumstances shall not assume the post of a director, supervisor, or senior manager of a company: (1) Being without civil capacity or with only limited civil capacity; (2) Having been sentenced to any criminal penalty due to an offence of corruption, bribery, encroachment of property, misappropriation of property, or disrupting the economic order of the socialist market and five years have not elapsed since the completion date of the execution of the penalty; or he or she has ever been deprived of his or her political rights due to any crime, and three years have not elapsed since the completion date of the execution of the penalty; (3) He or she was a former director, factory director, or manager of a company or enterprise which was bankrupt and liquidated, whereby he or she was personally liable for the bankruptcy of such company or enterprise, and three years have not elapsed since the date of completion of the bankruptcy and liquidation of the company or enterprise; (4) He or she was the legal representative of a company or enterprise, but the business license of this company or enterprise was revoked and this company or enterprise was ordered to close due to a violation of the law, whereby he or she is personally liable for the revocation, and three years have not elapsed since the date of the revocation of the business license thereof; (5) He or she has a relatively large amount of debt which is due but has not been paid. Where a company elects or appoints any director or supervisor, or hires any senior manager, by violating the provisions in the preceding paragraph, such elections, appointments, or hiring shall be invalid.Where any director, supervisor, or senior manager, during his term of office, is under any of the circumstances as mentioned in the preceding paragraph, the company shall remove him or her from his post. 25 The Insurance Law, art.82. 26 Ibid., art.83. 27 The Provisions on the Administration of Insurance Companies 2015, art.6.

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regulations, and the provisions issued by the CBIRC, and the equity structure of the insurance company is rational; (2) The draft by-laws (Articles of Association) of the insurance company comply with the provisions of the Insurance Law and the Company Law; (3) The investors have undertaken to contribute capital or subscribed shares of the insurance company, and the registered capital of the insurance company is not less than ¥200 million yuan and must be paid-in monetary capital; (4) The insurance company has a specific development plan, business strategy, organizational framework, and risk control system; (5) The proposed chairman of the board of directors and general manager of the insurance company satisfy the office qualifications prescribed by the CBIRC; (6) The person in charge of the formation preparation group is recognized by all the investors; (7) Other conditions as set out by the CBIRC. The CBIRC may, according to the scope or scale of business of an insurance company, adjust the minimum amount of registered capital of the insurance company, which, however, shall not be less than ¥200 million yuan.28 To apply for the formation preparation of an insurance company, the applicant shall submit the following materials in triplicate: (1) a written application for formation, stating the name and the proposed registered capital and scope of business of the insurance company to be formed; (2) a feasibility study report on the formation of the insurance company, including but not limited to its development plan, business strategy, organizational framework, and risk control system; (3) a formation preparation plan; (4) the draft by-laws of the insurance company; (5) relevant materials to be submitted by the investors as required by the CBIRC; (6) a list of the persons in charge of the formation preparation group and the proposed chairman of the board of directors and general manager and their respective certifications; and (7) other materials as set out by the CBIRC.29 The CBIRC shall examine an application for the formation preparation of an insurance company, make a decision to approve or disapprove the application within six months of accepting the application, and notify the applicant of the decision in writing. In the case of disapproval, a written explanation of the reasons for the disapproval shall be provided.30 The CBIRC shall, during the period of examining an application for the formation preparation of an insurance company, alert the investors to risks. The CBIRC shall hear the plans of the proposed chairman of the board of directors and general manager of the insurance company to be formed regarding work on the business management and development of the company.31 Where the CBIRC approves an application for the formation preparation of an insurance company, the applicant shall complete the preparatory work within one year of receiving the notice of approval. If the preparatory work is not completed upon expiry of the one-year period, the approval decision shall be automatically invalidated. The institution in formation preparation may not engage in any 28 29 30 31

Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10.

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insurance operation during the preparatory period. It shall be prohibited to modify the principal investor during the preparatory period.32 Upon completion of the preparatory work, the applicant may apply to the CBIRC for commencement of business if the following conditions are met: (1) Its shareholders comply with laws, administrative regulations, and the relevant provisions issued by the CBIRC; (2) Its by-laws comply with the provisions of the Insurance Law and the Company Law; (3) Its registered capital is not less than ¥200 million yuan and must be paid-in monetary capital; (4) Its directors, supervisors, and senior executives satisfy the office qualifications specified by the CBIRC; (5) It has a sound organizational structure; (6) It has established adequate and effective business, accounting, compliance, risk control, asset management, anti-money laundering, and other rules; (7) It has specific business development plans and has mid- and long-term asset allocation plans prepared according to asset-liability matching and other principles; (8) It has lawful business premises, with security and fire protection facilities satisfying the prescribed requirements. Its business premises and office equipment, among other items, are suitable for its business development plans, and its development of information technology systems satisfies the requirements of the CBIRC; (9) Other conditions as set out in laws, administrative regulations, and the provisions of the CBIRC.33 To apply for commencement of business, the applicant shall submit the following materials in triplicate: (1) a written application for commencement of business; (2) a resolution of the founding meeting or, in the absence thereof, a document or resolution on the consent of all the shareholders to the application for commencement of business; (3) company by-laws; (4) the name and the shareholding or capital contribution proportion of each shareholder, a capital verification certificate issued by a capital verification institution with a good credit standing, and a photocopy of the original voucher of capital received in the account; (5) relevant materials to be submitted by the shareholders as required by the CBIRC; (6) resumes and relevant supporting documents of the proposed directors, supervisors, and senior executives of the company; (7) the organizational structure and basic personnel composition of the company; (8) a certification on the ownership of or the right to use the business premises; (9) a relevant fire protection certificate submitted according to the requirements of the place where it is to be formed; (10) a prospectus on the types of insurance which the company will provide, a three-year business plan, a reinsurance plan, the mid- and long-term asset allocation plans, and the business, accounting, compliance, risk control, asset management, antimoney laundering, and other primary rules; (11) a report on the development of information technology systems; (12) a notice of pre-approval of company name; and (13) other materials as set out by the CBIRC.34 The CBIRC shall examine an application for commencement of business, conduct a business commencement check, and within 60 working days of accepting the application, make a decision to approve or disapprove the commencement of 32 Ibid., art.11. 33 Ibid., art.12. 34 Ibid., art.13.

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business. In the case of approval after the applicant passes the check, the CBIRC shall issue an insurance business permit to the applicant; in the case of disapproval after the applicant fails the check, the CBIRC shall notify the applicant in writing of the disapproval with an explanation of the reasons for the disapproval. An insurance company granted approval to commence business shall undergo the registration formalities with the Administration for Industry and Commerce on the basis of the approval document and the insurance business permit and may commence business only after obtaining a business license.35 4.2.3 Business commencement check of insurance companies The CBIRC is responsible for checking whether the formation preparation has reached the standards for the formation of an insurance company. In order to regulate the preparation for the formation of insurance companies, develop strict business commencement check standards, improve the corporate governance structure from the source, and effectively prevent business risks, the Notice on Further Strengthening the Business Commencement Check of Insurance Companies was issued on 22 June 2017 (hereinafter, the Business Commencement Check Notice 2017).36 (a) Strengthening the examination of the implementation of the preparation planning for the formation of insurance companies Strengthening the examination of the implementation of the preparation planning for the formation of insurance companies. The preparatory group for the insurance company (to be formed) shall, in strict accordance with the regulatory requirements, promote the performance of various tasks on the preparation for the formation of and the business commencement of insurance companies. The to-be chairman of the board of directors and the to-be general manager of an insurance company shall, before the convening of the founding meeting, make a statement to the CBIRC on its working ideas in terms of corporate governance, executive management team, and business planning, among others, and the CBIRC shall conduct a comprehensive evaluation. In the case of any severe inconsistency with the application materials for the formation preparation or any great deviation from the regulatory direction, the preparatory group shall be ordered to make rectification within a prescribed time limit.37 Strengthening the examination of the effectiveness of the by-laws of companies. The bylaws of an insurance company shall meet the requirements of the Company Law, the Insurance Law, and other laws and regulations along with the Guidelines for 35 Ibid., art.14. 36 Bao Jian Fa No. 51 [2017], issued on 22 June 2017 and came into force on the same day (see

accessed on 14 October 2020). This Notice also applies, mutatis mutandis, to the business commencement check of an insurance group (holding) company, insurance asset management company, captive insurance company, or mutual insurance organization. 37 The Notice on Further Strengthening the Business Commencement Check of Insurance Companies 2017, para.1.

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the Bylaws of Insurance Companies 2017.38 The by-laws shall meet other regulatory rules, shall specify the institutional arrangements for selection and appointment of directors, the check and balance mechanism, the authorization mechanism, the accountability mechanism, and other key links for corporate governance, and make advance arrangements and set correction procedures for corporate governance failure, governance stalemate, major business or financial crisis, and other special risk matters. Where the by-laws of a company fail to meet the relevant requirements, the revision thereof shall be completed before the convening of the founding meeting of the company.39 (b) Strengthening the verification of shareholders’ qualification conditions Strengthening the verification of shareholders’ qualification conditions. The shareholders of an insurance company shall comply with the relevant requirements of the Insurance Law, the Measures for the Administration of Equities of Insurance Companies 2018,40 and other laws and regulations. Where, during the preparation for the formation of an insurance company, any shareholder has a deteriorated financial condition, undergoes any change in its actual controller or affiliation relationship, or falls under any other circumstance that affects its qualification, it shall notify the preparatory group in writing within ten working days after the occurrence of the aforesaid circumstance, and the preparatory group shall report to the CBIRC in writing within ten working days of receipt of the notice.The CBIRC will conduct in a penetrating manner verification of the relevant shareholder’s qualification, require a detailed explanation of the change of the shareholder’s qualification and the reasons therefor, conduct a retrospective review as needed, and take corresponding regulatory measures.41 Strengthening the examination of the sources of funds for equity investment. The source of funds invested by a shareholder shall be true and legal and comply with the requirements of the regulatory provisions. In the application materials of business commencement, a shareholder shall provide an explanation of the specific source of its funds for equity investment, the bank account statement before its capital contribution and other relevant certification materials, and offer information on the long-term equity investment it has made until the capital contribution. Where there is any doubt about the source of funds, the CBIRC will conduct a retrospective review and require the shareholder to make a supplementary explanation of the basic information on and financial status of the parties where funds are sourced at all levels and provide the relevant certification materials.42

38 Bao Jian Fa No. 36 [2017], issued 24 April 2017 and came into force on the same day (see accessed on 14 October 2020). 39 The Notice on Further Strengthening the Business Commencement Check of Insurance Companies 2017, para.2. 40 The CIRC Order No. 5 [2018], issued on 2 March 2018 and came into force on 10 April 2018 (see

accessed on 14 October 2020). 41 The Notice on Further Strengthening the Business Commencement Check of Insurance Companies 2017, para.3. 42 Ibid., para.4.

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Strengthening the verification of a company’s equity structure. During the preparation for the formation of an insurance company, a shareholder may not transfer directly or in a disguised way the equities it holds in the insurance company. Where any shareholder violates such provision, the CBIRC will order it to make rectification within a prescribed time limit or disapprove the business commencement and list the relevant shareholder and parties in the access negative list and restrict its investment activities in the insurance industry.43 Intensifying social supervision. During the preparation for the formation of an insurance company, the CBIRC will address public inquiries to the insurance company with regard to shareholders’ equities, source of funds, qualifications of the to-be senior executives and other issues followed closely and questioned by the general public and media.44 (c) Increasing the interview assessment and intensifying the implementation of responsibilities Increasing the interview assessment. Before the on-site check of the business commencement of an insurance company, the interview with the to-be chairman, general manager, senior executives, and persons-in-charge in key positions must be carried out so as to get an in-depth understanding of the preparations for the newly formed company in terms of its strategic planning, product strategy, investment decision-making, human resource reserves, and corporate governance, and so on. In the case of unpractical planning, radical business development, insufficient human resource reserves, defective corporate governance, or other issues that may affect the operation of the company, the CBIRC will order the preparatory group to make a two-month period of rectification.45 Establishing duty performance assessment. Interview assessment results need to be signed by the interviewers for confirmation and be included in the archives on the performance of duties by management personnel. The CBIRC will conduct follow-up evaluation and incorporate the relevant information on implementation into the assessment system for professional managers in the insurance industry.46 (d) Improving the check standards and intensifying the long-term regulation Establishing a check assessment mechanism. The CBIRC will further improve the business commencement check standards for insurance companies, specify the evaluation contents, and establish the business commencement check assessment mechanism. According to the evaluation results of a company, the CBIRC will make the following decisions: (1) The company passes the check; (2) The company is ordered to make a one-month period of rectification; (3) The company is ordered to make a two-month period of rectification and be re-checked; (4) The company fails the check, and its business commencement is disapproved.47 43 44 45 46 47

Ibid., para.5. Ibid., para.6. Ibid., para.7. Ibid., para.8. Ibid., para.9.

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Strengthening follow-up evaluation and long-term regulation. In the first two years after the business commencement of an insurance company, the CBIRC will conduct follow-up evaluation of its implementation in terms of the development planning, product strategy, investment decision-making and corporate governance, and so on. If the evaluation results fail to reach the relevant standards, the insurance company shall not be allowed to form a new branch. At the same time, the evaluation results shall be included in the insurance company’s strategic risk assessment system, and serve as an important basis for changing business scope, product recordation, investment capacity recordation, and other matters.48 4.3 Formation of branch offices 4.3.1 The requirements for the formation of branch offices by the Insurance Law The Insurance Law (art.74 to 79) provides the requirements for the formation of branch offices by insurance companies and empowers the CBIRC to regulate the matter of the formation of branches.49 The branch offices of insurance companies have no corporate status (not legal entities), and their civil liabilities shall be assumed by the insurance companies.50 To set up a branch office, an insurance company shall apply in writing to the CBIRC, and submit the following materials: (1) an application form; (2) a threeyear business development planning of the branch office to be set up and market analysis materials; (3) the resumes (the curriculum vitae) and relevant certificates of the proposed senior managers of the branch office; and (4) other materials as specified by the CBIRC.51 The CBIRC shall examine an insurance company’s application for setting up a branch office, and, within 60 working days after accepting the application, make a decision on approval or disapproval. If approving the application, the CBIRC shall issue an insurance business operation permit for a branch office; if disapproving the application, it shall notify the applicant in writing and give reasons.52 The insurance company or the branch office thereof approved to be formed shall conduct the registration formalities at the Administration for Industry and Commerce on the basis of the insurance business operation permit and obtain a business license.53 Where an insurance company or a branch office thereof, without any good reasons, fails to conduct the registration formalities at the administrative body for industry and commerce within six months from the day when it obtains an insurance business operation permit, its insurance business operation permit shall become invalid.54 48 49 50 51 52 53 54

Ibid., para.10. The Insurance Law, art.74. Ibid. Ibid., art.75. Ibid., art.76. Ibid., art.77. Ibid., art.78.

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Setting up subsidiary companies and/or branch offices outside the territory of China by insurance companies shall be subject to the approval of the CBIRC.55 4.3.2 The requirements for the formation and management of a branch office by the Insurance Companies Provisions The Insurance Companies Provisions 2015 provide rules regarding formation and management of branch offices (articles 6–25 for formation and articles 35–40 for management). In this section, we consider the CBIRC’s requirements for the formation and management of branch offices. The term “branch offices of an insurance company” means the branches, central sub-branches, sub-branches, business departments, marketing services departments, and various captive institutions formed by insurance companies with the approval of the CBIRC according to the law.56 The “branch” means a branch office formed by an insurance company and named branch. The “provincial branch” means a branch formed by an insurance company in a province, autonomous region, or municipality directly under the Central Government according to the regulatory requirements of the CBIRC to be responsible for permit application, report submission, and other relevant matters. An insurance company which has formed branches in a province, autonomous region, or municipality directly under the Central Government other than its place of domicile shall designate one of them as the provincial branch. An insurance company which has formed branch offices in a city under separate state planning shall designate one of them to be responsible for permit application, report submission, and other relevant matters in the city under separate state planning according to the regulatory requirements of the CBIRC. Where a provincial branch is formed in a city under separate state planning, the provincial branch shall be responsible for the matters as aforementioned.57 (a) Formation of a branch office Insurance companies may, as needed for business development, apply for formation of branch offices. The branch offices of insurance companies shall be divided into four levels in descending order: branches, central sub-branches, sub-branches, and business departments or marketing service departments. An insurance company is not required to form branch offices at each level but shall first form a branch if it conducts business in a province, autonomous region, or municipality directly under the Central Government other than its place of domicile. Insurance companies are not required to manage their branch offices in the manner of management by an institution at an immediately higher level. Business departments or marketing service departments shall not manage any other branches.58

55 56 57 58

Ibid., art.79. The Provisions on the Administration of Insurance Companies 2015, art.3. Ibid., art.4. Ibid., art.15.

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Where an insurance company formed with the minimum registered capital of ¥200 million yuan applies for formation of a branch for the first time in each province, autonomous region, or municipality directly under the Central Government other than its place of domicile, not less than ¥20 million yuan shall be added to its registered capital. If the registered capital of an insurance company has reached the amount of ¥220 million yuan at the time when it applies for formation of a branch, the registered capital need not be increased. If the registered capital of an insurance company has reached ¥500 million yuan, the registered capital need not be increased in the formation of a branch provided that the insurance company satisfies the solvency requirements.59 An application for formation of a provincial branch shall be filed by the insurance company, and an application for formation of any other branch office shall be filed by the insurance company or by a provincial branch on the basis of an approval document of the insurance company. An application for formation of a branch office in a city under separate state planning may also be filed by a provincial branch office designated by the insurance company under paragraph 3 of art.4 of the Insurance Companies Provisions 201560 on the basis of an approval document of the insurance company.61 For the formation of a branch office, an application shall be filed, and the following conditions shall be met: (1) It satisfied the solvency requirements in the prior year and for two consecutive quarters before filing the application; (2) It has a sound corporate governance structure and adequate and effective internal controls; (3) It has adequate and effective rules for the management of branch offices; (4) It has fully studied the feasibility of the formation of the branch office; (5) If the branch office, other than a provincial branch, is to be formed in a province, autonomous region, or municipality directly under the Central Government other than the place of domicile of the insurance company, the provincial branch therein has already commenced business; (6) The applicant has no record of receiving any major administrative punishment from the financial regulatory authorities in the last two years and is not under official investigation by the CBIRC for any suspected major violation of law; (7) If the branch office to be formed is one other than a provincial branch, in the province, autonomous region, or municipality directly under the Central Government where the branch office is to be located, the provincial branch has no record of receiving any major administrative punishment from the financial regulatory authorities in the last two years, and other branch offices already formed have no record of receiving any major insurance administrative punishment in the last six months; (8) The person in charge of formation preparation is recognized by the applicant; (9) Other conditions as set out by the CBIRC.62 59 Ibid., art.16. 60 Paragraph 3 of art. 4 of the Insurance Companies Provisions 2015 provides that an insurance company which has formed branch offices in a city under separate state planning shall designate one of them to be responsible for permit application, report submission, and other relevant matters in the city under separate state planning according to the regulatory requirements of the CBIRC. 61 The Provisions on the Administration of Insurance Companies 2015, art.17. 62 Ibid., art.18.

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To form a branch office, the applicant shall submit the following materials in triplicate: (1) a written application for formation; (2) its solvency reports for the two consecutive quarters before application and audited solvency report for the prior year; (3) the corporate governance structure report of the insurance company for the prior year and the internal control rules of the applicant; (4) a feasibility study report on the formation of the branch office, including a threeyear business development plan and market analysis of the branch office and an explanation on the compatibility of the formation of the branch office with the risk management status and internal control status of the company; (5) the branch office management rules of the applicant; (6) A statement of the applicant that it has not received any major administrative punishment from the financial regulatory authorities in the last two years; (7) if the branch office to be formed is not a provincial branch, a statement that the provincial branch has not received any major administrative punishment from the financial regulatory authorities in the last two years; (8) the resume and relevant supporting documents of the person in charge of formation preparation of the branch office; and (9) other materials as set out by the CBIRC.63 The CBIRC shall conduct a documentary examination of an application for formation within 30 working days of receiving complete application materials. If the application fails to meet the conditions as stipulated in art.18 of the Insurance Companies Provisions 2015, it shall make a decision to disapprove the application with a written explanation of the reasons for the disapproval. If the application meets the conditions as aforementioned, it shall issue a notice of formation preparation to the applicant.64 The applicant shall complete the preparatory work for the formation of a branch office within six months of receiving a notice of formation preparation. The preparatory period shall not be counted for the time limit for administrative licensing. If the preparatory work is not completed during the preparatory period, an application for formation shall be filed anew in accordance with the Insurance Companies Provisions 2015. The institution in formation preparation may not engage in any insurance business operation during the preparatory period.65 Upon completion of the preparatory work, if the institution in formation preparation meets the following conditions, the applicant may submit a report to the CBIRC for a business commencement check: (1) It has lawful business premises, and its security and fire protection facilities satisfy the prescribed requirements; (2) It has established a necessary organizational structure and adequate and effective business, accounting, compliance, risk control, asset management, anti-money laundering, and other rules; (3) It has established information systems suitable for its operations and management; (4) Each of the proposed senior executives or the proposed primary person in charge satisfies the office qualifications; (5) It has provided employees with pre-job training; (6) It conducts no insurance business

63 Ibid., art.19. 64 Ibid., art.20. 65 Ibid., art.21.

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during the preparatory period of formation; (7) Other conditions as set out by the CBIRC.66 The following materials in triplicate shall be attached to the report submitted by the applicant for a business commencement check: (1) a report on the completion of the preparatory work; (2) the resume and supporting documents of each of the proposed senior executive or the proposed primary person in charge; (3) a certification on the ownership of or the right to use the business premises of the institution to be formed; (4) a report on the configuration and installation of computers, the application systems, and network construction; (5) business, accounting, risk control, asset management, anti-money laundering, and other rules; (6) a report on the organizational structure and practitioners of the institution, including the pre-job training of employees; (7) a relevant fire protection certificate submitted according to the requirements of the place where it is to be formed, or if a fire protection check or fire protection recordation is not required, a written undertaking from the applicant that necessary measures have been taken to ensure fire safety; and (8) other materials as set out by the CBIRC.67 The CBIRC shall, within 30 working days of receiving a complete report for a business commencement check, conduct a business commencement check and make a decision to approve or disapprove the formation. In the case of approval after the applicant passes the check, the CBIRC shall issue an insurance business permit of the branch office; or in the case of disapproval after the applicant fails the check, the CBIRC shall notify the applicant in writing of the disapproval with an explanation of the reasons for the disapproval.68 Upon approval of its formation, a branch office of an insurance company shall undergo the registration formalities with the Administrative Department for Industry and Commerce on the basis of the approval document and the insurance business permit of the branch office and may commence business only after obtaining a business license.69 (b) Management of a branch office Insurance companies shall enhance the management of branch offices, direct them to operate in compliance with laws and regulations, and ensure that an institution at a higher level conducts effective management and control of branch offices at a lower level under its management.70 An insurance company shall, according to the Provisions and the needs for its development, develop rules for the management of branch offices, and a provincial branch of it shall, according to the rules of the insurance company and the local actual circumstances, develop rules for the management of branch offices in the province, autonomous region, or municipality directly under the Central Government. For the branch offices formed by an insurance company in a city under

66 67 68 69 70

Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.35.

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separate state planning, the provincial branch or the branch office designated by the insurance company under paragraph 3 of art.4 of the Insurance Companies Provisions 201571 shall develop rules for the management of the local branch offices.72 The rules for the management of branch offices shall, at a minimum, include the following: (1) the functions of branch offices at various levels; (2) the personnel, premises, equipment, and other requirements for branch offices at various levels; (3) the internal decision-making rules for the formation and abolition of branch offices; (4) the duties and measures of an institution at a higher level to manage and control branch offices at a lower level.73 A branch office of an insurance company shall have employees in a necessary number, and each senior executive or the primary person in charge of the branch office shall be a regular employee who has entered into an employment contract with the insurance company.74 For the duration of a branch office of an insurance company, it shall have well-regulated and stable business premises and necessary office equipment.75 A branch office of an insurance company shall put its original insurance business permit in a conspicuous position of its business premises for inspection.76 4.3.3 The administrative measures for market access of branch offices The matters on market access of branch offices are regulated by the Notice of the CIRC on Issuing the Administrative Measures for the Market Access of Branch Offices 2013.77 This Notice contains 35 articles in five chapters: the general provisions, condition for formation preparation, business operating standards, procedures for establishment, submission of materials, and supplementary provisions. This Notice sets out more detailed rules relating to the formation of branch offices. The essential rules in respect of formation and management of branch offices of insurance companies can be found in the Insurance Companies Provisions 2015, so here it is unnecessary to go through the details of the Notice. 4.3.4 Other relevant matters on the administration of branch offices Matters on the supervision of market service departments (a type of branch offices) and transformation of branch offices are clarified by the Notice of the CIRC on 71 Paragraph 3 of art. 4 of the Insurance Companies Provisions 2015 provides that an insurance company which has formed branch offices in a city under separate state planning shall designate one of them to be responsible for permit application, report submission, and other relevant matters in the city under separate state planning according to the regulatory requirements of the CBIRC. 72 The Provisions on the Administration of Insurance Companies 2015, art.36. 73 Ibid., art.37. 74 Ibid., art.38. 75 Ibid., art.39. 76 Ibid., art.40. 77 Bao Jian Fa No.20 [2013], issued on 15 March 2013 and came into force on 1 April 2013 (see

accessed on 14 October 2020).

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Clarifying the Relevant Matters on the Administration of Branch Offices of Insurance Companies 2010 (hereinafter, the Clarifying Notice 2010).78 We now consider these matters in turn. (a) Supervision of market service departments The person in charge of a marketing service department shall meet the following conditions: (1) He or she has three or more years of insurance work experience or five or more years of economic work experience; (2) He or she is not prohibited from holding a senior manager post as prescribed by the CBIRC; (3) He or she has signed a labour contract with the insurance company as a regular employee of the company; (4) He or she meets other conditions as prescribed by the CBIRC. The person in charge of a marketing service department shall pass the examinations on insurance laws and regulations and related knowledge as recognized by the CBIRC.79 The reporting system shall apply to the office qualifications management of the person in charge of a marketing service department. An insurance institution which appoints the person in charge of a marketing service department shall, within ten working days from the day of making an appointment decision, report it to the local CBIRC office and submit the following written materials in triplicate as well as the corresponding electronic files: (1) a report on the office qualifications of the person in charge of the marketing service department; (2) an appointment decision; (3) a photocopy of the execution page of a labour contract signed by the person in charge of the marketing service department and the insurance company; (4) photocopies of the diploma, ID card, passport, and other relevant certificates of the newly appointed person in charge of the marketing service department; and (5) other materials as required by the CBIRC. An insurance institution which applies for establishing a marketing service department shall simultaneously submit to the local office of the CBIRC the aforesaid materials except the appointment decision, and within ten working days after making the formal appointment decision report the office qualifications information to the local office of the CBIRC.80 An insurance institution shall not appoint the person in charge of a marketing service department in violation of the office qualifications prescribed in this Notice; otherwise, the appointment shall be invalid, and the local office of the CBIRC shall order the insurance institution to make correction within a prescribed time limit.81 Where the person in charge of a marketing service department violates any law, administrative regulation, or relevant provision of the CBIRC, and the circumstances are serious, in addition to imposing administrative punishment pursuant to law, the local office of the CBIRC may, depending on the circumstances, suggest that the insurance institution replace the person in charge.82 78 Bao Jian Fa No. 49 [2010], issued on 10 June 2010 and came into force on the same day (see

accessed on 14 October 2020). 79 The Notice of the CIRC on Clarifying the Relevant Matters on the Administration of Branch Offices of Insurance Companies 2010, s.1(2). 80 Ibid., s.1(3). 81 Ibid., s.1(4). 82 Ibid., s.1(5).

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(b) Transformation of branch offices To be transformed into a branch office at another level, a branch office of an insurance company shall meet the following conditions: (1) The applicant has sound branch office management rules; (2) It has legal business premises and its safety and fire protection facilities conform to the prescribed standards; (3) It has established a necessary organizational structure and sound management rules for business operations, accounting affairs, risk control, asset management, anti-money laundering, and so on; (4) It has established information systems appropriate for its business operation and management; (5) It has proposed the senior managers or chief person in charge meeting the office qualifications; (6) It has provided pre-job training for employees; (7) The transformation is necessary and reasonable; (8) It has fully assessed the possible effects of the transformation and has feasible countermeasures available; (9) If it is to be transformed into a branch office at a higher level, the insurance company shall remain fully solvent in the last calendar year and in two consecutive quarters immediately before application; (10) If it is to be transformed into a branch office at a higher level, the applicant and the local provincial branch company have not been given any major administrative punishment by the financial regulatory authority in the last two years, and no other branch office established in the same province, autonomous region, or municipality directly under the Central Government has been given any major insurance administrative punishment in the last six months; (11) It meets other conditions as prescribed by the CBIRC.83 The applicant shall file an application for transformation and submit the following written materials in triplicate: (1) a written application for transformation; (2) branch office management rules of the applicant; (3) a written document on the insurance company’s consent to the transformation; (4) application materials on the office qualifications of the proposed senior managers or chief person in charge; (5) a certificate on the ownership of or the right to use the business premises of the institution to be established; (6) a report on the computer equipment, application system and network construction; (7) the rules for business operations, accounting affairs, risk control, asset management, anti-money laundering, and so on; (8) a report on the internal structure and employees, including information on the pre-job training of employees, and so on; (9) the solvency reports of the two consecutive quarters immediately before application and the audited solvency report of the previous calendar year; (10) a fire protection certificate submitted according to the provisions of the place where the branch office is to be located, or if the fire protection acceptance check or filing formalities are not required, a written commitment of the applicant that necessary measures have been taken to ensure fire safety; (11) a transformation report, including an explanation of the necessity and reasonableness of the transformation, the transformation information, the effects of transformation on the insurance business, insurance applicants, insured or beneficiaries, and a plan on handling them; (12) If it is to be transformed into a branch office at a higher level, a statement that the applicant and the provincial branch company have not been given any major administrative punishment by

83 Ibid., s.3(1).

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the financial regulatory authority in the last two years; and (13) other materials as required by the CBIRC.84 An application for transforming a branch office of a Chinese-funded insurance company into a provincial branch company shall be filed with the CBIRC, and an application for transformation of it into a branch office other than a provincial branch company shall be filed with the local office of the CBIRC. An application for transforming a branch office of a foreign-funded insurance company into a branch company, central sub-branch company, sub-branch company, or business department shall be filed with the CBIRC, and an application for transformation of it into a marketing service department shall be filed with the local office of the CBIRC. The CBIRC or its local office shall make a written decision on approval or disapproval within 20 working days after receiving complete application materials, and if a decision cannot be made within 20 working days, this time limit may be extended for ten working days with the approval of the person in charge of the CBIRC or its local office, and the applicant shall be notified of the reasons for the extension. The CBIRC or its local office shall issue an insurance business permit to the applicant in the case of approval or notify the applicant in writing of disapproval and reasons for disapproval in the case of disapproval. Before making a decision, the CBIRC or its local office may, for supervisory purposes, conduct an acceptance check of the institution to be transformed, and if the institution fails to pass the acceptance check, no transformation shall be approved.85 4.4 Formation of overseas insurance institutions The aforesaid is concerned with formation of insurance companies and branch offices within the territory of China. There are separate sets of rules regulating formation of overseas insurance institutions. According to art.79 of the Insurance Law, where an insurance company intends to establish subsidiaries, branches, or representative offices outside the territory of China, it must obtain approval from the CBIRC. The main piece of regulation for an insurance company to establish subsidiaries, branches, or representative offices outside the territory of China is the Measures for the Administration of the Formation of Overseas Insurance Institutions by Insurance Companies 2015 (hereinafter, the Measures 2015),86 which was first formulated in accordance with the Insurance Law and other laws and administrative regulations in 200687 and was amended in 2015 in order to strengthen the administration of the formation of overseas insurance institutions by insurance companies, prevent risks, and protect the interests of the insured. The CBIRC is charged with supervision and administration of the formation of overseas insurance institutions by insurance companies.88 84 Ibid., s.3(2). 85 Ibid., s.3(3). 86 The CIRC Order No. 3 [2015]) (see accessed on 14 October 2020. 87 The CIRC Order No. 7 [2006]. 88 The Measures for the Administration of the Formation of Overseas Insurance Institutions by Insurance Companies 2015, art.7.

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The term “formation of overseas insurance institutions” means the following activities of insurance companies: (1) formation of an overseas branch office or an overseas insurance company or insurance intermediary institution; and (2) acquisition of an overseas insurance company or insurance intermediary institution.89 “Acquisition” means that an insurance company acquires the shares of an overseas insurance company or insurance intermediary institution so as to hold 20% or more of the total voting capital of the company or institution or, although its shareholding is less than 20%, has the actual control or joint control of or has a significant impact on the institution. The Measures 2015 shall apply to an insurance company’s acquisition of a listed overseas insurance company or insurance intermediary institution, except as otherwise specified by the CBIRC.90 In the formation of overseas insurance institutions, insurance companies shall comply with the laws and administrative regulations of China on insurance and foreign exchange administration, the relevant provisions issued by the CBIRC, and the relevant foreign laws and provisions. In the acquisition of an overseas insurance company or insurance intermediary institution, an insurance company shall comply with the current provisions on insurance foreign exchange funds.91 The Measures 2015 shall also apply to an insurance company’s formation of an overseas insurance institution or an overseas not-for-profit institution such as an overseas representative office, liaison office, or office in Hong Kong, Macao, or the Taiwan region.92 The Measures 2015 shall also apply to an insurance group company’s or an insurance holding company’s formation of an overseas insurance institution or an overseas not-for-profit institution such as an overseas representative office, liaison office, or office, except as otherwise specified by the CBIRC.93 (a) Approval of formation To form an overseas insurance institution, an insurance company shall meet the following conditions: (1) It has operated for two years or more; (2) Its total assets at the end of the prior year are not less than ¥5 billion yuan; (3) Its foreign exchange funds at the end of the prior year are not less than US $15 million or an equivalent in freely convertible currency; (4) Its solvency level is in compliance with the relevant provisions issued by the CBIRC; (5) Its internal control and risk management rules are in compliance with the relevant provisions issued by the CBIRC; (6) It has no record of receiving any major punishment in the last two years; (7) The country or region where the overseas insurance institution is to be formed has a sound financial regulatory system and maintains an effective regulatory cooperation relationship with the insurance regulatory authority of China; (8) Other conditions as set out by the CBIRC.94 89 90 91 92 93 94

Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.33. Ibid., art.32. Ibid., art.9.

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To apply for formation of an overseas branch office or an overseas insurance company or insurance intermediary institution, an insurance company shall submit the following materials to the CBIRC: (1) a written application; (2) a photocopy of the decision of the State Administration of Foreign Exchange to confirm the source of foreign exchange funds; (3) its financial statements and foreign currency balance sheet for the prior year audited by an accounting firm; (4) its solvency status report for the prior year audited by an accounting firm; (5) its internal control and risk management rules; (6) basic information on the overseas insurance institution to be formed, including the name, domicile, by-laws, registered capital or working capital, equity structure, amount of contribution, scope of business, and resume and photocopy of identification of the person in charge of the formation preparation thereof; (7) a feasibility study report, market analysis report, and formation preparation plan on the overseas insurance institution to be formed; (8) a relevant explanation, if the laws of the place where the overseas insurance institution is to be located require the insurance company to assume joint and several liability with the overseas insurance institution formed by it; and (9) other materials as set out by the CBIRC.Where there is any other promoter of an overseas insurance company or insurance intermediary institution to be formed by an insurance company, the insurance company shall also submit the name, photocopy of share subscription agreement, business license, and balance sheet for the prior year audited by an accounting firm of the promoter.95 To apply for acquisition of an overseas insurance company or insurance intermediary institution, an insurance company shall submit the following materials to the CBIRC: (1) a written application; (2) a photocopy of the decision of the State Administration of Foreign Exchange to confirm the source of foreign exchange funds; (3) its financial statements and foreign currency balance sheet for the prior year audited by an accounting firm; (4) its solvency status reports and explanations thereof for the prior year and for the prior quarter audited by an accounting firm; (5) its internal control and risk management rules; (6) basic information on the overseas insurance institution to be acquired, including the name, domicile, by-laws, registered capital or working capital, scope of business, and person in charge thereof; (7) the financial statements of the overseas insurance institution to be acquired for the prior year audited by an accounting firm; (8) a feasibility study report, market analysis report, and acquisition plan on the acquisition of the overseas insurance institution; and (9) other materials as set out by the CBIRC. If the overseas insurance institution to be acquired is an insurance company, its solvency status reports and explanations thereof for the prior year and the prior quarter audited by an accounting firm shall also be submitted.96 The CBIRC shall, according to the law, examine an application for formation of an overseas insurance institution and make a decision to approve or disapprove the application within 20 working days of acceptance of the application. In the case of disapproval, the CBIRC shall notify the applicant in writing of the decision, with an explanation of the reasons for the disapproval.97 95 Ibid., art.10. 96 Ibid., art.11. 97 Ibid., art.12.

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An insurance company shall, within 20 working days after an overseas insurance institution formed by the insurance company obtains a permit or its acquisition transactions are completed, submit to the CBIRC a written report on the following information on the overseas insurance institution: (1) a photocopy of the permit; (2) the name and domicile of the institution; (3) the by-laws of the institution; (4) the organizational form, scope of business, registered capital or working capital, and amounts of contribution and proportion of contribution of other shareholders or partners of the institution; (5) The name and contact methods of the person in charge of the institution; and (6) other materials as set out by the CBIRC.98 An insurance company shall, within 20 working days of the formation of an overseas not-for-profit institution such as an overseas representative office, liaison office, or office, submit to the CBIRC a written report on the following information on the overseas representative office, liaison office, or office or other overseas not-for-profit institution: (1) a photocopy of the certificate of registration; (2) the name and domicile of the institution; (3) the name and contact methods of the person in charge of the institution; (3) the name and contact methods of the person in charge of the institution; and (4) other materials as set out by the CBIRC.99 (b) Management of overseas insurance institution An insurance company shall conduct effective risk management of an overseas insurance institution formed by it and supervise the institution in establishing and improving risk management rules according to the laws of and the relevant provisions issued by the regulatory authority of the country where the institution is located.100 An insurance company shall strictly control the security provided externally by an overseas insurance institution formed by it. Where an overseas branch office formed by an insurance company really needs to provide security externally, it shall obtain a credit rating certificate of the debtor and enter into a legally binding counter guarantee agreement. If, under the counter guarantee agreement, counter guarantee is provided in a manner such as property mortgage or pledge, the amount secured shall not exceed 60% of the reassessed value of the mortgaged or pledged property.101 An overseas branch office formed by an insurance company shall not provide loans externally, except for policy pledge loans.102 An insurance company shall establish performance evaluation, interim audit, and exit audit rules for the chairman of the board of directors and senior executives assigned to an overseas insurance institution formed by it.103

98 99 100 101 102 103

Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18.

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After the liquidation of an overseas insurance institution formed by an insurance company is completed, a liquidation report issued by the liquidation group and attested by the local certified public accountants shall be submitted to the CBIRC.104 (c) Supervisory inspection An insurance company shall, according to the accounting system of China and the provisions issued by the CBIRC, separately disclose the operation results, financial condition, and solvency status of an overseas insurance institution formed by it in its financial report and solvency report.105 Where an overseas insurance institution formed by an insurance company prepares a solvency report according to the requirements of the local insurance regulatory authority, the insurance company shall send a copy thereof to the CBIRC.106 An insurance company shall, within five months after the end of each fiscal year of an overseas insurance institution formed by it, submit to the CBIRC the financial statements of the overseas insurance institution for the prior year.107 An insurance company shall, before the end of January each year, submit to the CBIRC an annual work report of its overseas not-for-profit institution such as an overseas representative office, liaison office, or office. The annual work report of its overseas not-for-profit institution such as an overseas representative office, liaison office, or office shall include the main work of the institution and information on any modification of the institution.108 Where any of the following events occurs to an overseas insurance institution formed by an insurance company, the insurance company shall submit a written report to the CBIRC within 20 days after the occurrence of the event: (1) investment in or formation of a company by the institution; (2) division, combination, dissolution, abolition, or bankruptcy of the institution; (3) modification of the name or place of registration of the institution; (4) change of the chairman of the board of directors or a senior executive of the institution; (5) major modification of the registered capital or shareholder structure of the institution; (6) adjustment of the scope of business of the institution; (7) major operation or financial problem; (8) involvement in any significant lawsuit or receipt of any major punishment; (9) issuance of a regulatory report or an inspection report by the local insurance regulatory authority; and (10) other events reported as the CBIRC deems necessary.109 Where an insurance company transfers its shares in an overseas insurance institution formed by it, the transfer shall be subject to approval of the CBIRC.110 An insurance company shall report the following conduct involving an overseas insurance institution formed by it to the CBIRC for approval and submit materials 104 105 106 107 108 109 110

Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25.

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according to the provisions of art.11 of the Measures 2015: (1) increasing its shareholding in the overseas insurance institution; and (2) increasing the capital or working capital of the overseas insurance institution.111 An insurance company shall establish rules on the control and management of affiliated transactions. Any significant affiliated transaction between an insurance company and an overseas insurance company or insurance intermediary institution formed by it shall be reported to the CBIRC within 15 working days after the transaction is completed. “Significant affiliated transaction” means any of the following trading activities between an insurance company and an overseas insurance company or insurance intermediary institution formed by it: (1) outward or inward reinsurance business; (2) asset management, provision of security, and agency; (3) purchase and sale of fixed assets or transfer of rights and debts; (4) high-value borrowing; and (5) other significant trading activities.112 All the materials on an overseas insurance institution submitted by an insurance company to the CBIRC shall be complete, true, and accurate.113 (d) Legal liability Where an overseas insurance institution is formed without the approval of the CBIRC, the CBIRC shall (1) order the violator to take corrective action; (2) impose a fine of not less than ¥50,000 yuan up to but not more than ¥300,000 yuan on it; and (3) if the circumstances are serious, the CBIRC may restrict the violator’s scope of business, order it to stop accepting new business, or revoke its insurance business permit.114 Where the relevant reports, statements, documents, and materials are not submitted according to the provisions of the Measures 2015,115 the CBIRC shall order the violator to take corrective action, and if it fails to do so during a specified period, shall impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan on it.116 Where any false report, statement, document, or material is provided, the CBIRC shall order the violator to take corrective action and impose a fine of not less than ¥100,000 yuan nor more than ¥500,000 yuan on it; if the circumstances are serious, the CBIRC may restrict the violator’s scope of business, order it to stop accepting new business, or revoke its insurance business permit.117 All the reports, statements, documents, and materials submitted by an insurance company to the CBIRC under the Measures 2015 shall be in Chinese. Any original in a foreign language shall be accompanied by a Chinese translation. For 111 Ibid., art.26. 112 Ibid., art.27. 113 Ibid., art.28. 114 Ibid., art.29. 115 All the documents submitted by an insurance company to the CBIRC under the Measures 2015 shall be in Chinese. Any original in a foreign language shall be accompanied by a Chinese translation. For any discrepancy between the Chinese and the foreign versions, the Chinese version shall prevail. 116 The Measures for the Administration of the Formation of Overseas Insurance Institutions by Insurance Companies 2015, art.30. 117 Ibid., art.31.

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any discrepancy between the Chinese and the foreign versions, the Chinese version shall prevail.118 4.5 Formation of reinsurance companies Formation of reinsurance companies is regulated by the Provisions on the Formation of Reinsurance Companies 2002 (hereinafter the Provisions 2002),119 which were developed in accordance with the Insurance Law and the Regulation of China on the Administration of Foreign-Funded Insurance Companies for the purposes of promoting the development of the reinsurance market and regulating the formation of reinsurance companies.120 The term “reinsurance companies” mean companies formed with the approval of the CBIRC and legally registered to specially engage in the reinsurance business.121 The formation of reinsurance companies shall be subject to the approval of the CBIRC. By the scope of business, reinsurance companies may be divided into life reinsurance companies, non-life reinsurance companies, and general reinsurance companies.122 With the approval of the CBIRC, a reinsurance company may engage in all or part of the following business: (1) Life reinsurance business: (i) reinsurance business within China; (ii) retrocession business within China; and (iii) international reinsurance business; (2) Non-life reinsurance business: (i) reinsurance business within China; (ii) retrocession business within China; and (iii) international reinsurance business; (3) Engaging in all or part of the business in item (1) and all or part of the business in item (2) concurrently.123 The paid-in monetary capital of a life reinsurance company or a non-life reinsurance company shall not be less than ¥200 million yuan or an equivalent in a convertible currency, and the paid-in monetary capital of a general reinsurance company shall not be less than ¥300 million yuan or an equivalent in a convertible currency. The capital contributed by a foreign insurance company shall be in a convertible currency.124 A reinsurance company shall retain actuaries recognized by the CBIRC.125 The Chinese shareholders of a reinsurance company shall comply with the relevant provisions of the CBIRC on the proportion of shareholding and the modification of equities. A foreign insurance company which invests in a Chinese-foreign equity joint venture or a wholly foreign-owned reinsurance company shall satisfy the relevant commitments made by China upon its accession to the WTO.126 118 Ibid., art.34. 119 The Provisions on the Formation of Reinsurance Companies (the CIRC Order No. 4 [2002]) was issued by the CIRC on 17 September 2002 and came into force on the same day (see accessed on 14 October 2020). 120 The Provisions on the Formation of Reinsurance Companies 2002, art.1. 121 Ibid., art.2. 122 Ibid., art.3. 123 Ibid., art.4. 124 Ibid., art.5. 125 Ibid., art.6. 126 Ibid., art.7.

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The operating fund standards and the formation requirements for a branch to be formed within China by a foreign reinsurance company shall be governed by the Provisions 2002.127 The Provisions shall apply, mutatis mutandis, to a branch to be formed in the mainland by a reinsurance company from the Hong Kong Special Administrative Region, the Macao Special Administrative Region, or the Taiwan region.128 4.6 Formation and business scope of insurance group companies The regulatory rules relating to formation and business scope of insurance companies are provided in the Measures for the Administration of Insurance Group Companies (For Trial Implementation) 2010.129 The Measures 2010 were formulated in accordance with the Insurance Law, the Company Law, and other relevant laws and administrative regulations for the purpose of strengthening the supervision and administration of insurance group companies, effectively preventing the business risks of insurance groups, and promoting the sound development of the financial and insurance sectors.130 The CBIRC is responsible for supervision and administration of insurance group companies in accordance with the laws and administrative regulations and upon authorization of the State Council.131 The term “insurance group companies” refers to those companies that are formed upon approval of the CBIRC and registered according to law with words such as “insurance group” or “insurance holding” in their names and that exert control, joint control, or material impact on the member companies of the insurance group. The term “insurance group” refers to a collective of enterprises composed of an insurance group company and companies on which it exerts control, joint control, and material impact, and which has two or more insurance subsidiaries in addition to the insurance group company, whose insurance business is its principal business. The term “member companies of an insurance group” refers to the insurance group company and companies on which it exerts control, joint control, and material impacts.132 4.6.1 Formation The following conditions must met in order to form an insurance group company: (1) having qualified investors, appropriate equity structure, and investors controlling a total of more than 50% stake in two or more insurance companies; (2) of the insurance companies controlled by the investors, at least one has been engaged

127 Ibid., art.8. 128 Ibid., art.9. 129 Bao Jian Fa No. 29 [2010], issued on 12 March 2010 and came into force on the same day (see

accessed on 14 October 2020). 130 The Measures for the Administration of Insurance Group Companies (For Trial Implementation) 2010, art.1. 131 Ibid., art.2. 132 Ibid., art.3.

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in the insurance business for more than six years and has been profitable for the latest three consecutive years, with net assets of no less than ¥1 billion yuan and total assets of no less than ¥10 billion yuan. The solvency of the insurance companies controlled by the investors complies with the requirements of the CBIRC. They have sound corporate governance structures and internal control systems, and have committed no serious violations of laws or regulations in the last three years; (3) having a minimum registered capital of ¥2 billion yuan; (4) having directors, supervisors, and senior managerial personnel who meet the eligibility requirements as set forth by the CBIRC; (5) having a well-established governance structure, sound organizational structure, effective risk management, and internal control management systems; (6) having business places and office equipment commensurate with its business development; and (7) other conditions as provided by laws, administrative regulations, and by the CBIRC. The aforesaid conditions may be properly loosened upon approval of the CBIRC in cases of merger and acquisition for the purpose of handling risks.133 An insurance group company may be formed in the following two ways: First, the shareholders of an insurance company, as the sponsors, form an insurance group company with contributions of their equities in the insurance company and in money; in particular, the total monetary contributions shall not be less than 30% of the registered capital of the insurance group company. Secondly, an insurance company is renamed as an insurance group company, the insurance group company forms insurance subsidiaries with contributions in currency, and the insurance business of the original insurance company shall be transferred to the insurance subsidiaries in accordance with law.134 To apply for the formation of an insurance group company through the first way mentioned, the sponsors shall submit the following materials in triplicate to the CBIRC: (1) an application for formation, which shall bear the name, registered capital, business scope, and so on of the company to be formed; (2) a feasibility report, including the way of formation, corporate governance and institutional framework, development strategy, risk management and internal control systems, assessment of the solvency of the original and new insurance subsidiaries, and so on; (3) a formation preparation plan, including the equity structures of the insurance group company and its subsidiaries, the overall planning and operational procedures for rationalizing the equity relationship, name and business types of the subsidiaries, and so on; (4) Articles of Association of the insurance group company; (5) the audited financial accounting report and solvency report of the insurance company; (6) the share subscription agreement of the investors, the evidential materials showing that the boards of directors or the relevant institutions approve their investment, business licenses or other background materials of the investors and the audited financial accounting reports of the investors; (7) a decision of the founding assembly or, in the absence of which, a form or decision of all shareholders consenting to the application for starting business; (8) a capital assessment certification issued by a capital assessment institution with a good 133 Ibid., art.4. 134 Ibid., art.5.

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credit standing, a photocopy of the source document on the entry of capital into the account, and an assessment report of the equities of the insurance company; (9) the resumes of the person in charge of the formation preparation group, the directors, supervisors, and senior managerial personnel to be appointed and the relevant evidential materials; (10) a certificate on the ownership of or the right to use the business office; (11) the mid- and long-term development strategies and planning, business operation plans, foreign investment plans, and the major rules for capital and financial management, risk management, internal control, and so on; (12) a report on its information system building; (13) a company name preapproval notice; (14) legal opinions issued by a law firm; and (15) other materials as required by the CBIRC.135 To apply for the formation of an insurance group company using the second way mentioned, the sponsors shall submit the following materials to the CBIRC in triplicate: (1) an application for changing its name, which shall bear the name, registered capital, business scope, and so on of the company to be renamed; (2) a feasibility report, including the renaming method, corporate governance, and institutional framework, development strategy, risk management and internal control system, assessment of the solvency of the insurance subsidiaries before and after the insurance company is renamed, and so on; (3) a renaming plan, including the equity structures of the insurance group company and its subsidiaries, the overall planning and operational procedures for rationalizing the equity relationship, name and business types of the subsidiaries, and so on; (4) Articles of Association of the insurance group company; (5) the resolution of the shareholders’ meeting of the insurance company which approves the formation of an insurance group company; (6) the audited financial accounting report and solvency report of the insurance company; (7) a capital assessment certification issued by a capital assessment institution with a good credit standing, and a photocopy of the source document on the entry of capital into the account; (8) an assessment report of the assets to be contributed, a guarantee plan for the rights and interests of clients and creditors, and a guarantee plan for the rights and interests of employees; (9) the resumes of the person in charge of the preparatory group, the directors, supervisors, and senior managerial personnel to be appointed and the relevant evidential materials; (10) a certificate on the ownership of or the right to use the business office; (11) the mid- and long-term development strategies and planning, business operation plans, foreign investment plans, and the major rules for capital and financial management, risk management, internal control, and so on; (12) a report on the company’s information system building; (13) a company name pre-approval notice; (14) legal opinions issued by a law firm; and (15) other materials as required by the CBIRC.136 The directors, supervisors, and senior managerial personnel of an insurance group company shall conform to the relevant provisions of the CBIRC. The senior managerial personnel of an insurance group company shall include the general manager, deputy general managers, assistant to the general manager, secretary of 135 Ibid., art.6. 136 Ibid., art.7.

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the board of directors, chief compliance officer, chief financial officer, and other persons in charge with same powers.137 4.6.2 Business scope The business of an insurance group company shall focus on equity investment and management. An insurance group company shall make foreign equity investment and investment in the formation of the relevant enterprises with its own funds.138 The foreign equity investment and investment in the formation of the relevant enterprises made by an insurance group company shall be subject to the approval of the CBIRC, and the application procedures and materials shall be separately formulated by the CBIRC. Other use of funds of an insurance group company except for those as described in the preceding paragraph shall comply with the relevant provisions of the CBIRC on the use of insurance funds.139 An insurance group company may invest in the following insurance enterprises: (1) insurance companies; (2) insurance asset management companies; (3) professional insurance agencies, insurance brokerage agencies, and insurance assessment institutions; and (4) other insurance enterprises.140 An insurance group company may invest in non-insurance financial enterprises, including commercial banks. The total investment made by an insurance group company and its subsidiaries in non-insurance financial enterprises shall not exceed 30% of the group’s consolidated net assets.141 Where an insurance group company and its subsidiaries invest in the enterprises engaging in the same principal business of the same financial sector, they can hold controlling shares in not more than one enterprise, as is the general principle.142 An insurance group company may invest in non-financial enterprises relevant to the insurance business. Except for the aforesaid non-financial enterprises relevant to the insurance business, the investment made by an insurance group company in any other non-financial enterprise shall not exceed 25% of the paid-in capital of the enterprise, and the insurance group company shall not engage in the business operation of such enterprise. The total investment made by an insurance group company and its subsidiaries in non-financial enterprises shall not exceed 10% of the group’s consolidated net assets.143 An insurance group company may make overseas investment. The total investment made by an insurance group company and its subsidiaries in overseas entities shall not exceed 10% of the group’s consolidated net assets; in particular, the total investment made in a single overseas entity shall not exceed 5% of the group’s consolidated net asset.144 137 138 139 140 141 142 143 144

Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12 Ibid., art.13. Ibid., art.14. Ibid., art.15.

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Insurance group companies engaging in the insurance business shall comply with the Insurance Law, the Provisions on the Administration of Insurance Companies 2015, and other laws and administrative regulations.145 4.7 Regulation on modification, dissolution, and abolition of insurance institutions146 Two major pieces of legislation relating to the matters of modification, dissolution, and abolition of insurance institutions are the Insurance Law (art.84, articles 89–94, and art.149) and the Provisions on the Administration of Insurance Companies 2015 (articles 26–34). Unless it is otherwise provided for by the Insurance Law, the Company Law of China may also apply to these matters.147 4.7.1 Modification As to the matter of modification of insurance companies, the Insurance Law (art.84) provides statutory rules regarding changes of circumstances of the insurance companies under which an insurance company must obtain the approval of the CBIRC: (1) change of name; (2) change of registered capital; (3) change of business premises of the company or a branch office thereof; (4) cancellation of a branch office; (5) split or merger of the company; (6) amendment of the Articles of Association; (7) change of any shareholder whose amount of capital contribution accounts for 5% or more of the total capital of the company which is a limited liability company, or change of any shareholder who holds 5% or more of the shares of a company which is a joint-stock limited company; or (8) any other circumstance as specified by the CBIRC.148 In accordance with art.84 of the Insurance Law, the Insurance Companies Provisions 2015 provide two more detailed articles (articles 26 and 27) with regard to modification of insurance companies and branch offices. Article 26 of the Provisions stipulates that an insurance institution which falls under any of the following circumstances shall obtain an approval from the CBIRC: (1) modification of the name of an insurance company; (2) modification of registered capital; (3) expansion of the scope of business; (4) modification of business premises; (5) division or combination of an insurance company; (6) amendment of the by-laws of an insurance company; (7) modification of any shareholder whose amount of capital contribution accounts for not less than 5% of the total capital of an institution which is a limited liability company or modification of any shareholder who holds not less than 5% of the shares of an institution which is a joint-stock limited company; and (8) other circumstances as set out by the CBIRC.149 Under any of the following circumstances, an insurance institution shall report to the CBIRC within 15 working days after the circumstance occurs: (1) modification of any

145 146 147 148 149

Ibid., art.16. Insurance companies and branch offices. The Insurance Law, art.94. Ibid., art.84. The Provisions on the Administration of Insurance Companies 2015, art.26.

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shareholder whose amount of capital contribution accounts for not more than 5% of the total capital of an institution which is a limited liability company or modification of any shareholder who holds not more than 5% of the shares of an institution which is an unlisted joint-stock limited company; (2) modification of the name of a shareholder of an unlisted insurance company; (3) modification of the name of a branch office of an insurance company; (4) other circumstances as set out by the CBIRC.150 4.7.2 Dissolution and abolition (a) Rules under the Insurance Law In the event that an insurance company needs to be dissolved as a result of any split, merger, resolution of the shareholders’ meeting or occurrence of a cause of dissolution prescribed in the Articles of Association of the company, it shall be dissolved upon the approval of the CBIRC. An insurance company which operates the life insurance business shall not be dissolved except for any split, merger, or cancellation according to law. A liquidation group shall be set up to perform liquidation of an insurance company to be dissolved.151 Where an insurance company falls under any of the circumstances prescribed in article 2 of the Enterprise Bankruptcy Law of China,152 upon the approval of the CBIRC, the insurance company or any creditor thereof may apply to the people’s court for restructuring, reconciliation, or bankruptcy liquidation; the CBIRC may also apply to the people’s court for subjecting the company to restructuring or bankruptcy liquidation.153 The bankruptcy property shall be used for repayment in the following order after first repayment of bankruptcy fees and debts incurred for the common benefit of creditors: (1) the wages and salaries, medical fees, disability subsidies, and pensions owed to employees; the basic old-age insurance premiums and basic medical insurance premiums which shall be transferred into the personal accounts of employees; and the compensation which shall be made to employees as required by law and administrative regulations; (2) insurance indemnities or insurance money; (3) the social insurance fees other than those prescribed in (1) and taxes owed by the company; and (4) the general creditors’ rights in bankruptcy. If the bankruptcy property is not enough for repayment of debts in the same order, it shall be distributed pro rata. The salaries of the directors, supervisors, and senior managers of a bankrupt insurance company shall be calculated as per the average wage of the employees of the company.154 150 Ibid., art.27. 151 The Insurance Law, art.89. 152 According to art.2 of the Enterprise Bankruptcy Law of China, where an enterprise legal person cannot pay off its debts due and its assets are not enough for paying off all the debts, or it apparently lacks the ability to pay off its debts, the debts shall be liquidated according to the provisions of this Enterprise Bankruptcy Law. Where an enterprise legal person is under the circumstances as specified here, or it has apparently forfeited the ability to pay off its debts, it may undergo reorganization according to the provisions of the Enterprise Bankruptcy Law. 153 The Insurance Law, art.90. 154 Ibid., art.91.

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There are special rules for life insurance companies. In the event that a life insurance company is revoked or declared bankrupt, all of the life insurance contracts and reserves held by it must be transferred to other life insurance companies; where no agreement in respect of such transfer can be reached with other insurance companies, the CBIRC shall designate life insurance companies to accept such transfer.155 Where any life insurance contracts or liability reserves are transferred or accepted according to the designation of the CBIRC, the legitimate rights and interests of the insured and beneficiaries shall be protected.156 Where an insurance company terminates its business operation according to law, its insurance business operation license shall be revoked.157 In the event that the insurance business operation permit of an insurance company is revoked for illegal business operation or the solvency of an insurance company is lower than the standard prescribed by the CBIRC, and the order of the insurance market will be seriously endangered or the public interests will be seriously damaged if the company is not abolished, the CBIRC shall abolish it, make an announcement thereon, and legally form a liquidation group to conduct liquidation in a timely manner.158 (b) Rules under the Insurance Companies Provisions For the matters on dissolution and abolition of insurance institutions, articles 28–34 of the Insurance Companies Provisions 2015 set forth rules as follows. The dissolution of an insurance company according to the law shall be subject to the approval of the CBIRC, and the following materials in triplicate shall be submitted: (1) a written application for dissolution; (2) a resolution of its shareholders’ meeting; (3) information on the liquidation group and the person in charge thereof and the relevant supporting documents; (4) the liquidation procedure; (5) a plan on the arrangements of its claims and debts; (6) An asset distribution plan and an asset disposition proposal; and (7) other materials as set out by the CBIRC.159 A liquidation group shall be formed for the dissolution of an insurance company, and the liquidation work shall be subject to the supervision and guidance of the CBIRC. Where an insurance company is abolished according to the law, the CBIRC shall organize in a timely manner the formation of a liquidation group by the shareholders, the relevant departments, and the relevant professionals.160 The liquidation group shall notify the creditors of its formation within ten working days of formation and announce it three times at a minimum in a newspaper designated by the CBIRC within 60 working days. The liquidation group shall engage an accounting firm and a law firm with a good credit standing to evaluate the company’s claims, debts, and assets.161 155 156 157 158 159 160 161

Ibid., art.92. Ibid. Ibid., art.93. Ibid., art.149. The Provisions on the Administration of Insurance Companies 2015, art.28. Ibid., art.29. Ibid., art.30.

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The abolition of a branch office by an insurance company shall be subject to the approval of the CBIRC. The insurance business permit of the branch office shall be automatically invalidated on the date of approval of the abolition and be surrendered within 15 working days of the approval. Where a branch office of an insurance company is combined or abolished, it shall issue an announcement, notify the relevant insurance applicants, insured, or beneficiaries in writing, and fully inform them of the payment of insurance premiums, collection of insurance benefits, and other matters.162 Where an insurance company is dissolved or abolished according to the law, the disposition of its assets shall be conducted by public auction, by a transfer agreement, or in any other manner recognized by the CBIRC,163 and the shareholders of the company may not distribute the assets of the company or obtain any benefits from the company before the liquidation of liabilities under insurance contracts is completed.164 An insurance company which falls under any of the circumstances as set out in art.2 of the Enterprise Bankruptcy Law of China shall apply for reorganization, reconciliation, or bankruptcy liquidation according to the law.165 4.7.3 Rectification, takeover, reconstruction, or bankruptcy of an insurance company The Insurance Law empowers the CBIRC to order an insurance company to make correction (articles 139–143), to take over a troubled insurance company (articles 144–147), or to apply to the people’s court for subjecting the company to restructuring or bankruptcy liquidation (articles 148 and 153). Where an insurance company fails to set aside or carry forward the liability reserve funds or conduct the reinsurance formalities as required by the Insurance Law or seriously violates the provisions of the Insurance Law on the use of funds, the CBIRC shall order it to make correction within a prescribed time limit and may order it to change the person in charge and the relevant managers.166 Where an insurance company fails to make correction within the time limit, the CBIRC may decide to send insurance professionals and appoint the relevant persons of the insurance company to form a rectification group to make rectification on the company. A rectification decision shall bear the name of the company subject to rectification, the reasons for rectification, the members of the rectification group, and the period of rectification, which shall be made public.167 The rectification group shall have the right to supervise the day-to-day business of the insurance company in rectification. The person in charge and the relevant managers of the insurance company in rectification shall perform their functions under the supervision of the rectification group.168 162 163 164 165 166 167 168

Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34. The Insurance Law, art.139. Ibid., art.140. Ibid., art.141.

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In the process of rectification, the original businesses of the insurance company in rectification shall continue. However, the CBIRC may order the company to stop some original business or stop accepting new business and adjust its use of funds.169 Where an insurance company in rectification has rectified its violations of the Insurance Law and resumed normal business operations, the rectification group shall submit a report thereon, the rectification process shall be terminated upon the approval of the CBIRC, and the CBIRC shall make an announcement thereon.170 Where an insurance company falls under either of the following circumstances, the CBIRC may take it over: (1) the company is seriously insolvent; or (2) the company damages the public interest in violation of the Insurance Law, which may seriously endanger or has seriously endangered the solvency of the company. The debtor–creditor relationships of the insurance company shall remain unchanged after it is taken over.171 The measures for the formation of a takeover group and the implementation of takeover shall be determined and announced by the CBIRC.172 Upon the expiration of the takeover period, the CBIRC may decide to extend the takeover period, but the takeover period shall not exceed two years.173 Where an insurance company in takeover resumes its normal business operation capacity upon the expiration of the takeover period, the CBIRC shall decide to terminate the takeover and make an announcement thereon.174 Where an insurance company in rectification or takeover falls under the circumstances prescribed in art.2 of the Enterprise Bankruptcy Law, the CBIRC may apply to the people’s court for subjecting the company to restructuring or bankruptcy liquidation.175 During the period of rectification, takeover, or liquidation as a result of cancellation of an insurance company or upon the occurrence of any major risk to an insurance company, the CBIRC may take the following measures against the directly liable directors, supervisors, senior managers, and other directly liable persons of the company: (1) notifying the emigration administrative organ to prevent them from leaving China; or (2) requesting the judicial authority to prohibit them from disposing of their property by displacement, assignment, or any other means or from setting any other right in their property.176 4.8 Market access and withdrawal of non-insurance subsidiaries of insurance companies Insurance companies may invest in companies which do not conduct insurance business and are directly or indirectly controlled by the insurance companies.These kinds of companies are regulated by the Interim Measures for the Administration of Non-Insurance Subsidiaries of Insurance Companies 2014 (hereinafter, the 169 170 171 172 173 174 175 176

Ibid., art.142. Ibid., art.143. Ibid., art.144. Ibid., art.145. Ibid., art.146. Ibid., art.147. Ibid., art.148. Ibid., art.153.

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Non-Insurance Subsidiaries Measures 2014).177 The Non-Insurance Subsidiaries Measures 2014 provides rules regulating market access and withdrawal of noninsurance subsidiaries (articles 34–39). To directly invest in a non-insurance subsidiary, an insurance company shall abide by the relevant provisions of the CBIRC and undergo relevant approval or recordation procedure and report to the CBIRC.178 For an insurance company to directly invest in a non-insurance subsidiary providing sharing services, the following conditions shall be met: (1) The insurance company is a member company of an insurance group; (2) By the time of investment, the solvency ratio by the end of the last quarter is not less than 150%, and the solvency ratios of other insurance member companies of the insurance group meet the regulatory requirements of the CBIRC; (3) The non-insurance subsidiary providing sharing services in which the insurance company intends to invest mainly provides sharing services for the insurance group; (4) Other conditions as set out in the relevant regulatory provisions of the CBIRC for direct equity investment. Insurance companies may not make indirect investments in non-insurance subsidiaries providing sharing services.179 To directly invest in a non-insurance subsidiary providing sharing services, an insurance company shall apply to the CBIRC for confirmation on the basis of the following materials: (1) The materials required by the relevant regulatory provisions of the CBIRC for a major equity investment; and (2) A specific plan of sharing services or management, the system arrangements for risk isolation, and relevant measures for protecting the rights and interests of insurance consumers, and so on.180 Where a non-insurance subsidiary of an insurance company significantly endangers the operating safety of the insurance company, the CBIRC may order the insurance company to dispose of its equity in the non-insurance subsidiary within a certain time limit or order it to reduce its shareholding.181 Where an insurance company or its subsidiary or parent company in the insurance industry fails to satisfy the requirements for prudential supervision, and its operating status or financial condition deteriorates greatly, the CBIRC may require the insurance company to dispose of part or all of its equity in non-insurance subsidiaries within a certain time limit and use the funds from such disposal to improve the financial condition of the relevant insurance company.182 Where an insurance company disposes of its equity in a non-insurance subsidiary on its own decision or as required by the CBIRC, it shall report the relevant information to the CBIRC within ten working days after the disposal is completed.183

177 Bao Jian Fa No. 78 [2014], issued on 28 September 2014 and came into force on the same day (see

access on 14 October 2020). 178 The Interim Measures for the Administration of Non-Insurance Subsidiaries of Insurance Companies 2014, art.34. 179 Ibid., art.35. 180 Ibid., art.36. 181 Ibid., art.37. 182 Ibid., art.38. 183 Ibid., art.39.

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4.9 Supervision and administration of insurance institutions The CBIRC is responsible for supervising insurance institutions by combining on-site supervision with off-site supervision.184 The Insurance Companies Provisions 2015 set out rules in respect of supervision of insurance institutions (articles 59–69). An insurance institution which falls under any of the following circumstances may be placed by the CBIRC under priority supervision: (1) commission of any serious violation of law; (2) failing to satisfy the solvency requirements; (3) abnormal financial condition; and (4) other circumstances under which the CBIRC deems priority supervision necessary.185 The on-site inspection of an insurance institution conducted by the CBIRC shall include, but not be limited to, the following matters: (1) Whether the formation or change of the institution has been approved by or reported to the CBIRC according to the law; (2) Whether a director, supervisor, or senior executive’s satisfaction of office qualifications has been confirmed according to the law; (3) Whether its application materials for administrative licensing are true; (4) Whether its capital and various reserves are true and adequate; (5) Whether its corporate governance and internal control rules are developed in compliance with the provisions issued by the CBIRC; (6) Whether it satisfies the solvency requirements; (7) Whether its use of capital is legal; (8) Whether the legal requirements for its operations and financial condition are satisfied and whether its reports, statements, documents, and materials are provided in a timely, complete, and truthful manner; (9) Whether it has reported its insurance clauses and premium rates in use for approval or recordation as required; (10) Whether its business transactions with insurance intermediaries are legal; (11) Whether its information technology systems are developed in compliance with the relevant provisions; (12) Whether it has reported as required any other matters subject to ex post reporting; (13) Other matters under inspection as specified by the CBIRC.186 An insurance institution shall cooperate in an on-site inspection of it conducted by the CBIRC and provide the relevant documents and materials as required by the CBIRC.187 The staff members of the CBIRC shall implement an on-site inspection according to the law, and there shall be two inspectors at a minimum who shall produce their credentials and a notice of inspection. In on-site inspections, the CBIRC may engage an accounting firm and other intermediary institutions to provide relevant professional services; and if so, shall enter written engagement agreements with them.188 Where any insurance institution frequently abolishes branch offices or modifies the business premises of its branch offices, which may have or have had any adverse impact on the operations of the insurance company, the CBIRC shall have the authority to take the following measures as needed in supervision: (1) requiring the insurance institution to improve its branch office management rules during a 184 185 186 187 188

The Provisions on the Administration of Insurance Companies 2015, art.59. Ibid., art.60. Ibid., art.61. Ibid., art.62. Ibid., art.63.

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specified period; (2) asking the person in charge of the insurance institution and other relevant persons about such modification or abolition; (3) requiring the insurance institution to provide documents and materials on its internal decisionmaking on such modification or abolition; (4) issuing a letter of major risk alert or holding regulatory interviews with the relevant persons; and (5) other measures taken according to the law. The insurance institution shall take action to address relevant issues according to the requirements of the CBIRC, and in a timely manner report such action to the CBIRC in writing.189 The CBIRC shall, as needed in supervision, have the authority to require insurance institutions to submit reports or specific materials.190 Insurance institutions shall, in a timely manner, file their business reports, actuarial reports, financial accounting reports, solvency reports, compliance reports, and other reports, statements, documents, and materials with the CBIRC according to the relevant provisions. The various reports, statements, documents, and materials submitted by insurance institutions to the CBIRC shall be true, complete, and accurate.191 Any major resolution of the shareholders’ meeting or the board of directors of an insurance company shall be reported to the CBIRC within 30 working days after it is made, except as otherwise specified by the CBIRC.192 The CBIRC shall, as needed in supervision, have the authority to hold regulatory interviews with the directors, supervisors, and senior executives of insurance institutions, requiring them to provide explanations on insurance operations, risk control, internal management, and other relevant major issues.193 Where an insurance institution or any of its practitioners violates the Insurance Companies Provisions 2015, the CIBRC shall punish the violator in accordance with laws and administrative regulations. Provided that laws and administrative regulations are silent, the CIBRC shall order the violator to take corrective action, issue a warning to the violator, and impose a fine of not less than the amount of the illegal income nor more than three times the amount of the illegal income and ¥30,000 yuan if there is any illegal income on the violator. The CIBRC may impose a fine of not more than ¥10,000 yuan on the violator if there is no illegal income, and if the violator is suspected of any crime, may transfer the case to the judicial authority to hold the violator criminally liable.194 4.10 Supervision and administration of insurance group companies Regulatory rules for supervision and administration of insurance group companies are provided in the Measure for the Administration of Insurance Group Companies (For Trial Implementation) 2010195 (articles 40–48), which are considered next. 189 190 191 192 193 194 195

Ibid., art.64. Ibid., art.65. Ibid., art.66. Ibid., art.67. Ibid., art.68. Ibid., art.69. Bao Jian Fa No. 29 [2010], issued on 12 March 2010 and came into force on the same day.

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The CBIRC may request the following entities or individuals to provide materials or information relevant to the business management and financial status of an insurance group company within a prescribed time limit: (1) member companies of an insurance group company; (2) shareholders or actual controller of an insurance group company; (3) directors, supervisors, or senior managerial personnel of an insurance group company. The CBIRC may make investigation and collect evidence from the deposit bank of a member company of an insurance group company, designated commercial banks, asset custody institutions, stock exchanges, and securities depository and clearing institutions according to the Insurance Law and the relevant provisions in the financial regulation and coordination mechanism.196 An insurance group company shall, according to the relevant provisions, submit in a timely manner the relevant reports such as financial accounting reports and solvency reports and other materials to the CBIRC.197 In the case of any major event that may affect or possibly affect the business management, financial status, or risk control of an insurance group company or the clients’ asset safety, the insurance group company shall immediately submit an interim report to the CBIRC, indicating the causes of the event, the current status, the possible results, and the corresponding measures to be taken.198 Where a non-insurance subsidiary of an insurance group company significantly endangers the safe operation of any other insurance subsidiary, the CBIRC may order the insurance group company to dispose of its shares in the non-insurance subsidiary within a prescribed time limit or to reduce its shares in the insurance subsidiary to less than 25%.199 Where the capital adequacy level of a financial subsidiary of an insurance group company fails to meet the requirements of the financial regulatory institution, the CBIRC may request the insurance group company to ensure that the subsidiary has adequate capital through increasing the capital and other means. If the insurance group company fails to perform the relevant obligations, the CBIRC may apply regulatory measures to it such as putting restrictions on investment and business operations.200 Where an insurance subsidiary of an insurance group company fails to meet the requirements for prudential supervision and administration as set forth by the financial regulatory institution, and its business or financial conditions has significantly deteriorated, the CBIRC may request the insurance group company to assist it to resume normal operations or to dispose of some or all of its equities in other member companies within a certain period to improve the financial condition of the insurance subsidiary with the money obtained.201 The CBIRC shall conduct comprehensive and continuous consolidated supervision over capital, finance, and risks of insurance groups based on the supervision 196 The Measure for the Administration of Insurance Companies (For Trial Implementation) 2010, art.40. 197 Ibid., art.41. 198 Ibid., art.42. 199 Ibid., art.43. 200 Ibid., art.44. 201 Ibid., art.45.

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of a sole legal person so as to identify, measure, monitor, and evaluate the overall risk situation of insurance groups.202 Under the principle of “substance over form”, where an insurance group company invests in any of the following institutions other than the member companies, the institution that accepts the investment shall be included in the scope of consolidated supervision: (1) Although the asset scale of the institution accepting the investment accounts for a small proportion of the overall asset scale of the insurance group, its risks are enough to cause a material impact on the financial situation and risk level of the insurance group; (2) The harms and losses resulting from regulation compliance risks and reputation risks of the institution that accepted the investment are enough to cause a material impact on the insurance group’s reputation.203 The CBIRC shall be entitled to determine and adjust the scope of consolidated supervision and put forward regulatory requirements according to the changes in the equity structure, risk categories, and risk status of an insurance group company. An insurance group company shall report the scope of the consolidated supervision and the management thereof to the CBIRC.204 4.11 Conclusion The formation and dissolution of insurance companies are the two key regulatory matters which control the access and withdrawal of insurance companies to (and from) China’s insurance market. The CBIRC has formulated a number of sets of strict regulatory rules for formation of insurance companies. It can be concluded that the mechanism for regulating market access of insurance companies has been well established and implemented in China. But one point may be raised here, that is, it seems that the threshold for an insurance company to access the insurance market is too high. The obvious indicator of such a high threshold is the high amount of registered capital of ¥200 million yuan. This is much higher than the amount of registration capital in other jurisdictions.205 The high registered capital requirement may keep some investors outside the gate of the insurance market. At the early stage of the development of China’s insurance market, it was certainly prudential and justified to set a high threshold in terms of registered capital for the formation of an insurance company in order to protect insurance consumers.206 Now that the insurance market in China has been well developed and has become the second largest in the world, it is time for a lower threshold in order for more investors to access the market. This would be beneficial to consumers for better service and cheaper insurance 202 Ibid., art.46. 203 Ibid., art.47. 204 Ibid., art.48. 205 For example, the minimum amount of registered capital for a life insurance company is equivalent to about ¥10 million yuan in Germany, and ¥59 million yuan in South Korea; for a general insurance company; it is about ¥60 million yuan in Japan, and ¥10 million yuan in Hong Kong SAR. See Hualin Wei, “The Nature, the Development and the Supervision of Insurance” (2018) Studies on Financial Supervision and Administration, Vol 80(8), 1–20. 206 When the Insurance Law was first enacted in 1995, the minimum amount of registered capital of an insurance company to be established was ¥200 million (art.72).This has not been changed since then.

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products because of the competition of more insurance companies in the market. The strengthening of effective regulation regarding insurance companies’ solvency and corporate governance may effectively make up for any possible impact if the access requirements are loosened. This is, in fact, what the CBIRC is heading for. In comparison to the regulatory mechanism for market access, the regulatory mechanism for market withdrawal of insurance companies has yet to be further developed. Only a few insurance companies have so far been withdrawn from China’s insurance market; this fact may be one of the reasons for the lag of the development of such a withdrawal mechanism. This needs to be addressed by the CBIRC in the future, in compliance with the requirement by the State Council that “the reform of the insurance market access and exit mechanism shall be furthered”.207 Having considered the regulation of formation and dissolution of domestic insurance companies, we will consider in the next chapter how a foreign-funded insurance company is regulated in China. We will see that the door is now open much wider to foreign investors.

207 The Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry (the State Council No.29 [2014]), issued on 28 October 2014 and became effective on the same day (see accessed on 14 October 2020).

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CHAPTER 5

Regulation of foreign-funded insurance companies and the representative offices of foreign insurance institutions

5.1 Introduction This chapter consists of two parts: one is concerned with foreign-funded insurance companies and the other is concerned with the representative offices of foreign insurance institutions in China. Foreign-funded insurance companies include the following three types of insurance companies formed upon approval and operating within China in accordance with the relevant laws and administrative regulations of China: (1) Insurance companies formed within China by foreign insurance companies and Chinese companies or enterprises in the form of equity joint ventures (hereinafter, “equity joint venture insurance companies”); (2) Insurance companies formed within China by foreign insurance companies with foreign capital (hereinafter, “wholly foreignowned insurance companies”); (3) Branches within China of foreign insurance companies (hereinafter, “branches of foreign insurance companies”).1 As of December 2017, there were 57 foreign-funded insurance companies in China, with more than 1,800 branches.These insurance institutions were established by overseas insurance institutions from 16 countries and regions in the world.2 As of the end of 2017, the premium income of foreign-funded insurance companies accounted for 2% of the total premium income for property insurance and 7.4% of total premium income of life insurance in China.3 The primary legislation regulating foreign-funded insurance companies is the Regulation of the People’s Republic of China on the Administration of ForeignFunded Insurance Companies (hereinafter, the RAFFIC). The State Council of China enacted the RAFFIC for the first time on 12 December 2001 and amended it three times, on 30 May 2013, on 6 February 2016, and on 30 September 2019,4

1 The Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies 2019 (the Order of the State Council No. 720 [2019]), art.2 2 Economic Daily, 14 January 2019 (see accessed on 4 March 2021). 3 Economic Daily, 14 January 2019 (see accessed on 14 October 2020). 4 The Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies was adopted at the 49th Executive Meeting of the State Council on 5 December 2001, promulgated by Decree No. 336 of the State Council of the People’s Republic of China on 12 December 2001, and became effective on 1 February 2002. It was amended three times, on 30 May 2013 by the Order of the State Council No. 636, on 6 February 2016 by the Order of the State Council No. 666, and

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for the purpose of meeting the need to open up to the outside world and develop the economy and strengthen and improve the supervision and administration of foreign-funded insurance companies in China. To facilitate the implementation of the RAFFIC and in accordance with the Insurance Law and the RAFFIC, the China Insurance Regulatory Commission (the CIRC, the former insurance supervision and regulation authority in China) formulated the Detailed Rules for the Implementation of the Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies (hereinafter, the Implementation Rules 2019) in May 2004 and amended three times, in December 2010, in February 2018 by the CIRC, and in November 2019 by the China Banking and Insurance Regulatory Commission (the CBIRC which plays the role of the insurance supervision and regulation authority in China).5 Representative offices of foreign insurance institutions in China are regulated by the Measures for the Administration of Foreign Insurance Institutions’ Representative Offices in China (hereinafter, the Measures for Representative Offices 2018), which were formulated by the CIRC on 12 July 20066 and amended on 13 February 20187 for the purposes of strengthening the administration of foreign insurance institutions’ representative offices in China (hereinafter, representative offices) and meeting the demand for opening China’s insurance market to the outside world.8 Representative offices refer to the representative offices and general representative offices established by “foreign insurance institutions” inside the territory of China upon approval, engaging in liaison, market investigations, and other similar non-business activities. The term “foreign insurance institutions” refers to those institutions, such as the insurance companies, reinsurance companies, insurance intermediary institutions, insurance associations, and other insurance organizations which are registered outside the territory of China.9 5.2 Regulation on the administration of foreign-funded insurance companies The 2019 version of the RAFFIC consists of 42 articles in seven chapters. It provides rules with regard to the establishment of foreign-funded insurance companies in China, the scope of the business, the supervision and administration on 30 September 2019 by the Order of the State Council No. 720. (see accessed on 14 October 2020). 5 The Detailed Rules for the Implementation of the RAFFIC was issued on 13 May 2004, by the CIRC Order No. 4 [2004], amended for the first time in accordance with the Decision of CIRC on Amending Some Rules by the CIRC Order No. 10 [2010] on 3 December 2010, for the second time in accordance with the Decision of the CIRC to Amend Four Sets of Rules Including the Detailed Rules for the Implementation of the RAFFIC by the CIRC Order No. 4 [2018] on 13 February 2018, and for the third time by the CBIRC Order No. 4 [2019] on 29 November 2019 (see accessed in 14 October 2020). 6 The CIRC Order No 5 [2006]. 7 The CIRC Order No 4 [2018] (see accessed on 14 October 2020). 8 The Measures for the Administration of Foreign Insurance Institutions’ Representative Offices in China 2018, art.1. 9 Ibid., art.2.

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of the companies, the dissolution of the companies and their legal liabilities. Foreignfunded insurance companies must abide by the laws and regulations of China and shall not infringe upon the social and public interests of China. The legitimate business activities and lawful rights and interests of foreign-funded insurance companies are protected by the laws of China.10 Where the RAFFIC is silent on the administration of foreign-funded insurance companies, the Insurance Law, other relevant laws and administrative regulations, and other relevant provisions of the state, shall apply.11 The RAFFIC applies, mutatis mutandis, to insurance companies formed in the Chinese mainland by insurance companies from the Hong Kong Special Administrative Region, the Macao Special Administrative Region, or the Taiwan Region and operating on the Chinese mainland.12 The CBIRC is now responsible for the supervision and administration of foreignfunded insurance companies. The local offices of the CBIRC conduct the routine supervision and administration of foreign-funded insurance companies within their respective jurisdictions.13 5.2.1 The establishment of foreign-funded insurance companies The formation of a foreign-funded insurance company is subject to the approval of the CBIRC.14 The regions where foreign-funded insurance companies may be formed shall be determined by the CBIRC according to the relevant provisions.15 For the formation of foreign-funded insurance companies engaging in personal insurance and those engaging in property insurance, the form of business and the proportion of foreign investment are determined by the CBIRC according to the relevant provisions.16 The minimum registered capital of an equity joint venture insurance company or a wholly foreign-owned insurance company shall be ¥200 million yuan or an equivalent in freely convertible currencies and must be paid-in monetary capital.17 The head office of a foreign insurance company shall grant not less than ¥200 million yuan or an equivalent in freely convertible currencies to a branch of the foreign insurance company as working capital.18 The CBIRC may, according to the scope and scale of business of a foreign-funded insurance company, raise the minimum amount of the registered capital or working capital of the foreign-funded insurance companies.19 A foreign insurance company which is to apply for the establishment of a foreignfunded insurance company must meet the following conditions:20 (1) It possessed 10 11 12 13 14 15 16 17 18 19 20

The RAFFIC 2019, art.3. Ibid., art.38. Ibid., art.39. Ibid., art.4. Ibid., art.5(1). Ibid., art.5(2). Ibid., art.6. The RAFFIC 2019, art.7(1). Ibid., art.7(2). Ibid., art.7(3). Ibid., art.8.

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total assets of not less than US$5 billion at the end of the year prior to the submission of its application for the establishment;21 (2) The country or region where it is domiciled has a sound system of insurance supervision and administration, and it is under the effective supervision and administration by the relevant competent authorities of the country or region in which it is located; (3) It satisfies the solvency standards of the country or region where it is domiciled; (4) Its application has been approved by the competent authorities of the country or region where it is located; and (5) It meets other prudent conditions as set out by CBIRC.22 To form a foreign-funded insurance company, the applicant shall file a written application with the CBIRC and submit the following materials: (1) A written application signed by the legal representative of the applicant, or if an equity joint venture insurance company is to be formed, a written application signed by the legal representatives of all the parties to the equity joint venture; (2) The business license (duplicate) of a foreign applicant, a certificate on its satisfaction of the solvency standards, and an opinion on its application issued by the competent authorities of the country or region where the foreign applicant is located;23 (3) The by-laws (Articles of Association) of a foreign applicant and its annual reports for the last three years;24 (4) Materials on a Chinese applicant if an equity joint venture insurance company is to be formed;25 (5) A feasibility study report

21 “At the end of the year” means at the end of last fiscal year (art.9 of the Implementation Rules 2019). 22 According to art.10 of the Implementation Rules 2019, “other prudential condition” shall, at a minimum, include the following conditions: (1) A reasonable corporate government structure; (2) A sound risk management system; (3) Adequate and efficient internal control rules; (4) Efficient management information systems; and (5) a good operating condition, without any record of major violations of laws and regulations. 23 Where an applicant is unable to provide the business license (duplicate) as required in art.9(2) of the RAFFIC, it may provide a valid photocopy of the business license or a written certification from the competent authority to prove that the applicant is entitled to engage in the insurance business (art.11 of the Implementation Rules 2019). The “certificate on its satisfaction of the solvency standard” issued by the competent authority of the country or region where the foreign applicant is located in art.9(2) of the RAFFIC shall include either of the following: (1) In the last fiscal year before the date of issuance of the certificate by the competent authority, the solvency of the applicant satisfies the regulatory requirements of the country or region; (2) In the last fiscal year before the date of issuance of the certificate by the competent authority, the applicant has no record of non-compliance with the solvency standards of the country or region (art.12 of the Implementation Rules 2019). The “opinion on its application” issued by the competent authority of the country or region where the foreign applicant is located in art.9(2) of the RAFFIC shall include: (1) whether the applicant’s application for forming an insurance institution within China is in compliance with the laws of the country or region; (2) whether it approves the application of the applicant; and (3) any record of punishment of the applicant in the last three years before the date of issuance of the opinion by the competent authority (art.13 of the Implementation Rules 2019). 24 The “annual reports” in art.9(3) of the RAFFIC shall include the balance sheets, income statements, and cash flow statements of the applicant for the last three fiscal years before the date of application. The sheets and statements in the preceding paragraph shall be accompanied by the audit opinions issued by an accounting firm or an audit firm recognized by the country or region where the applicant is located (art.14 of the Implementation Rules 2019). 25 Except as otherwise specified by any law or administrative regulation or approved by the State Council, the “Chinese applicant” in art.9(4) of the RAFFIC shall meet the conditions and the requirements by the Administrative Measures for the Administration of Equity in Insurance Companies 2018 (art.15 of the Implementation Rules 2019).

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and a formation preparation plan for the company to be formed; (6) The names, resumes, and certificates of satisfaction of office qualifications of the persons in charge of the preparations for the formation of the company; (7) Other materials as set out by the CBIRC.26 The CBIRC shall conduct a preliminary examination of an application for forming a foreign-funded insurance company and within six months of receipt of complete application documents decide whether to accept or reject the application. If it decides to accept the application, it shall issue a formal application form to the applicant; otherwise, it shall inform the applicant in writing of its rejection with an explanation of the reasons for the rejection.27 The applicant shall complete the formation preparations within one year of receipt of the formal application form, and the period may be extended by three months with the approval of the CBIRC if the formation preparations are not completed within the period for a good reason.28 If the applicant still fails to complete the formation preparations within the extension, the decision of the CBIRC to accept the application shall be invalidated automatically. After the completion of the formation preparations, the applicant shall submit the completed application form, along with the following documents, to the CBIRC for approval: (1) A report on formation preparations;29 (2) The by-laws of the company to be formed; (3) The investors of and their amounts of contribution to the company to be formed; (4) A certification of capital verification issued by a statutory capital verification institution;30 (5) A power of attorney issued to the primary person in charge of the company to be formed;31 (6) The names, resumes, and certificates of satisfaction of office qualifications of the senior executives of the company to be formed;32 (7) Business plans and reinsurance schemes of the company to be formed for the future three years; (8) The insurance clauses, a list of premium rates, and an explanation on the calculation of liability reserves for the types of insurance provided by 26 The RAFFIC 2019, art.9. 27 Ibid., art.10. 28 Where an applicant applies for extending the period of formation preparations in accordance with art.11 of the RAFFIC, it shall submit a written application to the CIRC within one month before the period of formation preparations expires explaining the reasons for the extension (art.17 of the Implementation Rules 2019). 29 The “report on formation preparations” in art.11(1) of the RAFFIC shall contain an overview of the documents listed in all the other items of the article (art.18 of the Implementation Rules 2019). 30 The “statutory capital verification institution” in art.11(4) of the RAFFIC means an accounting firm which satisfies the requirements of the CBIRC (art.19 of the Implementation Rules 2019). The “certification of capital verification” in art.11(4) of the RAFFIC shall include: (1) a capital verification report issued by a statutory capital verification institution; and (2) a photocopy of the original receipt of the registered capital or working capital in the bank account (art.20 of the Implementation Rules 2019). 31 The “primary person in charge” in art.11(5) of the RAFFIC means the general manager of the branch of a foreign insurance company to be formed.The power of attorney issued to the primary person in charge of the branch of a foreign insurance company to be formed means the power of attorney issued to the general manager of the branch of a foreign insurance company to be formed as signed by the chairman of the board of directors or the general manager of the foreign insurance company.The power of attorney shall explicitly state the powers of the authorized person (art.21 of the Implementation Rules 2019). 32 The “senior executives of the company to be formed” in art.11(6) of the RAFFIC shall satisfy the office qualifications set out by the CBIRC. The senior executives of a branch of a foreign insurance company shall satisfy the office qualifications for the senior executives of the head office of an insurance company (art.22 of the Implementation Rules 2019).

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the company to be formed within China; (9) Materials on the business premises and other facilities related to the operations of the company to be formed;33 (10) If a branch of a foreign insurance company is to be formed, a letter of guarantee from the head office on its assumption of responsibility for the taxes and debts of the branch; (11) If an equity joint venture insurance company is to be formed, the contracts on the joint venture; (12) Other documents as set out by the CBIRC.34 The CBIRC shall, within 60 working days of receipt of the complete formal application materials for establishing a foreign-funded insurance company, decide whether to approve or disapprove the application. In the case of approval, it shall issue a permit for engaging in the insurance business to the applicant; in the case of disapproval, it shall inform the applicant in writing of the decision with an explanation of the reasons for the disapproval.35 If the formation of a foreign-funded insurance company is approved, the applicant shall, on the basis of the permit for engaging in the insurance business, undergo registration with the administrative department for industry and commerce and obtain a business license.36 A foreign-funded insurance company shall, after its formation, set aside a deposit at the rate of 20% of the total amount of registered capital or working capital and place the deposit in a bank designated by the CBIRC. The deposit may not be used for any purpose other than repayment of debts of the foreign-funded insurance company during its liquidation.37 The formation of branch offices within China of foreign-funded insurance companies shall be subject to the approval of the CBIRC according to the relevant provisions.38 5.2.2 New changes in respect of formation of foreign-funded insurance companies The State Council has made three major changes to the 2019 version of the RAFFIC.39 The first is the removal of the requirements that a foreign insurer must have been operating for 30 years and have maintained a CBIRC-approved insurance representative office in China for two years before it can apply for establishing a foreign-funded insurance company in China. This previous policy had the effect of preventing those more recently-established insurers from breaking into China’s insurance market.40 The removal of these requirements has cleared the way for 33 The “materials on the business premises” of the company to be formed in art.11(9) the RAFFIC means the certification documents on the ownership of or the right to use the business premises. The “materials” on “other facilities related to the operations” in art.11(9) the RAFFIC shall include, at a minimum, information on the allocation of computer equipment, the construction of computer networks, and the information management systems (art.23 of the Implementation Rules 2019). 34 The RAFFIC 2019, art.11. 35 Ibid., art.12(1). 36 Ibid., art.12(2). 37 Ibid., art.13. 38 Ibid., art.14. 39 The State Council Order No. 720 [2019], 30 September 2019 (see accessed on 14 October 2020). 40 In the old versions of the RAFFIC, a foreign insurance company which was to apply for the establishment of a foreign-funded insurance company in China was required to meet the following conditions (in addition to those conditions as specified in art.8 of the 2019 version of the RAFFIC): “(1) It has engaged in insurance business for not less than 30 years; (2) It has maintained a representative office

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those more recently established foreign insurers to enter into China’s insurance market. Second, a new provision (art.40) has been introduced into the 2019 version of the RAFFIC: Foreign insurance group companies may establish foreign-funded insurance companies in China.41 Previously, only a foreign insurer actually engaging in the insurance business was allowed to establish a foreign-funded insurance company in China. Such a change expands the shareholder universe for a foreignfunded insurance company to all entities within an insurance group (including the holding company), making it easier for, say, a holding company or a non-insurance subsidiary to meet the shareholder qualification requirements.42 Third, another new provision (art. 41) has been introduced into the 2019 version of the RAFFIC: Overseas financial institutions may invest in foreign-funded insurance companies in China.43 Previously, to invest in a foreign-funded insurance company in China, such investor had to meet certain shareholder qualification requirements, including “operating an insurance business for more than 30 years”, which made it impossible for other types of financial institutions to invest in a foreign-funded insurance company in China. The detailed administrative measures in relation to the second and third changes as stipulated in art.40 and art.41 of the 2019 version of the RAFFIC shall be formulated by the CBIRC in accordance with the principles of the RAFFIC.44 These changes are designed to widen the expertise and skill pool of foreign investors investing in foreign-funded insurance companies in China and to encourage innovation and diversity among providers of insurance services in China. It may increase competition for both domestic insurers and foreign-funded insurance companies but should improve the range of products available, as the skill sets of those outside the insurance sector can be brought to bear when designing new products. However, as the detailed rules for foreign insurance groups to establish foreign-funded insurance companies in China and for overseas financial institutions to invest in foreign-funded insurance companies in China have yet to be published by the CBIRC, the full impact of the new changes is still to be determined. 5.2.3 The scope of the business A foreign-funded insurance company may, according to the scope of business affirmed by the CBIRC, engage in all or part of the following types of the insurance business: (1) Property insurance, including but not limited to property loss insurance, liability insurance, and credit insurance; and (2) Personal insurance,

within the territory of China for not less than 2 years.” For example, see art.8 of the 2016 version of the RAFFIC. 41 The RAFFIC 2019, art.40. 42 Hogan Lovells, “Open for business: China adopts new legislation to further open up its insurance and banking sectors to foreign investors”, 28 October 2019 (see accessed on 14 October 2020). 43 The RAFFIC 2019, art.41. 44 Ibid., articles 40 and 41.

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including but not limited to life insurance, health insurance, and accidental injury insurance.45 A foreign-funded insurance company may engage in large commercial risk insurance and master policy business within the scope as affirmed by the CBIRC according to the relevant provisions.46 But it may not concurrently engage in property insurance and personal insurance.47 A foreign-funded insurance company may also conduct reinsurance business, such as outward reinsurance or inward reinsurance, for its property or personal insurance business.48 The specific scope of business, territories of business, and range of clients of a foreign-funded insurance company are subject to the affirmation of the CBIRC according to the relevant provisions, and the foreign-funded insurance company may only engage in the insurance business within the affirmed scope, territories, and range.49 5.2.4 Supervision and administration The CBIRC has the authority to inspect the operations, financial condition, and use of funds of foreign-funded insurance companies, to require foreign-funded insurance companies to provide relevant documents, materials, and written reports during a specified period, and to punish and otherwise legally deal with their violations of laws or regulations.50 Foreign-funded insurance companies shall accept the supervisory inspections legally conducted by the CBIRC, and honestly provide relevant documents, materials, and written reports and may not refuse or impede such inspections or conceal any information.51 A foreign-funded insurer may not conduct any purchase or sale of assets or other transactions with its affiliated enterprises except with the approval of the CBIRC.52 “Affiliated enterprise” means an enterprise which has any of the following relations with a foreign-funded insurance company: (1) There is a relationship of control in terms of shares or contributions; (2) Both are controlled by a third party in terms of shares or contributions; and (3) Other affiliations in terms of interests.53 A branch of a foreign insurance company shall, within three months after the completion of each fiscal year, submit to the CBIRC the financial accounting reports of the branch and the head office for the prior year, which shall be made public.54 If the head office of a foreign insurance company falls under any of the following circumstances, a branch of the foreign insurance company shall, within ten working days of the occurrence of the circumstance, file a relevant report with the CBIRC in writing: (1) The name, primary person in charge, or place of registration of the foreign insurance company is modified; (2) The capitalization of the foreign 45 46 47 48 49 50 51 52 53 54

Ibid., art.15. Ibid. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19(1). Ibid., art.19(2). Ibid., art.20(1). Ibid., art.20(2). Ibid., art.21.

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insurance company is modified; (3) A shareholder which holds 10% or more of the total capital or shares of the foreign insurance company is modified; (4) The scope of business of the foreign insurance company is adjusted; (5) The foreign insurance company is punished by the competent authorities of the country or region where it is located; (6) The foreign insurance company suffers heavy losses; (7) The foreign insurance company is divided, merged, or dissolved or is legally abolished or declared bankrupt; (8) Other circumstances as set out by the CBIRC.55 Where a foreign insurance company is dissolved or is legally abolished or declared bankrupt, the CBIRC shall require a branch of the foreign insurance company to cease developing any new business.56 A foreign-funded insurance company which engages in insurance using foreign exchange shall comply with the provisions of the state on foreign exchange administration.57 A foreign-funded insurance company which engages in the insurance business within China shall conduct pricing and settlement in Renminbi except with the approval of the administrative department of foreign exchange of the state.58 The Chinese versions of the documents, materials, and written reports submitted to the CBIRC under the RAFFIC shall be provided.59 5.2.5 Termination and liquidation Where a foreign-funded insurance company is divided or merged or a cause of dissolution as set out in its by-laws appears, it may be dissolved with the approval of the CBIRC.60 Where it is dissolved, a liquidation group shall be legally formed to conduct liquidation.61 A foreign-funded insurance company which engages in

55 Ibid., art.22. 56 Ibid., art.23. 57 Ibid., art.24(1). 58 Ibid., art.24(2). 59 Ibid., art.25. 60 Where an equity joint venture or wholly foreign-owned property insurance company applies for dissolution as a result of division, merger, or appearance of any cause of dissolution as set out in the company by-laws, it shall be subject to the approval of the CBIRC, and the following documents shall be submitted in triplicate: (1) A written application signed by the chairman of the board of directors of the company; (2) A resolution of the shareholders’ meeting of the company; (3) The composition of the liquidation group to be formed and a liquidation plan; and (4) A plan for dealing with outstanding liabilities (art.27 of the Implementation Rules 2019). 61 An equity joint venture or wholly foreign-owned property insurance company which is dissolved with the approval of the CBIRC shall cease conducting any new transactions from the date of receipt of the approval document of the CBIRC, surrender its permit for engaging in the insurance business to the CBIRC, and form a liquidation group within 15 days (art.28 of the Implementation Rules 2019). The liquidation group shall, within five days of its formation, notify in writing the industry and commerce, taxation, labour and social security, and other relevant administrative departments of the commencement of liquidation procedures for the company (art.29 of the Implementation Rules 2019). The liquidation group shall, within one month of its formation, engage an accounting firm satisfying the requirements of the CBIRC to conduct an audit and submit an audit report to the CBIRC within three months of the engagement (art.30 of the Implementation Rules 2019).The liquidation group shall, before the tenth day of each month, submit to the CBIRC a report on the latest repayment of debts and disposition of assets, among others (art.31 of the Implementation Rules 2019).

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life insurance shall not be dissolved except for the division or merger of the foreignfunded insurance company.62 Where the permit for engaging in the insurance business of a foreign-funded insurance company is revoked by the CBIRC for its violation of any law or administrative regulation, it shall be legally abolished, and the CBIRC shall legally organize the formation of a liquidation group in a timely manner to conduct liquidation.63 The liquidation of a foreign-funded insurance company as a result of its dissolution or legal abolition shall be announced three times at a minimum in newspapers64 within 60 working days of the formation of the liquidation group. The content of such announcement shall be subject to confirmation.65 Where a foreign-funded insurance company is unable to repay its due debts, it may, with the consent of the CBIRC, be legally declared bankrupt by the people’s court. Under the organization of the people’s court, a liquidation group shall be formed by the CBIRC and other relevant departments and personnel for the foreign-funded insurance company declared bankrupt to conduct liquidation.66 Where a foreign-funded insurance company is dissolved or legally abolished or declared bankrupt, it may not transfer any of its assets out of China before it has repaid its debts.67 5.2.6 Legal liability Any foreign-funded insurance company formed in violation of the provisions of the RAFFIC, or any illegal insurance operation, shall be banned by the CBIRC; the violator shall be held criminally liable in accordance with the provisions of the Chinese Criminal Law on the crime of illegal formation of a financial institution, the crime of illegal business operations, or any other crime; if the violation is not criminally punishable, any illegal income shall be confiscated by the CBIRC, and a fine of not less than the amount but not more than five times the amount of the illegal income shall be imposed by the CBIRC on the violator, or if there is no illegal income or the amount of illegal income is less than ¥200,000 yuan, a fine 62 The RAFFIC, art.26. According to art.31 of the Implementation Rules 2019, where a foreign property insurance company applies for removing its branch within China, it shall be subject to the approval of the CBIRC, and the following materials shall be submitted: (1) A written application signed by the chairman of the board of directors or the general manager of the foreign property insurance company; (2) The composition of the liquidation group to be formed and a liquidation plan.; and (3) A plan for dealing with outstanding liabilities. The specific procedures for an equity joint venture or wholly foreign-owned property insurance company to apply for dissolution in the RAFFIC and these Detailed Implementation Rules 2019 shall apply to a foreign property insurance company’s removal of its branch within China. Where a foreign property insurance company is dissolved or is legally abolished or declared bankrupt, the liquidation and the disposition of debts of a branch of the foreign property insurance company shall be conducted according to the corresponding provisions of art.30 of the RAFFIC and these Detailed Implementation Rules 2019 on the dissolution of an equity joint venture or wholly foreign-owned property insurance company. 63 The RAFFIC 2019, art.27. 64 The “newspapers” in art.28 of the RAFFIC means newspapers designated by the CBIRC (art.32 of the Implementation Rules 2019). 65 The RAFFIC 2019, art.28. 66 Ibid., art.29. 67 Ibid., art.30.

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of not less than ¥200,000 yuan but not more than ¥1 million yuan shall be imposed by the CBIRC on the violator.68 Where a foreign-funded insurance company engages in the insurance business beyond the affirmed scope of business, territories of business, or range of clients, in violation of the provisions of the RAFFIC, it shall be held criminally liable in accordance with the provisions of the Chinese Criminal Law on the crime of illegal business operations or any other crime; if the violation is not criminally punishable, the foreign-funded insurance company shall be ordered by the CBIRC to take corrective action and refund the premiums that have been collected, its illegal income shall be confiscated by the CBIRC, and a fine of not less than the amount but not more than five times the amount of the illegal income shall be imposed on it. If there is no illegal income, or the amount of illegal income is less than ¥100,000 yuan, a fine of not less than ¥100,000 yuan but not more than ¥500,000 yuan shall be imposed by the CBIRC on it, and if it fails to take corrective action during the specified period or there is any serious consequence, it shall be ordered to suspend business for a specified period or its permit for engaging in the insurance business shall be revoked.69 Where a foreign-funded insurance company falls under any of the following circumstances in violation of the provisions of the RAFFIC, it shall be ordered by the CBIRC to take corrective action, and a fine of not less than ¥50,000 yuan but not more than ¥300,000 yuan shall be imposed by the CBIRC on it, and if the circumstances are serious, it may be ordered to cease accepting any new transactions or its permit for engaging in the insurance business may be revoked: (1) It fails to set aside and place a deposit as required or uses the deposit in violation of the relevant provisions; (2) It transacts with an affiliated enterprise in violation of the relevant provisions; or (3) It fails to make up the deficit of registered capital or working capital as required.70 Where a foreign-funded insurance company falls under any of the following circumstances in violation of the provisions of the RAFFIC, it shall be ordered by the CBIRC to take corrective action during a specified period, and if it fails to do so during the specified period, a fine of not less than ¥10,000 yuan but not more than ¥100,000 yuan shall be imposed by the CBIRC on it: (1) It fails to submit the relevant documents, materials, or written reports as required; or (2) It fails to issue an announcement as required.71 Where a foreign-funded insurance company falls under any of the following circumstances in violation of the provisions of the RAFFIC, a fine of not less than ¥100,000 yuan but not more than ¥500,000 yuan shall be imposed by the CBIRC on it: (1) It provides any false document, material, or written report; or (2) It refuses or impedes any supervisory inspection legally conducted.72

68 69 70 71 72

Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35.

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Where a foreign-funded insurance company transfers any of its assets out of China in violation of the provisions of the RAFFIC, it shall be ordered by the CBIRC to transfer back such assets into China, and a fine of not less than 20% but not more than the value of the transferred asset shall be imposed.73 Where a foreign-funded insurance company violates any relevant law or administrative regulation of China or the provisions of the RAFFIC, the CBIRC may disqualify the senior executives of the company for such offices within China during a specified period or for life.74 5.3 The Implementation Rules for the RAFFIC In order to implement the decision of the central government to further expand the opening-up of the insurance sector and implement the newly revised RAFFIC, the CBIRC published the revised version of the Detailed Rules for the Implementation of the RAFFIC (the Implementation Rules 2019) on 29 November 2019, which became effective on the same day.75 The Implementation Rules 2019 further puts into effect the latest opening-up measures of the insurance sector, relaxes the restrictions on foreign ownership of joint-venture life insurance companies, and lifts the foreign ownership up to 51%.76 It also reserves regulatory space for the complete removal of the restrictions on foreign ownership in due course in 2020.77 The Implementation Rules 2019 relaxes the market entry requirements for foreign-funded insurance companies and removes entry requirements such as “30 years of operation” and “setting up representative offices as precondition”. In order to regulate the shareholding management of foreign-funded insurance companies, the Implementation Rules 2019 requires foreign-funded insurance companies to have at least one normaloperating insurance company as the main shareholder and further clarifies the responsibilities and obligations of the main shareholders so as to ensure their sustainable and healthy operation.78 In terms of unifying the regulatory standards for domestic and foreign-funded companies, the Implementation Rules 2019 removes provisions on the management of branches of foreign-funded insurance companies.79 Policies on foreign-funded insurance companies in setting up branch offices are in line with those on Chinese insurance companies.80 The qualification requirements of Chinese applicants to establish joint venture insurance companies are subject to the Measures for the Administration of the Equities of Insurance

73 Ibid., art.36. 74 Ibid., art.37. 75 The CBIRC Order No. 4 [2019]. 76 The Implementation Rules 2019, art.3. 77 Ibid. 78 Ibid., arts.4–6. 79 Ibid., art.25(3). 80 Ibid., art.25(3). The branches of local insurers and those of foreign-funded insurers are now regulated by the Administrative Measures for the Market Access of Branch Offices of Insurance Companies, the CIRC Order No. 20 [2013] (see accessed on 14 October 2020).

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Companies 201881 to ensure the consistency of regulatory standards over domestic and foreign companies.82 5.3.1 Removal of foreign shareholding cap for life insurance companies There had been a long-standing cap of 50% on foreign shareholding for foreignfunded life insurance companies for nearly two decades, dating back to the time when China initially opened up its insurance sector to foreign investors in 2002 under China’s WTO accession commitments. The CIRC allowed only up to 50% foreign ownership in life insurance companies in the past. For this reason, the majority of foreign life insurers in China were/are joint ventures with 50/50 ownership split between the foreign insurer and the domestic company.83 For non-life insurance, there was and still is no limit on foreign ownership, so foreign players are allowed to invest up to 100% of foreign ownership, with CBIRC’s approval. The situation started to change just a few years ago. In July 2018, the foreign shareholding cap was raised to 51% with the intention that the cap would be completely removed in 2021.84 The 51% foreign shareholding cap remained unchanged under art.3 of the Implementation Rules 2019. On 6 December 2019, the CBIRC issued the Notice on Clarifying Timing of Removing Foreign Ownership Restrictions on Joint Venture Life Insurance Companies, setting out three points, as follows:85 (1) Starting from 1 January 2020, the restriction on foreign ownership in joint-venture life insurance companies is officially removed. Foreign ownership in joint-venture life insurance companies can reach 100%; (2) Relevant parties may submit applications to the CBIRC in accordance with the RAFFIC and the Implementation Rules 2019 and this Notice. The CBIRC shall review and approve the applications in accordance with relevant laws and regulations; (3) The CBIRC will start the revision of the provision of “foreign ownership shall not exceed 51% of the company’s total 81 The CIRC Order No. 5 [2018] (see accessed on 14 October). For more on the topic of equity administration, see chapter 8 of this book. 82 The Implementation Rules 2019, art.15. 83 The Implementation Rules 2019, art.3 provides that: [w]here foreign insurance companies and Chinese companies or enterprises form insurance companies engaging in the personal insurance business within China in the form of equity joint ventures (EJV life insurance companies), the foreign stake in such a joint venture shall not exceed 51% of the total shares of the joint venture. The shares held directly or indirectly by foreign insurance companies in an EJV life insurance company shall not exceed this percentage limit (see accessed in April 2016).

84 The Market Access by Foreign Investors Special Administrative Measures for Foreign Investment Access (Negative List) (2018 Version) promulgated by the National Development and Reform Commission and the Ministry of Commerce on 28 June 2018. 85 The CBIRC Order No. 230 [2019] (see accessed on 14 October 2020). In this Notice, it is said that on 20 July 2019, the Office of the Financial Stability and Development Committee of the State Council released the Relevant Measures for Further Opening up Financial Sector and brought forward the transitional period of completely removing foreign ownership restrictions on foreign-funded life insurance companies to 2020. To put into effect the just-mentioned opening-up measures, relevant specific matters are hereby notified.

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equity capital” in the existing Implementation Rules (the version of 29 November 2019), which will be reissued after revision. 5.3.2 Introduction of the “major shareholder” requirement by the 2019 version of the Implementing Rules Article 4 of the Implementing Rules 2019 requires that a foreign-fund insurance company shall have at least one insurer with normal business operations as its major shareholder. The major shareholder requirement is a newly imposed concept and comes with certain obligations. It applies not only to foreign-funded life companies but also to foreign-funded property companies. By art.4 of the Implementing Rules 2019, a “major shareholder” of a foreign-funded insurance company refers to a shareholder who has the highest shareholding percentage (calculated on an aggregated basis with its affiliates and operations and management of the persons acting in concert) or who otherwise exerts a material influence on the foreignfunded insurance company as defined under applicable laws, administrative regulations, and stipulations by CBIRC. Articles 5 and 6 of the Implementation Rules 2019 impose certain obligations on major shareholders. First, art.5 stipulates that major shareholders shall promise not to transfer the shares held by them within five years from the date of obtaining the shares. This must be provided in the Articles of Association of the foreign-funded insurance company. This five-year lock-up obligation is excepted in certain special circumstances, that is, share transfer approved by the CBIRC for risk management purpose, ordered by the CBIRC pursuant to applicable laws, as part of a judicial enforcement process, or among various entities controlled by the same controller.86 Second, if a major shareholder of a foreign-funded insurance company intends to reduce its shareholding or withdraw from the Chinese market, it shall perform its shareholder obligations to ensure that the solvency of the insurance company meets regulatory requirements.87 These institutional arrangements are conducive to further improving the regulatory system of equity management of foreign insurance companies, optimizing the governance institutions of foreign insurance companies, and ensuring the continuous and stable operation of foreign insurance companies. 5.3.3 New rules to eligibility criteria for the Chinese partner to a joint venture insurance company In the past, the eligibility requirements for the Chinese partner to a joint venture insurance company were provided in art.16 of the 2018 version of the Implementation Rules.88 Generally, the Chinese applicant had to be a company or enterprise with legal personality, with good operational status, and profitable in the year preceding the application date.89 Article 15 of the 2019 version of the Implementa86 87 88 89

The Implementation Rules 2019, art.5(2). Ibid., art.6. The CIRC Order No. 4 [2018]. The Implementation Rules 2018, art.16.

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tion Rules provides that Chinese applicants for the establishment of joint venture insurance companies must comply with the conditions and requirements as set out in the Measures for the Administration of Equity in Insurance Companies.90 This is to ensure the harmonization of relevant regulatory requirements. 5.3.4 Unified rules for establishment of branch offices by domestic and foreign-funded insurance companies Prior to December 2019, there were separate requirements for a foreign-funded insurance company to set up branch offices in provinces or cities outside its place of establishment. Under the Implementing Rules 2019, such separate requirements have now been abolished. Article 25 of the Implementation Rules 2019 stipulates that the establishment and administration of branch of a foreign-funded insurance company shall follow relevant CBIRC rules. Such relevant rules refer to the Provisions on the Administration of Insurance Companies (2015)91 and also the Administrative Measures for the Market Access of Branch Offices of Insurance 2013;92 these rules used to apply only to domestic capital insurance companies but now apply to both domestic and foreign-funded insurance companies. One benefit to the foreign-funded insurance companies arising from the unification of the rules is that for certain types of applications, such as establishment of branch offices below provincial level, the local offices of the CBIRC can approve the application. This means less bureaucracy and faster approvals. In summary, the changes under the new Implementation Rules 2019 and the Notice on Clarifying Timing of Removing Foreign Ownership Restrictions on Joint Venture Life Insurance Companies 2019 reflect China’s most recent commitments to further open up its financial service industry. A more unified regulatory approach that applies equally to both domestic and foreign-funded insurance companies has been instituted. It is anticipated that China will continue to adopt further measures to speed up the opening-up of its insurance sector. 5.4 Administration for representative offices of foreign insurance institutions in China Representative offices refers to the representative offices and general representative offices established by “foreign insurance institutions” inside the territory of China upon approval, engaging in liaison, market investigations, and other similar nonbusiness activities. The basic statutory provision regulating a representative office is provided in art.80 of the Insurance Law: Setting up representative offices within the territory of China by foreign insurance companies shall be subject to the approval of the insurance supervision and regulation 90 The CIRC Order No. 5 [2018]. 91 The CIRC Order No. 3 [2015]; for more on the topic of formation of branch office, see chapter 4 of this book. 92 The CIRC Order No. 20 [2013], published on 15 March 2013 and became effective on 1 April 2013.

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authority of the State Council. None of such representative offices shall carry out any insurance operating activity.

The current regulation for representative offices of foreign insurance institutions is the Measures for the Administration of Foreign Insurance Institutions’ Representative Offices in China 2018 (the Measures for Representative Offices 2018), which consists of 47 articles in five chapters. We now consider the matters on establishment, supervision, and legal liabilities of representative offices in China. 5.4.1 Establishment of representative offices A foreign insurance institution (the applicant) must apply to the CBIRC for establishing a representative office in China. The applicant shall meet a number of requirements and conditions:93 (1) Its business operational status is good; (2) It has been engaged in the insurance business for 20 years or more if it has any insurance business, or 20 years or more shall have lapsed since its establishment if it has no insurance business;94 (3) It has no record of violation of any law or regulation within three years prior to the application date; and (4) other prudential conditions prescribed by the CBIRC. The calculation of the time period of a foreign insurance institution’s engagement in the insurance business shall not be affected if it merges with any other institution or if it forms a new insurance institution by combining with any other institution.95 The time period of engagement in the insurance business by a subsidiary of a foreign insurance institution shall be calculated from the establishment of this subsidiary. The time period of engagement in the insurance business by a foreign insurance group corporation shall be calculated from the following two dates, whichever is earlier: (1) the date on which the group begins to engage in the insurance business; and (2) the date on which its subsidiary starts to engage in the insurance business.96 An applicant shall submit the following application materials: (1) A formal application form; (2) An application letter to the chairman of CBIRC which is signed by the board chairman or general manager; (3) A photocopy of the business license or lawful certificate for opening the business or registration certificate issued by the relevant competent authority of the country or region where the applicant is located; (4) The Articles of Association, a name list of the members of the board of directors, and a name list of the management personnel or main partners; (5) The annual reports of the three years prior to the application date; (6) The opinions issued by the relevant competent authority of the country or region on the applicant’s establishment of the representative office in China, or a recommendation

93 The Measures for the Administration of Foreign Insurance Institutions’ Representative Offices in China 2018, art.5. 94 The phrase “has been engaged in insurance business for 20 years or more” means that the foreign insurance institution has engaged in insurance business for 20 consecutive years or more. 95 The Measures for the Administration of Foreign Insurance Institutions’ Representative Offices in China 2018, art.5. 96 Ibid.

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letter issued by the industrial association. The opinions or recommendation letter shall state the penalties imposed upon the applicant during the three years prior to their/its issuance; (7) The research report on the feasibility and necessity of the establishment of a representative office; (8) An authorization to the chief representative, which is signed by the board chairman or general manager; (9) A declaration of the applicant that the chief representative candidate has no record of penalty due to any serious violation of law or regulation within three years prior to the application date; (10) A resume of the chief representative candidate; (11) Other documents prescribed by CBIRC. The materials submitted by an applicant shall be authentic and valid.97 An applicant shall submit the application documents to the CBIRC that shall handle the applications for the establishment of representative offices in light of the following circumstances, respectively: (1) If there is any error in the application documents that can be corrected on the spot, it shall permit the applicant to correct such error on the spot; (2) If the application documents are not complete or are not presented in the statutory form, it shall, either on the spot or within five working days thereafter, inform the applicant once and for all of the contents to be supplemented, otherwise it shall be deemed to have accepted the application as of the date of receiving the application documents; (3) If the application documents are complete and in the statutory form, or the applicant has submitted all the supplemented application documents as required, it shall accept the application. Whether or not the CBIRC accepts an application, it shall issue a written document bearing a special seal and with the date indicated on it.98 The CBIRC shall, according to the prudential principle, examine the application for the establishment of a representative office and shall make a decision on whether or not to approve it within 20 working days after the acceptance date. If it is unable to make such a decision within 20 working days, it may extend the time limit by ten working days upon approval of the Chairman of the CBIRC and shall inform the applicant of the reason for extension. The CBIRC shall issue an approval certificate if it decides to approve an application; otherwise, it shall make an explanation in writing.99 After a representative office obtains an approval document, it shall go through the industrial and commercial registration under relevant previsions.The representative office shall move into a fixed office within three months after it obtains the approval document and shall report the following matters to the CBIRC: (1) the certification for industrial and commercial registration; (2) the certification for the lawful right to use the office; (3) the telephone number, fax number, and post address of the office; and (4) the mobile phone number and e-mail address of the chief representative. If the representative office fails to move into a fixed office site within three months, the original approval document shall be automatically invalidated.100

97 98 99 100

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9.

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5.4.2 Supervision and administration A representative office must abide by the laws and regulations of China and the relevant provisions of CBIRC. The legal rights and interests of the representative offices shall be under the protection of Chinese law.101 The CBIRC shall, in accordance with the law and upon the authorization of the State Council, perform its supervisory functions towards the representative offices. The local offices of the CBIRC shall, within the scope of authorization of CBIRC, conduct daily supervision on the representative offices within their respective jurisdiction on behalf of the CBIRC.102 The name of a representative office shall be composed of the following contents in sequence: “the name of the country or region where the foreign insurance institution is located”, “the name of the foreign insurance institution”, “the name of the local city” and the “representative office”; the name of a general representative office shall be composed of the following contents in sequence: “the name of the country or region where the foreign insurance institution is located”, “the name of the foreign insurance institution”, and “general representative office in China”.103 Except for the principal responsible person, the main employees of a representative office shall be referred to as “representatives” or “deputy representatives”.104 The employees of a representative office shall abide by the laws and regulations of China, be of good conduct, and have no criminal records.105 The general representatives and chief representatives shall have the education background, practical experience, and work ability which are essential for them to perform their duties. A general representative shall have no fewer than eight years of work experience, and a college diploma or above. A chief representative shall have no fewer than five years of work experience and a college diploma or above. Where a general representative or chief representative does not have a college diploma or above, he or she shall have no fewer than ten years of practical insurance experience.106 There shall be no more than three foreign employees in a representative office.107 No representative office or none of the employees of a representative office may engage or participate in any insurance business activities.108 A representative office shall have an independent and fixed office and full-time employees.109 No general representative or chief representative may concurrently assume posts in two or more representative offices, or concurrently assume a post in any other commercial institution.110 101 102 103 104 105 106 107 108 109 110

Ibid., art.3. Ibid., art.4. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17.

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A general representative or chief representative shall permanently stay in the representative office to be responsible for the routine work. He or she shall stay in the representative office for no fewer than accumulatively 240 days each year.111 A general representative or chief representative shall not leave the representative office for 30 consecutive days each time. If he or she leaves the representative office for 14 consecutive days, he or she shall designate a special person to perform the duties on his behalf and submit a written report to the local office of the CBIRC.112 A representative office shall, by the end of February each year, submit a previousyear work report in duplicate to the CBIRC via the local office of the CBIRC. The work report shall be filled out according to the format as prescribed by the CBIRC.113 A representative office shall, within six months after the end of the fiscal year of the foreign insurance institution it represents, submit a previous-year annual report of the foreign insurance institution which it represents to the CBIRC and to the local office of the CBIRC, respectively.114 Where the foreign insurance institution represented by a representative office is under any of the following circumstances, the representative office shall, within ten working days as of the occurrence of the event, submit a written report to the CBIRC, and simultaneously send a copy to the local office the CBIRC: (1) The company’s Articles of Association, registered capital, or the registered address is modified; (2) The foreign insurance institution is split up or merged or its main person-in-charge is changed; (3) The foreign insurance institution is operating at a heavy loss; (4) The foreign insurance institution is punished due to violation of any law or regulation; (5) The relevant competent authority of the country or region where the foreign insurance institution is located takes major supervisory measures against the said institution; (6) Other events that severely affect the foreign insurance institution’s business.115 Where a representative office changes its general representative or chief representative, it shall file an application with the CBIRC and submit the following materials: (1) An application letter addressed to the Chairman of the CBIRC, which is signed by the chairman of the board of directors or by the general manager of the foreign insurance institution it represents; (2) An authorization to the general representative candidate or chief representative candidate, which is signed by the chairman of the board of directors or by the general manager of the foreign insurance institution it represents; (3) The identity certificate, education certificate, and resume of the general representative candidate or chief representative candidate; and (4) Other materials as required by the CBIRC.116 Where a representative office intends to modify its name, it shall file an application with the CBIRC and submit the following materials: (1) an application form for modifying the name; (2) an application letter addressed to the Chairman of the CBIRC, which is signed by the Chairman of the board of directors or by the 111 112 113 114 115 116

Ibid., art.18(1). Ibid., art.18(2). Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

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general manager of the foreign insurance institution it represents; and (3) other materials as required by the CBIRC.117 A foreign insurance institution which has established two or more representative offices within the territory of China may designate one of the representative offices as the general representative office, but it shall, in accordance with art.23 of the Measures for Representative Offices 2018, apply to the CBIRC for changing the name of this representative office into the general representative office. If a representative office is changed to the general representative office, the general representative office shall go through industrial and commercial formalities for modifying the registration of the representative office.118 Where a representative office intends to change its general representative, chief representative, or changes its name, it shall file an application with the CBIRC in accordance with the Measures for Representative Offices 2018. The CBIRC shall, within 20 working days after it accepts the application, make a decision of approval or disapproval. If the CBIRC decides to approve the application, it shall issue an approval document to the applicant. If it decides to disapprove it, it shall make a written decision and make an explanation.119 A representative office can only change its office within the administrative area of the city where it is located, and shall, within five working days after it changes its office, report in writing the following matters to the CBIRC and the local office of the CBIRC: (1) the certificate for the lawful right to use the new office; and (2) the telephone number, fax number, and post address of the new office. The “change of office” includes moving, expanding, reducing, and increasing space in an office.120 Where a representative office is to be cancelled, a written application containing the following matters shall be filed to the CBIRC: (1) an introduction to the representative office to be cancelled; and (2) a photocopy of the document of the foreign insurance institution on the cancellation of the representative office.121 Where a representative office changes, increases, or reduces its representative, deputy representative, or any foreign employee, it shall, within five working days after the person is changed, added, or removed, report to the local institution dispatched by the CBIRC and submit the certificates of identity and education background as well as the resumes of the appointed staff.122 Where, after the representative office of a foreign insurance institution is cancelled, if the general representative office is the only representative office of this foreign insurance institution in China, the general representative office shall, in accordance with art.23 of the Measures for Representative Offices 2018, file an application with the CBIRC for changing itself from a general representative office into a representative office.123 117 118 119 120 121 122 123

Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29.

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Where, after a representative office is cancelled, if the foreign insurance institution it represented still has a general representative office, the said general representative office shall be responsible for the unsettled matters. If there is no general representative office, other representative offices of the foreign insurance institution it represented shall be responsible for the unsettled matters. If all the representative offices of the foreign insurance institution it represented have been cancelled, the foreign insurance institution it represented shall be responsible for the unsettled matters.124 Where necessary, the CBIRC or its local office may, for the purpose of supervision, interview the general representative or chief representative of the representative office, warn him or her of the risks and require him or her to make an explanation about the relevant problems.125 The CBIRC and its local office shall conduct routine and annual inspections over a representative office, which cover: (1) whether or not the formalities for the modification of the representative office are complete; (2) whether or not the contents of the application materials are consistent with the actual circumstances; (3) whether or not the formalities for the appointment or change of the employees of the representative office are complete; (4) whether or not the representative office engages in business activities; and (5) other matters which the CBIRC or its local office deems necessary to be inspected.126 5.4.3 Legal liabilities Any representative office established without approval by violating the Measures for Representative Offices 2018 shall be banned by the CBIRC in accordance with the law.127 Anyone who engages in insurance business activities by violating the Measures for Representative Offices 2018 shall be punished by the CBIRC in accordance with the relevant laws and regulations.128 Anyone who fails to submit the report or documents required by the Measures for Representative Offices 2018 shall be ordered to make a correction and be given a warning by the local office of CBIRC. If the circumstance is serious, he or she shall be fined ¥1,000 yuan.129 Where a representative office engages in insurance business activities by violating the Measures for Representative Offices 2018, the directly liable employee of the representative office shall be given a warning by the CBIRC. If the circumstance is serious, he or she shall be fined no more than ¥5,000 yuan. Where a representative office engages in other business activities by violating the Measures for Representative Offices 2018, the directly liable employee of the representative office shall be given a warning by the CBIRC. If the circumstance is serious, he or she shall be fined no more than ¥1,000 yuan.130 124 125 126 127 128 129 130

Ibid., art.30. Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36.

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Where a representative office provides any false information or conceals any important fact, it shall be given a warning.131 Where a representative office violates other provisions of the Measures for Representative Offices 2018, it shall be ordered to make a correction. If it fails to do so, it shall be given a warning.132 The local office of the CBIRC shall report in a timely manner to the CBIRC the information about the punishments given to the representative offices. If a representative office has been given an administrative sanction by the CBIRC or its local office three times or more, or if a representative office obtains a huge amount of illegal gains from the business activities in which it engaged or participated and causes any serious consequences, the CBIRC may regard the punishments given to the representative office as a prudent condition when the foreign insurance institution, which the said representative office represents, applies for establishing a foreign-funded insurance company in China.133 5.5 Conclusion China has further opened its insurance industry to foreign investors. The State Council promulgated the amended RAFFIC (effective on 30 September 2019) that has eliminated two key requirements for the formation of a foreign-funded insurance company in China – the 30-year insurance experience and the two-year representative office in China. The requirements previously had either delayed or prevented potential foreign investors from entering the Chinese insurance market.134 In addition, the RAFFIC 2019 shows two more changes: First, the RAFFIC 2019 now allows the parent holding or group company (which itself may not be an insurance company) of an insurance company to hold equity directly in the Chinese subsidiary insurance company rather than having to make the investment from an insurance company itself.135 In the past, the CBIRC required that the parent itself had to be an insurance company and operate the same types of insurance as the to-be-formed Chinese subsidiary – this means the parent of a life insurance subsidiary in China had to be a life insurance company (not a travel or other kind of insurance company or an upper-level parent of the life insurance company if the parent itself was not a life insurance company).This change makes it easier to meet the US$5 billion total asset value qualification requirement, because the upper-level holding or group company may have US$5 billion total assets,136 although each insurance company alone subordinated to it may not have US$5 billion in assets.137

131 Ibid., art.37. 132 Ibid., art.38. 133 Ibid., art.39. 134 The RAFFIC 2019, art.8. 135 Ibid., art.40. 136 Ibid., art.8. 137 Brinton Scott, Suan Deng and Jane Zhou, “China Implements Revised Regulations Further Opening the Insurance Industry”, 21 October 2019 (see accessed on 14 October 2020).

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Second, the RAFFIC 2019 now also allows foreign non-insurance financial institutions to co-invest with foreign insurance companies into a foreign-invested insurance company in China.138 In the past, foreign non-insurance financial institutions were not allowed to co-invest with foreign insurance companies in any Chinese insurance company and could only co-invest with Chinese domestic investors or other foreign non-insurance financial institutions into Chinese insurance companies that have no more than 25% foreign ownership. The issues, including, among others, qualification requirements and the shareholding ratio cap for a foreign non-insurance institution investment in such foreign-funded insurance company, remain to be addressed and clarified by the CBIRC.139 The new Implementation Rules (effective on 29 November 2019) and the Notice on Clarifying Timing of Removing Foreign Ownership Restrictions on Joint Venture Life Insurance Companies (6 December 2019) set out three key opening-up policies to foreign-funded insurers: First, with effect from 1 January 2020, the foreign shareholding equity cap applicable to joint venture foreign-funded life insurers is abolished. From that date, foreign shareholdings in foreign-funded life insurance companies are not limited, including the ability of foreign shareholder(s) to hold 100% of the equity. Second, foreign-funded life insurance companies, in establishing and managing branches within China, are now governed by one and the same pre-existing regulations which have governed and continue to govern the establishment and management of branches by domestic-invested insurance companies – that is, the Administrative Measures for the Market Access of Branch Offices of Insurance 2013. Third, qualifying criteria for prospective and current domestic shareholders (if any) of foreign-funded life insurance companies are now governed by one and the same pre-existing regulations which have governed and continue to govern domestic-invested insurance companies – that is, the Measures for the Administration of Equity of Insurance Companies 2018. By the enactment of the new regulations in respect of the market entrance and administration for foreign-funded insurance companies, China has demonstrated that the door is open wider to foreign investors. There is no doubt that China will continue to take further measures to accelerate the opening up of its insurance market.

138 The RAFFIC 2019, art.41. 139 Ibid.

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CHAPTER 6

Regulation of administrative licencing and insurance permits

6.1 Introduction Insurance institutions that intend to engage in insurance activities in China must be licensed before they can operate. The requirements and procedures for licensing must be clear, objective, and public and must be consistently applied.1 Licensing contributes to efficiency and stability in the insurance sector. Strict conditions governing the formal approval through licensing of insurance legal entities are necessary to protect consumers. The relevant licensing criteria should be applied to prospective entrants consistently to promote a level playing field at point of admission to the insurance sector. Licensing requirements and procedures should not be used inappropriately to prevent or unduly delay access to the market.2 The China Banking and Insurance Regulatory Commission (the CBIRC), its local offices (Banking and Insurance Regulatory Bureaus and Banking and Insurance Regulatory Sub-Bureaus) are responsible for the implementation of administrative licensing and administration of insurance permits. The China Insurance Regulatory Commission (the CIRC, the predecessor of the CBIRC) formulated the first regulation for matters on administrative licensing, namely, the Measures of the CIRC on the Implementation of Administrative Licensing, on 30 June 2004, which came into force on 1 July 2004.3 The Measures were amended on 14 February 2014.4 The 2014 version of the Measures has now been repealed by the Provisions of the CBIRC on the Implementation Procedures of Administrative Licensing, which was issued by the CBIRC on 24 May 2020 and came into force on 1 July 2020 (hereinafter, the Provisions of Licensing).5 The CIRC also formulated the Measures for the Administration of Insurance Permits on 22 June 2007, which came into force on 1 September 2007 (hereinafter,

1 International Association of Insurance Supervisors, Insurance Core Principles and Common Framework for the Supervision of Internationally Active Insurance Groups (updated in November 2019), ICP 4 Licensing (see accessed on 14 October 2010). 2 Ibid., ICP 4.0.1. 3 The CIRC Order No. 4 [2004]. 4 The CIRC Order No. 2 [2014]. 5 The CBIRC Order No. 7 [2020] (see accessed on 14 October 2020)

DOI: 10.4324/9781351122863-6

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the Measures of Permits),6 and are still effective. In addition, the CIRC issued the Notice of CIRC on the Relevant Matters Concerning the Implementation of the Measures for Administration of Insurance Permits on 13 August 2007.7 The Provisions of Licensing 2020 and the Measures of Permits 2007 are the two major regulations for insurance licensing. In this chapter, we consider the regulations on administrative licensing and insurance permits in China. 6.2 The principles of insurance licensing The role of the CBIRC in licensing is to assess whether insurance legal entities are able to fulfil their obligations to insureds on an ongoing basis. The licensing procedure is the first step towards achieving this objective. The CBIRC shall follow the principles of openness, fairness, justice, non-discrimination, efficiency, and convenience for the implementation of administrative licensing. Where laws and administrative regulations stipulate that the implementation of administrative licensing should follow the principle of prudent supervision, the provisions shall be followed.8 All insurance institutions engaged in insurance activities must be licensed. The applicant for administrative licensing must satisfy certain conditions and requirements: It must have a sound business and financial plans; must have a corporate or group structure that does not hinder effective supervision; must establish that the applicant’s board members, both individually and collectively, senior management, key persons in control functions, and significant owners are suitable; must have an appropriate governance framework; and must satisfy capital requirements.9 These and other requirements are all made publicly available at the website of the CBIRC.10 Guidelines on how to file an application for a license, which include advice on the required format of documents and the expected time it would take to process an application upon the receipt of all relevant documents, are also provided by the CBIRC on the same website. The CBIRC assesses applications, makes decisions, and informs applicants of the decision within a reasonable time, which is clearly specified, and without undue delay in the Provisions of Licensing 2020.11 The CBIRC requires a legal entity to submit an application if it proposes to conduct insurance activities. The application should include information on the

6 The CIRC Order No. 1 [2007] (see accessed on 14 October 2020). 7 Bao Jian Fa No. 70 [2007] (see accessed on 14 October 2020). 8 The Provisions on Implementation Procedures of Administrative Licensing 2020, art.3. 9 The ICP, 4.4. 10 See the CBIRC website accessed on 14 October 2020. 11 The Provisions on Implementation Procedures of Administrative Licensing 2020, articles 11, 15 and 19.

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types of business to be written and contain all the documents and information required by the regulation to confirm that the licensing requirements are met.12 In instances where the application is deemed not complete, the CBIRC informs the applicant without delay, and the applicant is given the opportunity to provide additional information to complete the application.13 In assessing the application, the CBIRC can sometimes rely on external bodies and consider the reports or opinions from various sources carefully and apply their own judgment in making the final decision on the application. In the course of reviewing the application, the decision-making authority may directly organize, or entrust the lower-level authority, or request the applicant, to organize expert review for the application matters that are difficult, complex, or highly technical, and to form a written review opinion signed by the experts.14 The CBIRC shall make its assessment and finalize its decision within a reasonable time frame and without undue delay. A time period is indicated to the applicant for the assessment procedure, commencing from the date on which all complete application documentation has been submitted to the CBIRC. Within this period, the CBIRC can decide on the acceptability of the application for a license.15 The CBIRC refuses to issue a license if the applicant does not meet the licensing requirements. If the license is denied, the applicant is provided with an explanation.16 A license clearly states its scope and the classification of insurance activities that the insurance legal entity is licensed to conduct. The CBIRC publishes a list of licensed insurance legal entities and the scope of the licenses granted and clearly states the scope of license that has been granted to each insurance legal entity. This provides clarity to the public as to which entities are licensed for specific classes of business.17 6.3 Administrative licensing and insurance permits “Administrative licensing” means the acts that the CBIRC or its local offices perform, under relevant laws, administrative regulations, and authorization decided by the State Council. These acts include examining the applications filed by the citizens, insurance institutions, and other legal persons or organizations and determining whether to permit them to conduct particular activities. Insurance permits are uniformly designed and printed by the CBIRC and authorized to insurance holding companies and insurance group companies, insurance companies, insurance asset management companies, and insurance intermediaries 12 Ibid., art.7. For example, see the CBIRC website for the application materials required for formation of insurance companies ( accessed on 14 October 2020). 13 The Provisions on Implementation Procedures of Administrative Licensing 2020, art.11. 14 Ibid., art.22. 15 Ibid., art.30. 16 Ibid., art.31. 17 See the website of the CBIRC accessed on 24 September 2020.

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that operate insurance business. Insurance permits are numbered in a unified manner and stamped with the CBIRC’s seal. An insurance holding company or insurance group, or any of its subsidiaries, that does not engage in the insurance business or insurance asset management business does not need to obtain an insurance permit.18 The information recorded in an insurance permit is consistent with that in the decision to grant administrative licensing.19 Where the CBIRC makes a decision to grant administrative licensing, if an insurance permit is required to be issued, the permit shall be issued to the applicant for administrative licensing.20 6.3.1 The scope of administrative licensing The Insurance Law provides situations where administrative licensing is needed in a number of articles. (1) Formation of an insurance company. The formation of an insurance company shall be subject to the approval of the insurance supervision and regulation authority of the State Council. When examining an application for formation of an insurance company, the insurance supervision and regulation authority of the State Council shall consider the needs of the insurance industry for development and fair competition.21 Upon the approval of the insurance supervision and regulation authority of the State Council in conjunction with the securities regulatory authority of the State Council, insurance companies may set up insurance asset management companies.22 (2) Post-holding qualification of senior staff. The directors, supervisors, and senior managers of insurance companies shall have good conduct, be familiar with laws and administrative regulations on insurance, have the management capability required for performing their duties, and have obtained the corresponding post-holding qualifications approved by the competent insurance regulatory authority before holding posts. The scope of senior managers of insurance companies shall be prescribed by the insurance supervision and regulation authority of the State Council.23 The senior managers of a full-time insurance agent or an insurance broker shall have good conduct, be familiar with insurance laws and administrative regulations, have the management capability required for performing their duties, and have obtained the corresponding post-holding qualifications approved by the insurance supervision and regulation authority before holding posts.24 18 The Notice of CIRC on the Relevant Matters Concerning the Implementation of the Measures for Administration of Insurance Permits 2007, s.3. 19 The Measures for the Administration of Insurance Permits 2007, art.11. 20 Ibid., art.12. 21 The Insurance Law, art.67. 22 Ibid., art.107. 23 Ibid., art.81. 24 Ibid., art.121.

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(3) Alteration of circumstances. An insurance company shall obtain the approval of the insurance supervision and regulation authority under any of the following circumstances:25 (i) change of name; (ii) change of registered capital; (iii) change of business premises of the company or a branch office thereof; (iv) cancellation of a branch office; (v) split or merger of the company; (vi) amendment of the Articles of Association; (vii) change of any shareholder whose amount of capital contribution accounts for 5% or more of the total capital of the company which is a limited liability company, or change of any shareholder who holds 5% or more of the shares of the company which is a joint-stock limited company; or (viii) any other circumstance as specified by the insurance supervision and regulation authority of the State Council. (4) Dissolution of an insurance company. Where an insurance company needs to be dissolved as a result of any split, merger, resolution of the shareholders’ meeting, or occurrence of a cause of dissolution prescribed in the Articles of Association of the company, it shall be dissolved upon the approval of the insurance supervision and regulation authority of the State Council. An insurance company which operates the life insurance business shall not be dissolved except for any split, merger, or cancellation according to law.26 (5) Restructuring, reconciliation, or bankruptcy liquidation of an insurance company. Where an insurance company falls under any of the circumstances prescribed in article 2 of the Enterprise Bankruptcy Law of China, upon approval of the insurance supervision and regulation authority of the State Council, the insurance company or any creditor thereof may apply to the people’s court for restructuring, reconciliation or bankruptcy liquidation; the insurance supervision and regulation authority of the State Council may also apply to the people’s court for subjecting the company to restructuring or bankruptcy liquidation.27 (6) Business licensing. The scope of business of an insurance company shall be as follows: (i) personal insurance, including life insurance, health insurance, accidental injury insurance, etc.; (ii) property insurance, including property loss or damage insurance, liability insurance, credit insurance and surety bonds, etc.; and (iii) other insurance-related businesses approved by the insurance supervision and regulation authority of the State Council. No insurer shall concurrently operate the personal insurance business and the property insurance business. However, upon the approval of the insurance supervision and regulation authority of the State Council, an insurance company which operates the property insurance business may operate the short-term health insurance business and the accidental injury insurance business. Insurance companies shall operate insurance businesses within the scope of business approved by the insurance supervision and regulation authority of the State Council.28 25 26 27 28

Ibid., art.84. Ibid., art.89. Ibid., art.90. Ibid., art.95.

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Upon the approval of the insurance supervision and regulation authority of the State Council, an insurance company may operate the following reinsurance of the insurance businesses prescribed in article 95 of this Law: (i) outward reinsurance; and (ii) inward reinsurance.29 (7) Insurance intermediaries licensing. Insurance agencies and insurance brokers shall satisfy the requirements prescribed by the insurance supervision and regulation authority of the State Council, and have obtained the insurance agency business license or brokerage business license issued by the insurance supervision and regulation authority.30 In accordance with the Insurance Law, the Provisions of Licensing 2020 set forth the matters on which administrative licensing is required. The administrative licensing matters of the CBIRC for insurance institutions and other financial institutions supervised and administrated by the CBIRC include the licensing matters on establishment, alteration, and termination of the institutions, business licensing matters, licensing matters for the qualifications of directors or supervisors or senior management personnel of insurance institutions and other insurance related financial institutions, and other licensing matters according to laws, administrative regulations, or decided by the State Council.31 6.3.2 The types and content of insurance permits Insurance permits include the following types:32 corporate permit and insurance business permit of an insurance company, permit for insurance marketing services, permit for insurance agent business, permit for insurance brokerage business, permit for insurance adjuster business, permit for sideline insurance agent business, and corporate permit and insurance asset management business permit of an insurance asset management company. An insurance permit shall record the following information:33 the name of the institution, the code of the institution, the domicile of the institution, the business scope of the institution, the territorial scope of the institution, the date when the decision to grant administrative licensing is made, the date of issuance of the permit, and the authority issuing the permit. An insurance permit may take effect only after the official seal of the CBIRC is affixed thereto. 6.4 The Provisions on Implementation Procedures of Administrative Licensing In line with the reform of the banking and insurance regulatory system and in order to standardize and unify the implementation procedures of administrative 29 30 31 32 33

Ibid., art.96. Ibid., art.119. The Provisions on Implementation Procedures of Administrative Licensing 2020, art.4. The Measures for the Administration of Insurance Permits 2007, art.5. Ibid., art.9.

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licensing in the banking and insurance sectors, the CBIRC recently issued the Provisions on Implementation Procedures of Administrative Licensing 2020. The Provisions of Licensing 2020 covers main procedural issues involved in the whole process of administrative licensing. It focuses on continuously streamlining administration and delegating power, further improving administrative licensing procedures, conducting administrative licensing work in a sound and standardized manner, and protecting the lawful rights of applicants. The Provisions of Licensing 2020 consists of 40 articles in six chapters that are applicable to banking and insurance institutions. 6.4.1 General provisions To regulate the administrative licensing conduct of the CBIRC and its local offices, clarify the administrative licensing procedures, and improve the efficiency of administrative licensing, the Provisions of Licensing 2020 is formulated in accordance with laws and administrative regulations such as the Banking Supervision and Administration Law of China, the Insurance Law, and the Administrative License Law of China.34 The CBIRC shall implement administrative licenses for banks, insurance institutions, and other financial institutions under the supervision and administration of the CBIRC in accordance with the procedures of the Provisions of Licensing 2020. The CBIRC may authorize local offices to implement administrative licenses according to law, and the Banking and Insurance Regulatory Bureau may authorize the Banking and Insurance Regulatory Sub-Bureau to implement administrative licenses within the scope authorized by the CBIRC. For administrative licensing authorized to be implemented, the decision on administrative licensing is made in the name of the authorized institution.35 The Banking and Insurance Regulatory Bureau shall implement the administrative license within the scope authorized by the CBIRC in accordance with the procedures of these Provisions.The Banking and Insurance Regulatory Sub-Bureau shall implement the administrative license within the scope authorized by the CBIRC and the Banking and Insurance Regulatory Bureau in accordance with the procedures set out in these Provisions.36 The administrative licensing implementation procedure is divided into three links: application and acceptance, review, decision and delivery.37 The CBIRC and its local offices shall implement administrative licensing in accordance with the following operational procedures:38 (1) The application shall be accepted, reviewed, and decided by one of the local offices of the CBIRC, that is, the Banking and Insurance Regulatory Bureau or the Banking and Insurance Regulatory Sub-Bureau; (2) The application shall be accepted by the Banking

34 35 36 37 38

The Provisions on Implementation Procedures of Administrative Licensing 2020, art.1. Ibid., art.1. Ibid. Ibid., art.5. Ibid., art.6.

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and Insurance Regulatory Sub-Bureau for preliminary review, and submitted to the Banking and Insurance Regulatory Bureau for review and decision; (3) The application shall be accepted by the Banking and Insurance Regulatory Bureau for preliminary review, and submitted to the CBIRC for review and decision; (4) The application shall be accepted by the CBIRC, and jointly reviewed and decided with other administrative authorities; (5) Other situations stipulated by laws, administrative regulations, or by the CBIRC. 6.4.2 Application and acceptance The applicant shall submit the application materials in accordance with the catalogue and format requirements of the application materials for administrative licensing published by the CBIRC.39 The method for applicants to submit application materials to the accepting authority is to submit them in person. to use the postal service, or to electronically transfer to the office of the CBIRC, the office of the Banking and Insurance Regulatory Bureau, or the office of the Banking and Insurance Regulatory Sub-Bureau.40 The application materials shall indicate the detailed and accurate contact information and the mailing address for the delivery of the administrative license decision. If the application materials are submitted in person, the handling personnel shall show the power of attorney and legal identity documents. If the applicant is a natural person, it shall present legal identity documents; if the applicant entrusts others to submit application materials, the trustees shall also submit the applicant’s authorization letter and the trustees’ legal identity documents.41 The application matter accepted by the lower-level authority and reported to the higher-level authority shall be submitted by the applicant to the accepting authority, and the application form shall be submitted, briefly explaining the application matter. The main accepting authority of the application materials submitted in the preceding paragraph shall be the decision-making authority.42 If the application matter does not need to obtain an administrative license according to law or the application matters are not within the scope of the authority of the accepting authority, the accepting authority shall promptly notify the applicant of the disapproval and issue a notice of disapproval. If the application matter does not fall within the scope of the authority of this office, the applicant shall also be notified to apply to the relevant administrative authority.43 Where the application matter is within the scope of the authority of the accepting authority, the accepting authority shall check the application materials in accordance with the catalogue and format requirements of the application materials for administrative licensing. If the accepting authority finds that the application

39 40 41 42 43

Ibid., art.7. Ibid., art.8. Ibid. Ibid., art.9. Ibid., art.10.

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materials are incomplete or do not meet the requirements, it shall issue a correction notice to the applicant within five working days from the date of receipt of the application materials to inform the applicant of all the materials to be submitted and to request the applicant to submit correction application materials within three months from the date of issuance of the correction notice.44 Where the application materials are complete and meet the stipulated requirements, the accepting authority shall handle the application for administrative license within five working days from the date of receiving the complete application materials and issue an acceptance notice to the applicant. The acceptance notice shall indicate the date of receipt of the materials and the date of acceptance. The date of receipt of application shall be the date of receipt of complete application materials.45 The decision not to accept the application shall be made for the applicant who has any of the following circumstances:46 (1) The applicant has failed to submit the requested application materials within three months from the date of issuance of the correction notice; (2) The applicant has submitted incomplete application materials or the materials submitted do not meet the requirement within three months from the date of issuance of the correction notice; (3) Other situations stipulated by laws, administrative regulations, or by the CBIRC. If it is decided not to accept the application, the accepting authority shall issue a notice of non-acceptance and explain the reasons for the non-acceptance. The decision not to accept the application shall be made within five working days after the end of the correction period, or within five working days from the date of receiving all the requested application materials.47 Before a decision is made to accept an application, an applicant can request to withdraw the application by submitting a written withdrawal application to the accepting authority; the accepting authority shall return the application materials to the applicant after registration.48 The acceptance notice, non-acceptance notice, and correction notice shall be affixed with the official seal of the accepting authority and dated by the accepting authority and shall be handed over, mailed, or electronically transmitted to the applicant by the accepting authority.49 6.4.3 Examination of the application The application matters accepted by the lower-level authority and reported to the higher-level authority shall be examined by the lower-level authority within 20 44 45 46 47 48 49

Ibid., art.11. Ibid. Ibid., art.12. Ibid. Ibid., art.13. Ibid., art.14.

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working days from the date of acceptance, and the examination opinions and complete application materials shall be reported to the decision-making authority.50 Where the application matters accepted by the CBIRC involve the local supervision responsibilities of the Banking and Insurance Regulatory Bureau, the CBIRC may solicit the opinions of the relevant Banking and Insurance Regulatory Bureau.51 Where the application matters accepted by the Banking and Insurance Regulatory Bureau involve the local supervision responsibilities of the Banking and Insurance Regulatory Sub-Bureau, the Banking and Insurance Regulatory Bureau may solicit the opinions of the relevant Banking and Insurance Regulatory Sub-Bureau.52 Where the application matters accepted by the Banking and Insurance Regulatory Bureau and the Banking and Insurance Regulatory Sub-Bureau involve the supervisory responsibilities of the authorities at the same level or higher, the Banking and Insurance Regulatory Bureau and the Banking and Insurance Regulatory Sub-Bureau may solicit the opinions of the authorities at the same level or higher.53 The authorities at all levels shall promptly provide feedback to the authorities seeking opinions.54 When the accepting authority or decision-making authority examines the application for an administrative license, if it finds that the matters of the administrative license directly concern the major interests of others, it shall notify the interested parties. Applicants and interested parties have the right to make statements and defences. The accepting authority or decision-making authority shall listen to the opinions of the applicant and interested parties.55 If, in the course of reviewing the application, the accepting authority or decisionmaking authority considers that the applicant needs a written explanation of the application materials, it may put together all the questions into a written opinion at once and request the applicant to make a written explanation. If the decisionmaking authority deems it necessary, it may request the applicant to make a written explanation for the second time with the approval of the relevant person in charge.56 The written explanation can be submitted by face-to-face submission, postal mail or electronic transmission; it can also be submitted by fax, e-mail, and so on with the consent of the accepting authority or decision-making authority.57 The applicant shall submit a written explanation within two months from the date of the written opinion. If the written explanation is not submitted on time, the applicant shall be deemed to give up the written explanation automatically.58 If the accepting authority or decision-making authority believes that the applicant needs to explain the application materials in person, it may hold talks with the applicant in the office. The number of staff participating in the talks shall not be

50 51 52 53 54 55 56 57 58

Ibid., art.15. Ibid., art.16. Ibid. Ibid. Ibid. Ibid., art.17. Ibid., art.18. Ibid. Ibid.

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fewer than two persons. The accepting authority or decision-making authority shall make a record of the meeting and confirm it with the signature of the applicant.59 In the course of reviewing the application, the accepting authority or decisionmaking authority may directly conduct or entrust lower-level authority to conduct on-site verification of the relevant contents of the application materials, as circumstances require. There shall be no fewer than two staff members to carry out on-site verification, and they shall present legal certificates. On-site verification staff shall take notes and collect relevant certification materials.60 Where the accepting authority or the decision-making authority considers it necessary to verify the relevant petitions and reported materials during the review process, it shall promptly verify and form a written verification opinion.61 In the course of reviewing the application, the decision-making authority may directly organize, or entrust the lower-level authority, or request the applicant, to organize expert review for the application matters that are difficult, complex, or highly technical, and to form a written review opinion signed by the experts.62 Where an administrative license directly involves a significant interest between an applicant and other parties, the decision-making authority shall inform the applicant and interested parties of the right of requesting a hearing before making an administrative licensing decision. Where the applicant or interested parties submits a hearing application within five working days of being informed of the right to a hearing, the decision-making authority shall organize a hearing within 20 working days.63 In the course of reviewing the application by the accepting authority or the decision-making authority, if one of the following situations occurs, a decision to suspend the reviewing may be made and the applicant shall be notified of the decision of suspension:64 (1) The applicant or the person directly related to the relevant administrative licensing matter is being investigated by relevant administrative authority for suspected violation of laws and regulations or by the judicial institutions, and the case has not been closed, which has a significant impact on the corresponding administrative licensing matter; (2) The applicant has been ordered by the CBIRC to suspend business for rectification, or to be taken over, and other regulatory measures. These regulatory orders have not been lifted; (3) The provisions of relevant laws, administrative regulations, and rules need to be further clarified for specific meanings, and the relevant authorities are requested to interpret; (4) The applicant has voluntarily requested to suspend the reviewing of the application, and the reasons for suspension are justified.

59 60 61 62 63 64

Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24.

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Where laws, administrative rules, and regulations have other provisions on the situations in the preceding paragraphs, those other provisions shall prevail.65 If the reviewing of the application is suspended due to the circumstances stipulated in paragraph one of article 24 (1), (2), or (3) of the Provisions of Licensing 2020, after the situation disappears, the accepting or the decision-making authority shall resume the reviewing process and notify the applicant.66 If the applicant voluntarily requests to suspend the reviewing of the application, it shall submit a written application to the accepting authority. If it agrees to suspend the reviewing process, the accepting authority shall issue a notice of suspension. If the applicant applies for resumption of the reviewing process, it shall submit a written application to the accepting authority. If approved, the accepting authority shall issue a notice of resumption of reviewing process.67 The following time is not counted into the review period:68 (1) Where the applicant is required to give a written explanation of the problems in the application materials, the time from the date of the written opinion is sent to the applicant to the time when the applicant’s written explanation has been received by the accepting authority; (2) Where it is necessary to verify the relevant petitions and reported materials, the time from the date of making the decision to verify to the completion of the verification; (3) Where expert review is required, the time from the organization of the expert review to the time when the written review opinion is formed; (4) Where a hearing needs to be organized, the time from the date when the applicant or interested party submits the hearing application to the end of the hearing; (5) In the case of suspension of the review, the time from the date when the decision to suspend the review is made to the time when the notice of resumption of the review is issued; (6) The time stipulated by law, such as inspection and testing within the review period, shall not be counted. The time for deduction of the preceding paragraph shall be given to the applicant in a timely manner by the accepting authority or decision-making authority. The time deducted from items (2) and (3) shall not exceed a reasonable and necessary time limit.69 6.4.4 Decision and delivery In the course of the accepting authority’s or decision-making authority’s review of the application, where the applicant’s death, incapacity, or termination in accordance with the law makes the application for administrative licensing out of compliance 65 66 67 68 69

Ibid. Ibid., art.25. Ibid. Ibid., art.26. Ibid.

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with the legal conditions, or the administrative licensing decision is not necessary, the accepting authority or decision-making authority shall terminate the review.70 In the course of the accepting authority’s or decision-making authority’s review of the application, if the applicant voluntarily requests to withdraw its application and submits a written application to terminate the reviewing process to the accepting authority, the accepting or decision-making authority shall terminate the reviewing of the application.71 The application for administrative licensing accepted and decided by one authority shall be reviewed by the deciding authority within a prescribed period of time; a written decision shall be made to approve or disapprove the administrative license, and the written decision shall be served on the applicant within ten working days after the decision is made.72 The administrative license accepted by the lower-level authority and reported to the higher-level authority shall be reviewed by the decision-making authority after receiving the preliminary examination opinion of the lower-level authority and the applicant’s complete application materials, and the decision-making authority shall make a written decision on whether to grant or not to grant the administrative license. The written decision shall be served to the applicant within ten working days after the decision is made, and at the same time it shall be copied to the lower authority.73 If a decision to suspend the review or terminate the review is made, the written decision shall be served to the applicant within ten working days after the decision is made.74 Where an application for administrative licensing is accepted by the CBIRC and is to be jointly reviewed and decided by the CBIRC with other administrative authorities, after acceptance and review by the CBIRC, the application materials shall be submitted to the relevant administrative authorities for review. Based on the review opinions and within the prescribed time limit, a written decision to grant or not to grant an administrative license shall be made.75 For matters that do not meet the requirements for administrative licensing, the decision-making authority shall make a decision not to grant the administrative licensing. If the decision-making authority makes a decision not to grant an administrative license, it shall explain the reasons and inform the applicant that it has the right to apply for administrative reconsideration or to bring an administrative lawsuit within the limitation period.76 In any of the following circumstances, the decision-making authority or its superior authority may revoke an administrative license at the request of interested parties or according to its powers:77 (1) The staff members of the CBIRC and its local offices make a decision to grant an administrative license by abusing their powers or due to negligence; 70 71 72 73 74 75 76 77

Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid. Ibid. Ibid., art.30. Ibid., art.31. Ibid., art.32.

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(2) Making a decision to grant an administrative license beyond the legal authority; (3) Making a decision to grant an administrative license in violation of legal procedures; (4) Approving an administrative license for applicants who do not have the application qualifications or do not meet the legal requirements; (5) Other circumstances in which the administrative license can be revoked according to law. If the applicant obtains administrative permission by fraud, bribery, or other improper means, it shall be revoked.78 If the administrative license is revoked by reason of (2) and (3) aforementioned79 and the revocation may cause significant damage to the public interest, it shall not be revoked. If the administrative license is revoked by reason of (1) aforementioned, the applicant’s legitimate rights and interests shall be compensated according to law. Where the administrative license is revoked by reason of (2) aforementioned, the applicant’s interests obtained based on the administrative license are not to be protected.80 The administrative licensing decision document shall be delivered to the applicant by registered mail or express mail and may also be transmitted to the applicant electronically. If it is served by post, the decision-making authority shall promptly obtain from the postal department the applicant’s receipt with the applicant’s signature on it.81 The administrative permission decision document may also be collected by the applicant at the request of the applicant, and the recipient shall present the letter of authorization and legal identity documents and sign for receipt.82 If the applicant does not come to pick up the administrative licensing document within five days of receiving the pick-up notice, and the accepting authority cannot deliver the licensing document to the applicant by mail or other methods, it can be delivered through the CBIRC’s extranet website or the public announcement by newspapers or periodicals. After 60 natural days from the date of the announcement, it shall be deemed to have been delivered to the applicant. After the decision-making authority makes a decision to grant an administrative license, if it is necessary to issue or renew a financial permit or insurance permit to the applicant, the decision-making authority shall notify the applicant to obtain or renew the financial permit or insurance permit at the license-issuing authority.83 The license-issuing authority shall issue or renew the financial permit or insurance permit within ten working days after the decision is made.84

78 79 80 81 82 83 84

Ibid. Ibid. Ibid. Ibid., art.33. Ibid. Ibid., art.34. Ibid.

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6.4.5 Public announcement The CBIRC and its local offices shall publicize the matters, basis, conditions, procedures, deadlines, and catalogues and format requirements of the application materials to be submitted by the applicants for the convenience of the applicants.85 The CBIRC and its local offices shall make public announcements in one or more of the following ways:86 announce on the website of the CBIRC extranet, announce in publicly issued newspapers and periodicals, print the administrative license manual and place it in the office for inspection, posting the announcement in the offices, and other effective and convenient publicity methods. Except for involving state secrets, business secrets, and personal privacy, the administrative licensing decision made by the CBIRC and its local offices shall be announced through the CBIRC’s extranet website or by public announcement.87 6.5 Regulation of insurance permits 6.5.1 The Measures for Administration of Insurance Permits Insurance permits application and administration are regulated by the Measures for the Administration of Insurance Permits 2007. The Measures consists of 32 articles and were developed in accordance with the Insurance Law, the Administrative Licensing Law of China, and other laws and administrative regulations for the purposes of enhancing the administration of insurance permits, regulating the licensing for the insurance sector, and maintaining the order of the insurance market.88 The CBIRC is responsible for the issuance and management of insurance permits. The local offices of the CBIRC shall exercise the powers of issuing and managing insurance permits as authorized by the CBIRC.89 The CBIRC shall establish an insurance permit regulatory system under the principles of compliance with the law, openness, impartiality, convenience for the people, and efficiency.90 The following institutions in the insurance category within the territory of China shall obtain insurance permits according to the law:91 (1) Insurance holdings companies and insurance group companies conducting insurance business; (2) Insurance companies and the branch offices thereof; (3) Insurance asset management companies and the branch offices thereof; (4) Insurance agents, insurance brokers, insurance adjusters, and the branch offices thereof; (5) Sideline insurance agents; and (6) Other institutions in the insurance category as set out by the CBIRC.

85 86 87 88 89 90 91

Ibid., art.35. Ibid., art.36. Ibid., art.37. The Measures for the Administration of Insurance Permits 2007, art.1. Ibid., art.2. Ibid., art.3. Ibid., art.4.

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Insurance permits include the following types of insurance permits:92 corporate permit and insurance business permit of an insurance company, permit for insurance marketing services, permit for insurance agent business, permit for insurance brokerage business, permit for insurance adjuster business, permit for sideline insurance agency business, and corporate permit and insurance asset management business permit of an insurance asset management company. Insurance permits shall be uniformly designed and printed by the CBIRC. Without the authorization from the CBIRC, no other entity or individual may design, print, issue, capture, or impound insurance permits.93 The CBIRC conducts hierarchical administration of insurance permits.94 A local office of the CBIRC shall be responsible for the service and replacement of insurance permits of the following institutions within its jurisdiction:95 (1) Branch offices of an insurance company; (2) Branch offices of an insurance asset management company; (3) Insurance agents and the branch offices thereof; (4) Insurance brokers and the branch offices thereof; (5) Insurance adjusters and the branch offices thereof; and (6) Sideline insurance agents. An insurance permit shall record:96 the name of the institution, the code of the institution, the domicile of the institution, the business scope of the institution, the territorial scope of the institution, the date when the decision to grant administrative licensing is made, the date of issuance of the permit; and the authority issuing the permit. An insurance permit may take effect only after the official seal of the CBIRC is affixed thereto.97 Codes of institutions in the insurance category shall be assigned to them in a uniform format across the country. The CBIRC shall print out insurance permits according to the codes of institutions in the insurance category.98 The institution code on an insurance permit shall be permanent. Where any information recorded in an insurance permit changes or the insurance permit expires or is lost or damaged, and the institution in the insurance category applies for a new permit, the new permit shall continue to adopt the original institution code.99 Where the nature of an institution in the insurance category changes or it is relocated to a place outside the licensed territory or is legally terminated, the code of the institution shall be automatically invalidated.100 The information recorded in an insurance permit shall be consistent with that in the decision to grant administrative licensing.101

92 93 94 95 96 97 98 99 100 101

Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid. Ibid., art.10. Ibid. Ibid. Ibid., art.11.

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Where the CBIRC makes a decision to grant administrative licensing and the issuance of an insurance permit is required, the permit shall be issued to the applicant for administrative licensing.102 The CBIRC shall, within ten working days after the decision to grant administrative licensing is made, serve the decision together with the insurance permit on the applicant for administrative licensing.103 The CBIRC shall serve decisions to grant administrative licensing and insurance permits directly on the applicants for administrative licensing or by post if direct service is difficult.104 In the case of direct service, there must be a service receipt to which the applicant for administrative licensing shall affix the date of receipt and the applicant’s signature or seal. In the case of service by post, the postal certificate must be preserved. The postmark date on the postal certificate shall be the date of service.105 Where it is difficult for the CBIRC to serve a decision to grant administrative licensing directly or by post, it may serve it by announcement. A decision to grant administrative licensing which is served by announcement shall be deemed served two months after the announcement is issued. The applicant for administrative licensing shall, within two months of the service of the decision to grant administrative licensing by announcement, collect its insurance permit from the CBIRC. If it fails to do so, both the decision to grant administrative licensing and the insurance permit shall be automatically invalidated.106 Institutions in the insurance category shall properly preserve their insurance permits. No entity or individual may forge, alter, lease out, lend, or transfer any insurance permit.107 An institution in the insurance category shall place the original of its insurance permit in a conspicuous position in its business premises for inspection.108 The CBIRC shall enhance the information management of insurance permits, establish a complete institution management archives system, and disclose information related to insurance permits according to the law.109 Where any information recorded in an insurance permit changes, the institution in the insurance category shall surrender the original permit to the CBIRC and obtain a new one. If the change of information is subject to the approval of the CBIRC, the institution in the insurance category shall collect a new insurance permit from the CBIRC within two months after the approval decision is made; if the change is not subject to the approval of the CBIRC, the institution in the insurance category shall collect a new insurance permit from the CBIRC within one month after the change occurs.110

102 103 104 105 106 107 108 109 110

Ibid., art.12. Ibid. Ibid., art.13. Ibid. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18.

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No terms of validity shall be fixed for the insurance permits of the following institutions in the insurance category:111 insurance holdings companies and the branch offices thereof, insurance group companies and the branch offices thereof, insurance companies and the branch offices thereof, and insurance asset management companies and the branch offices thereof. The terms of validity of insurance permits of institutions in the insurance category other than those just listed shall be governed by the relevant provisions issued by the CBIRC.112 Where an institution in the insurance category needs to renew the term of validity of its insurance permit which is to expire, it shall apply to the CBIRC within the prescribed time limit. The CBIRC shall make a decision to grant or deny the renewal before the term of validity of the insurance permit expires. If the CBIRC grants the renewal, the institution in the insurance category shall, within ten days after receipt of the decision to grant renewal, surrender the original permit to the CBIRC and collect a new one.113 Where an insurance permit is damaged, the institution in the insurance category shall surrender the original permit to the CBIRC and collect a new one.114 Where an insurance permit is lost, the institution in the insurance category shall, within ten days after it becomes aware of the loss, declare the invalidation of the permit in a newspaper designated by the CBIRC and apply for a new one to the CBIRC on the basis of a written explanation and the material on the declaration of invalidation.115 An institution in the insurance category which collects a new insurance permit from the CBIRC shall submit the following materials:116 (1) supporting documents on the change of information recorded on the insurance permit (both originals and photocopies); (2) letter of introduction or power of attorney from the institution in the insurance category; (3) Legal and valid identification of the person collecting the permit (both originals and photocopies); and (4) Other materials as set out by the CBIRC. Where an institution in the insurance category receives an insurance permit or collects a new insurance permit for the change of information recorded in its insurance permit, it shall, within 20 working days after receiving or collecting the insurance permit, announce it in a newspaper designated by the CBIRC.117 The announcement shall include118 the information recorded in the insurance permit; the name of the legal representative or person in charge of the institution in the insurance category; the business scope and operating territory of the institution in the insurance category; and the domicile, postal code, and telephone number of the institution in the insurance category. 111 112 113 114 115 116 117 118

Ibid., art.19. Ibid. Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid.

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An institution in the insurance category shall, within 15 working days after it is dissolved, legally abolished, or legally declared bankrupt, surrender its insurance permit to the CBIRC.119 The CBIRC shall cancel an insurance permit according to the law, and issue an announcement under any of the following circumstances:120 the term of validity of the insurance permit expires and is not renewed, the institution in the insurance category is legally terminated, the insurance licensing is cancelled or revoked or the insurance permit is revoked according to the law, and other circumstances as set out by laws, administrative regulations, or the CBIRC. The CBIRC shall destroy the insurance permits surrendered on a regular basis.121 Where an institution in the insurance category falls under any of the following circumstances, the CBIRC shall order it to take corrective action during a specified period, and if it fails to do so, impose a fine of not more than ¥30,000 yuan:122 (1) Failing to surrender the original insurance permit and collect a new one as required, in the case of any change of information recorded in its insurance permit; (2) Failing to report the loss of its insurance permit to the CBIRC as required; (3) Failing to place its insurance permit in its business premises as required; and (4) Failing to publish an announcement in a newspaper as required by these Measures of Permits 2007. Where an institution in the insurance category falls under any of the following circumstances, the CBIRC shall order it to take corrective action and impose a fine of not more than ¥30,000 yuan on it and a fine of ¥5,000 yuan on the directly liable senior executive; if it is criminally punishable, the offender shall be held criminally liable according to the law:123 forging, altering, leasing out, lending, or transferring its insurance permit, or using any expired or invalidated insurance permit. 6.5.2 The Relevant Matters Concerning the Implementation of the Measures for Administration of Insurance Permits The CIRC also issued the Notice of CIRC on the Relevant Matters Concerning the Implementation of the Measures for Administration of Insurance Permits on 13 August 2007, which came into force on the same day and is still effective.124 The Measures for Administration of Insurance Permits 2007 streamline the types of insurance licenses; first, the Measures no longer divide insurance licenses into originals and duplicates, and second, the Measures cancel the legal person licenses for insurance intermediary institutions. The legal person licenses of insurance companies and insurance asset management companies shall be served and

119 120 121 122 123 124

Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Bao Jian Fa No. 70 [2007].

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changed by the CBIRC, and other types of licenses shall be served and changed by insurance regulatory bureaus.125 A license currently held by an insurance institution can still be used if no alteration occurs to the registration items of the license. In the case of the alteration of registered capital or senior manager (legal person, general manager, deputy general manager) or the expiry of valid term, the insurance institution shall get a new license at the CBIRC or the relevant insurance regulatory bureau.126 An insurance holding company or insurance group, or any of its subsidiaries, that does not engage in the insurance business or insurance asset management business, does not need to obtain an insurance license. A license obtained earlier shall be returned to the CBIRC.127 The institutional code indicated in a new license will still be the former one, the geographic scope is limited to only foreign-funded insurance companies, the day when the administrative licensing decision is made is the day when the insurance institution is established upon approval, and the day for issuance of a license is the day for printing the license.128 To obtain a license, a person shall hold a letter of introduction or a power of attorney issued by the insurance institution as well as a lawful and valid certificate on his or her own identity (both the original and the duplicate thereof).129 Each insurance regulatory bureau shall strengthen the management of insurance licenses. First, it shall implement the centralized management of licenses; second, it shall manage the licenses as important archival documents; third, a registration system shall be rigidly enforced for obtaining, printing, issuing, reissuing, and destroying the licenses; fourth, in the case of the destruction of licenses, the serial number, type, and quantity of the licenses being destroyed shall be recorded in detail; and fifth, it shall report the detail figures of various types of licenses that have been taken out of or put into the library (being obtained, issued, taken back, lost, voided, or destroyed) to the General Office of the CBIRC.130 6.6 Conclusion The Insurance Law requires that in certain circumstances, administrative licensing must be obtained for a legal entity to carry our insurance activities. In accordance with the Insurance Law, the Administrative Licensing Law, and other laws and regulations, the CIRC/CBIRC formulated two major regulations for the matters of administrative licensing and for insurance permits, namely, the Provisions of Licensing 2020 and the Measures of Permits 2007. The requirements and procedures in these two regulations are clear, objective, and public, and they must be consistently applied. 125 The Notice of CIRC on the Relevant Matters Concerning the Implementation of the Measures for Administration of Insurance Permits 2007, s.1. 126 Ibid., s.2. 127 Ibid., s.3. 128 Ibid., s.4. 129 Ibid., s.5. 130 Ibid., s.7.

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As compared with the 2014 version of the Measures on the Implementation of Administrative Licensing,131 the Provisions of Licensing 2020 provides new rules for the administrative licensing implementation procedure. First, the procedures for suspending review and resuming review of an application are introduced.132 If there are several situations such as the following, the accepting or decision-making authority may suspend the review and resume the review when the conditions are met: [When] the applicant or the person directly related to the relevant administrative licensing matter is being investigated by relevant administrative authority for suspected violation of laws and regulations, or by the judicial institutions, and the case has not been closed, which has a significant impact on the corresponding administrative licensing matter.133

Second, the rights and procedures of applicants and interested parties to apply for hearings are clarified, and the integrity of the administrative licensing process and the comprehensive protection of the rights of applicants and interested parties are further guaranteed.134 In addition, in the file transmission method of the submitting of application materials, delivery of relevant documents to the applicant, or the submitting of written explanations by the applicant and other procedures, the electronic transmission method can be used to promote the development of internetfacilitated government services and improve the standardization and facilitation of the administrative examination and approval of the administrative licensing.

131 132 133 134

The CIRC Order No. 2 [2014]. The Provisions on Implementation Procedures of Administrative Licensing 2020, articles 24 and 25. Ibid., art.24. Ibid., art.23.

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CHAPTER 7

Regulation of corporate governance

7.1 Introduction Corporate governance broadly refers to the mechanisms,1 processes,2 and relations by which corporations are controlled and directed. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and include the rules and procedures for making decisions in corporate affairs. According to the International Association of Insurance Supervisors (the IAIS), the modern system of insurance supervision and regulation is made up of three pillars: the regulation of corporate governance, the regulation of market behaviour, and the regulation of solvency.3 A sound system of corporate governance of an insurance company is necessary for the success of the company. In this chapter, we consider the pillar of corporate governance of insurers. In chapters 9, 10, and 11, we will consider another two pillars of insurers’ market behaviour (insurance business and insurers’ conduct) and solvency. 7.2 The legal framework for corporate governance of insurance companies The corporate governance framework of an insurer can promote the development, implementation, and effective oversight of policies that clearly define and support the objectives of the insurer. It has the functions to define the roles and responsibilities of persons accountable for the management and oversight of an insurer by clarifying who possesses legal duties and powers to act on behalf of the insurer and under which circumstances; to set requirements relating to how decisions and actions are taken, including documentation of significant or material decisions, along with their rationale; to provide sound remuneration practices which promote the alignment of remuneration policies with the long-term interests of insurers to 1 Governance mechanisms include monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders. 2 Corporate governance includes the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory, and market environment. 3 See the Insurance Core Principle (ICP) 2019, by the International Association of Insurance Supervisors accessed on 26 September 2020.

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DOI: 10.4324/9781351122863-7

REGULATION OF CORPORATE GOVERNANCE

avoid excessive risk taking; to provide for communicating with the supervisor, as appropriate, matters relating to the management and oversight of the insurer; and to provide for corrective actions to be taken for non-compliance or weak oversight, controls, or management.4 An effective corporate governance framework enables an insurer to be flexible and transparent, to be responsive to developments affecting its operations in making timely decisions, and to ensure that powers are not unduly concentrated. The corporate governance framework supports and enhances the ability of the key players responsible for an insurer’s corporate governance, that is, the board of directors, senior management, and key persons in control functions to manage the insurer’s business soundly and prudently. It is therefore important that the laws and regulations require insurers to establish and implement a corporate governance framework which provides for sound and prudent management and oversight of the insurer’s business and adequately recognizes and protects the interests of policyholders.5 The Insurance Law provides several articles (articles 81, 82, 83, 108, 109, 110, and 151) for regulating some aspects of corporate governance. The Company Law also provides rules for corporate governance. These articles are considered in relevant parts of this chapter. The insurance regulatory authority – the former authority was China Insurance Regulatory Commission (the CIRC) and the current authority is the China Banking and Insurance Regulatory Commission (the CBIRC) – has promulgated many regulations for corporate governance, risk management, and internal control of insurance companies and insurance groups. In the following sections, we will consider the following topics of corporate governance: requirements for directors, supervisors, and senior officers (see section 7.4); the regulation of corporate governance structure (s.7.5); the regulation of the operation of the board of directors of insurance companies (s.7.6); administration of auditing of directors and senior managers of insurance companies (s.7.7); the internal audit of insurance companies (s.7.8); the guidelines for salary management rules of insurance companies (s.7.9); compliance management of insurance companies (s.7.10); related-party transactions of insurance companies (s.7.11); risk management of insurance companies (s.7.12); comprehensive risk management of personal insurance companies (s.7.13); internal control of insurance companies (s.7.14); evaluation of insurance company corporate governance (s.7.15); corporate governance of insurance group companies and of insurance groups (s.7.16); information disclosure by insurance companies (s.7.17); and corporate governance action plan for three years from 2020 to 2022 (s.7.18). 7.3 Statutory requirements for directors, supervisors, and senior officers of insurance companies The Insurance Law sets forth a number of requirements for appointment of directors or senior managers. The directors, supervisors, and senior officers of insurance companies must have good morals, be well versed in insurance-related laws and 4 Ibid., the ICP 7.0.1. 5 Ibid., the ICP 7.

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administrative regulations, have operation and management ability needed for fulfilling their responsibilities, and have obtained the qualifications for holding a position verified by the CBIRC before taking the position.6 The scope of senior officers of an insurance company is defined by the CBIRC.7 According to article 146 of the Company Law,8 a person may not serve as a company’s director, supervisor, or senior officers if he or she is: (1) a person with no or limited capacity for civil acts; (2) a person that was sentenced to criminal punishment for the crime of corruption, bribery, encroachment of property, misappropriation of property or disruption of the order of the socialist market economy, and not more than five years has elapsed since the expiration of the enforcement period; or a person that was deprived of his political rights for committing a crime, and not more than five years has elapsed since the expiration of the enforcement period; (3) a director, factory director or manager of a company or enterprise liquidated upon bankruptcy that was personally responsible for the bankruptcy of the company or enterprise, and not more than three years has elapsed since the date of completion of the bankruptcy liquidation; (4) the legal representative of a company or enterprise that had its business license revoked and had been closed down by order for violation of law, for which such representative bears individual liability, and not more than three years has elapsed since the date on which the business license of the company or enterprise was revoked; and (5) a person with a comparatively large amount of personal debts due and unsettled. If a company elects or appoints a director or supervisor or employs senior officers in violation of the preceding paragraph, such election, appointment, or employment shall be invalid. If a director, supervisor, or senior officer falls under the circumstances just specified during his or her term of office, the company shall dismiss him or her from his office. In addition to the circumstances as provided for in article 146 of the Company Law, the Insurance Law specifies two circumstances under which a person may not serve as an insurance company’s director, supervisor, or senior officer: (1) Any director, supervisor or senior officer of a financial institution who was disqualified by the financial supervision and regulation authority for violation of laws or regulations or disciplines, and five years have not elapsed since the date of disqualification; and

6 The Insurance Law, art.81. 7 Ibid. 8 The Company Law of the People’s Republic of China was adopted at the 5th Meeting of the Standing Committee of the Eighth National People’s Congress on 29 December 1993 and amended three times, on 25 December 1999, 27 October 2005, and 28 December 2013. The 2013 version came into effect as of 1 March 2014 (see accessed in 15 October 2020).

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(2) Any lawyer, chartered public accountant or any professional of an asset evaluation agency or certification agency whose practicing license was revoked for violation of laws or regulations or disciplines, and five years have not elapsed since the date of revocation.9 Where the director, supervisor, or senior officer of an insurance company has caused loss to the company due to violation of laws, administrative regulations, or provisions in the Articles of Association when performing their duties for the company, the director, supervisor, or senior officer of the company shall be liable for compensation.10 7.4 Requirements for directors, supervisors, and senior officers formulated by the CBIRC The CIRC/CBIRC sets requirements for the board of directors, senior management, and key persons in control functions of an insurer to be and remain suitable to fulfil their respective roles. According to article 57 of the Provisions on the Administration of Insurance Companies 2015,11 before appointing a person to the position of director, supervisor, or senior executive, an insurance institution shall apply to the CBIRC for confirmation of the person’s satisfaction of office qualifications. The administration of the office qualifications for directors, supervisors, and senior executives of insurance institutions shall be governed by the Insurance Law and the relevant provisions issued by the CBIRC. In accordance with the Insurance Law, the Company Law, the Provisions on the Administration of Insurance Companies 2015, and other laws and regulations, the CIRC formulated a number of regulations in relation to qualification requirements, qualification examination, the implementation plan of post-holding qualification examination, and the training of directors, supervisors, and senior executives of insurance institutions, as follows: (1) Provisions on the Administration of the Office Qualifications for the Directors, Supervisors and Senior Executives of Insurance Companies (2018 amendment) on 13 February 2018.12 (2) The Notice of the CIRC on Issuing the Interim Measures for the Administration of the Office Qualification Examination for Directors, Supervisors and Senior Executives of Insurance Institutions on 18 January 2016.13 (3) The Notice of the CIRC on Issuing the Implementation Plans for Regulating the Work on the Post-Holding Qualification Examinations of Directors,

9 The Insurance Law, art.82. 10 Ibid., art.83. 11 The CIRC Order No. 3 [2015] (see accessed on 14 October 2020). 12 The CIRC Order No. 4 [2018] (see accessed on 14 October 2020). 13 Bao Jian Fa No. 6 [2016] (see accessed on 14 October 2020).

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Supervisors and Senior Executives of Insurance Institutions on 24 December 2015, which came into force on 1 January 2016.14 (4) The Notice of the CIRC on Issuing the Administrative Measures for the Training of Directors, Supervisors and Senior Executives of Insurance Institutions on 19 April 2015.15 These regulations are considered in the following sub-sections. 7.4.1 The office qualifications for the directors, supervisors, and senior executives of insurance companies For the purposes of strengthening and enhancing the administration of the directors, supervisors, and senior executives of insurance companies, ensuring the stable and solid operations of insurance companies, and promoting the sound development of the insurance industry, the CIRC issued the Provisions on the Administration of the Office Qualifications for the Directors, Supervisors and Senior Executives of Insurance Companies (the Provisions 2018) on 13 February 2018.16 The CBIRC conducts the unified supervision and administration of the office qualifications for the directors, supervisors, and senior executives of insurance companies. The local offices of the CBIRC supervise and administer the office qualifications for the senior executives of the branch offices of insurance companies within their respective jurisdictions, except for the branches of Chinese-funded reinsurance companies and the branches of overseas insurance companies.17 The term of “senior executives” means the following persons who have the decision-making power or have a significant impact on the business management and risk control of an insurance institution:18 (1) The general manager, deputy general managers, and assistant general managers of the head office. (2) The secretary for the board of directors, chief compliance officer, chief actuary, chief financial officer, and chief auditor of the head office. (3) The general manager, deputy general managers, and assistant general managers of a branch or a central sub-branch. (4) The manager of a sub-branch or a business department. (5) An executive who has the same power as any of the aforesaid senior executives. 14 Bao Jian Fa No. 122 [2015]; (see accessed on 14 October 2020). 15 Bao Jian Fa No. 43 [2015] (see accessed on 14 October 2020). 16 The CIRC Order No. 4 [2018]. 17 Provisions on the Administration of the Office Qualifications for the Directors, Supervisors and Senior Executives of Insurance Companies 2018, art.2. 18 Ibid., art.4.

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A director, supervisor, or senior executive of an insurance institution shall, before holding the office, be confirmed by the CBIRC to satisfy the office qualifications.19 (a) Office qualifications The directors, supervisors, and senior executives of an insurance institution shall abide by laws, administrative regulations, and relevant rules of the CBIRC and comply with the by-laws of the insurance company.20 The directors, supervisors, and senior executives of an insurance institution shall be honest and trustworthy, have a good awareness of regulatory compliance in operations, and have the business management ability required for performing their respective functions.21 The directors, supervisors, and senior executives of an insurance institution shall pass the examinations on insurance laws and regulations and related knowledge as recognized by the CBIRC.22 The chairman of the board of directors of an insurance company shall have five or more years of financial work experience or ten or more years of economic work experience. The director or supervisor of an insurance company shall have five or more years of work experience appropriate for performing his or her functions.23 The secretary for the board of directors of an insurance company shall have a university diploma at or above the undergraduate course level and have five or more years of work experience appropriate for performing his or her functions.24 The general manager, deputy general manager, or assistant general manager of an insurance company shall satisfy the following qualifications:25 (1) Having a university diploma at or above the undergraduate course level or a bachelor’s degree or above. (2) Having eight or more years of financial work experience or ten or more years of economic work experience. In addition to the qualifications in the preceding paragraph, the general manager of an insurance company shall have any of the following office experience: (1) Having five or more years of experience as a senior executive of a branch of an insurance company at or above the general manager level. (2) Having five or more years of experience as the head of a department of an insurance company. (3) Having five or more years of experience of holding an equivalent managerial office in a financial regulatory authority.

19 20 21 22 23 24 25

Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11.

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(4) Having other professional credentials sufficient to prove that he or she possesses the knowledge, ability, and experience required for the office to be held. The general manager, deputy general manager, or assistant general manager of a provincial branch of an insurance company shall satisfy the following qualifications:26 (1) Having a university diploma at or above the undergraduate course level or a bachelor’s degree or above. (2) Having five or more years of financial work experience or eight or more years of economic work experience. In addition to the qualifications in the preceding paragraph, the general manager of a provincial branch of an insurance company shall have any of the following office experience: (1) Having three or more years of experience as a senior executive of a central sub-branch of an insurance company at or above the general manager level. (2) Having three or more years of experience of holding an office at or above the level of the head of a department of a provincial branch of an insurance company. (3) Having three or more years of experience as a senior executive of any other financial institution. (4) Having five or more years of experience of holding an equivalent managerial office in a state authority or a large- or medium-sized enterprise. (5) Having other professional credentials sufficient to prove that he or she possesses the knowledge, ability, and experience required for the office to be held. The provisions of the preceding two paragraphs shall apply, mutatis mutandis, to the office qualifications for the senior executives of a branch formed by an insurance company in a city under separate state planning to exercise the managerial functions of a provincial branch. The general manager, deputy general manager, or assistant general manager of a branch or a central sub-branch of an insurance company shall satisfy the following qualifications:27 (1) Having a university diploma at or above the undergraduate course level or a bachelor’s degree or above. (2) Having three or more years of financial work experience or five or more years of economic work experience. In addition to the qualifications in the preceding paragraph, the general manager of a branch or a central sub-branch of an insurance company shall have any of the following office experience: 26 Ibid., art.12. 27 Ibid., art.13.

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(1) Having two or more years of experience as a senior executive of an insurance institution. (2) Having two or more years of experience of holding an office at or above the level of the head of a department of a branch or a central sub-branch of an insurance company. (3) Having two or more years of experience as a senior executive of any other financial institution. (4) Having three or more years of experience of holding an equivalent managerial office in a state authority or a large- or medium-sized enterprise. (5) Having other professional credentials sufficient to prove that he or she possesses the knowledge, ability, and experience required for the office to be held. The manager of a sub-branch or a business department of an insurance company shall have three or more years of insurance work experience or five or more years of economic work experience.28 Where the person to serve as the chairman of the board of directors or a senior executive of an insurance institution has a master’s degree or above, the length of financial or economic work experience in his or her office qualifications may be reduced by two years.29 Where the person to serve as a senior executive of an insurance institution meets any of the following conditions, the university diploma required in his or her office qualifications may be a junior college diploma:30 (1) Having eight or more years of insurance work experience. (2) Having eight or more years of work experience in law, accounting, or audit. (3) Having eight or more years of experience of holding a managerial office in a financial institution, large- or medium-sized enterprise, or state authority. (4) Holding a certified public accountant or a legal profession qualification or any other professional qualification recognized by the CBIRC. (5) Being commended as an individual by an insurance company for his or her business management performance, in the three years before the filing of an application for confirmation of his or her satisfaction of office qualifications. (6) Being commended as an individual by the CBIRC or the government at or above the prefecture level, in the five years before the filing of an application for confirmation of his or her satisfaction of office qualifications. (7) To serve as a senior executive in a harsh, remote, or border region. The confirmation of satisfaction of the office qualifications for a deputy general manager or any other senior executive who presides over the work of an insurance

28 Ibid., art.14. 29 Ibid., art.15. 30 Ibid., art.16.

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institution shall be governed by the relevant stipulations of the Provisions 2018 on the general manager of the institution at the same level.31 The confirmation of satisfaction of the office qualifications for the senior executives of a branch of an overseas insurance company shall be governed by the relevant stipulations of the Provisions 2018 on the senior executives of the head office of an insurance company.32 An insurance institution shall establish employment relationships with its senior executives by entering into written labour contracts with them.33 A senior executive of an insurance institution who concurrently holds any other business management office shall comply with the following provisions:34 (1) He/she shall not violate the Company Law and other relevant provisions of the state. (2) He/she shall not concurrently hold any office with conflicts of interest. (3) He/she shall have time required for performing his or her office. Where the person to serve as a director, supervisor, or senior executive of an insurance institution falls under any of the following circumstances, the CBIRC shall not grant confirmation of his or her satisfaction of office qualifications:35 (1) He/she has no civil competency or has limited civil competency. (2) It has not been five years since he or she finished serving a criminal sentence for corruption, bribery, encroachment upon property, embezzlement of property, or disturbance of the socialist market economic order; or it has not been five years since he or she finished serving a criminal sentence with deprival of political rights for any crime. (3) It has not been three years since he or she finished serving any other criminal sentence. (4) It has not been five years since the confirmation of his or her satisfaction of office qualifications was cancelled or revoked by a financial regulatory authority. (5) It has not been five years since the expiry of the period during which he or she was prohibited from market access by the financial regulatory authority. (6) It has not been five years since a state authority decided to take the disciplinary action of expelling him or her from public service. (7) It has not been five years since his or her practicing certificate as a lawyer, a certified public accountant, or a professional of an assets appraisal institution, a verification institution, or any other institution was revoked for his or her violation of any law or discipline. (8) It has not been three years since the completion of the bankruptcy liquidation of a company or enterprise in which he or she was a director or factory 31 32 33 34 35

Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21.

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(9)

(10) (11) (12) (13) (14)

(15)

director or a manager, and he or she was personally liable for the bankruptcy of the company or enterprise. It has not been three years since a company or enterprise in which he or she was the legal representative forfeited its business license if the company or enterprise forfeited its business license for any violation of law and was ordered to close down, and he or she was personally liable for the forfeiture and closedown. He or she has a relatively large amount of personal debts which have not been paid off upon maturity. The CBIRC imposed an administrative punishment of warning or fine on him or her within one year before an application is filed. He/she is under formal investigation by the CBIRC for suspected involvement in a serious violation of law, and no conclusion has been drawn. It has not been two years since a major administrative punishment was imposed on him or her by any other government department. It has not been five years since he or she finished serving a criminal sentence imposed in Hong Kong, Macao, or the Taiwan region or outside the territory of China, or it has not been three years since he or she finished serving an administrative punishment imposed in the aforesaid region for a serious violation of law. Any other circumstances as set out by the CBIRC.

A director, supervisor, or senior executive of an insurance company which is ordered to conduct an overhaul or is in receivership shall not assume the office of a director, supervisor, or senior executive in any other insurance institution during the period of overhaul or receivership, if he or she is directly liable for the ordered overhaul or the receivership.36 (b) Confirmation of satisfaction of office qualifications An application for the confirmation of satisfaction of the office qualifications for a director, supervisor, or senior executive of an insurance institution and the relevant reports required by the Provisions 2018 shall be submitted by the insurance company, provincial branch, or a branch office in a city under separate state planning as specified under the Provisions on the Administration of Insurance Companies 2015.37 A director, supervisor, or senior executive of an insurance institution shall, before holding the office, submit the following written materials in triplicate to the CBIRC, as well as the corresponding electronic documents:38 (1) A written application for confirmation of satisfaction of the office qualifications for a director, supervisor, or senior executive candidate. (2) A completed application form for qualification as a director, supervisor, or senior executive, as uniformly provided by the CBIRC. 36 Ibid., art.22. 37 Ibid., art.23. 38 Ibid., art.24.

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(3) Photocopies of the identification card, diploma, and other relevant certificates of the person to serve as a director, supervisor, or senior executive and a photocopy of his or her passport if he or she has one. (4) A comprehensive review regarding the conduct, expertise, business capability, and work performance, among others, of the person to serve as a director, supervisor, or senior executive. (5) A photocopy of the page with signatures and seals of the labour contract with the person to serve as a senior executive. (6) Other materials as set out by the CBIRC. An insurance institution shall honestly submit the materials specified in the preceding paragraph. An insurance institution and the person to serve as a director, supervisor, or senior executive shall be responsible for the veracity and integrity of the materials, which shall not contain any false record, misleading statement, or major omission. Where the person to serve as a senior executive of an insurance institution frequently changes his or her office in insurance companies, he or she shall submit a written statement on his or her work in the past two years, explaining why he or she has frequently changed his or her office.39 Before granting confirmation of a person’s satisfaction of the office qualifications for a director, supervisor, or senior executive of an insurance institution, the CBIRC may check the basic information on the person’s work with institutions where he or she used to hold an office.40 The CBIRC may interview the person to serve as a director, supervisor, or senior executive of an insurance institution regarding the office to be held, including:41 (1) acquiring the basic information on the person; (2) informing the person of issues which he or she shall be particularly concerned with; and (3) assessing the person in any other aspects as the CBIRC deems necessary. A written record of the interview shall be kept and be signed by the interviewers and the person. The CBIRC shall, within 20 working days of acceptance of an application for confirmation of satisfaction of office qualifications, make a decision to grant or not to grant confirmation. If the decision cannot be made within 20 working days, the time limit may be extended by ten working days with the approval of the person in charge of the CBIRC, and the applicant shall be notified of the reasons for the extension. If the CBIRC decides to grant confirmation, it shall issue a confirmation document to the applicant. If it decides not to grant confirmation, it shall, in the written decision, explain the reasons for not granting confirmation.42 Where a senior executive of an insurance institution whose satisfaction of office qualifications has been confirmed is transferred to or is to hold concurrently any other senior executive office at the same or at a lower level within the same insurance institution, his or her satisfaction of office qualifications need not be reconfirmed, unless the CBIRC specifies otherwise with respect to the qualifications for 39 40 41 42

Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28.

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the office to be held. Where a director or supervisor of an insurance institution is transferred to or is to hold concurrently a senior executive office, an application for confirmation of satisfaction of office qualifications shall be submitted to the CBIRC again.43 Where a director, supervisor, or senior executive of an insurance institution falls under any of the following circumstances, the confirmation of his or her satisfaction of office qualifications shall be automatically invalidated:44 (1) The insurance institution has not appointed a person to the office two months after the confirmation of his or her satisfaction of office qualifications. (2) He/she resigns from the insurance company. (3) The CBIRC imposes the administrative punishment of prohibition from access to the insurance industry on him or her. (4) Any of the circumstances as set out in paragraph 1 of article 146 of the Company Law or article 82 of the Insurance Law45 occurs. (c) Supervision and administration Except under the circumstance prescribed in paragraph 1 of article 29 of the Provisions 2018, an insurance institution shall not appoint in any form any person to a director, supervisor, or senior executive position without the CBIRC’s confirmation of satisfaction of office qualifications.46 Under any of the following circumstances, an insurance institution may designate a temporary person in charge, but his or her term of office shall not exceed three months:47 (1) The original person in charge resigns or is removed from office. (2) The original person in charge is unable to normally perform his or her functions for any illness, accident, or other reason. (3) Any other special circumstances as recognized by the CBIRC. The temporary person in charge shall have the capability appropriate for performing his or her functions and shall not fall under any of the circumstances of

43 Ibid., art.29. 44 Ibid., art.30. 45 Article 82 of the Insurance Law provides: A person under any of the circumstances prescribed in Article 146 of the Company Law of the People’s Republic of China or any of the following circumstances shall not hold a post of director, supervisor or senior manager in an insurance company: (1) For a former director, supervisor or senior manager of a financial institution, whose post-holding qualification has been cancelled by the financial regulatory body for any lawbreaking or disciplinary violation, it has not been five years since the day when he is disqualified; or (2) For a former lawyer, certified public accountant or professional of an institution such as asset assessment institution or verification institution, whose practicing qualification has been revoked for any lawbreaking or disciplinary violation, it has not been five years since the day when he is disqualified.

46 Provisions on the Administration of the Office Qualifications for the Directors, Supervisors and Senior Executives of Insurance Companies 2018, art.31. 47 Ibid., art.32.

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prohibition from holding a senior executive office as set out in the Provisions 2018. An insurance institution shall, within ten days of making any of the following decisions, report it to the CBIRC:48 (1) A decision on the appointment, removal, or approval of resignation of a director, supervisor, or senior executive. (2) A decision to take the disciplinary action of removal from office or expulsion of a senior executive. (3) A decision to remove a director, supervisor, or senior executive from office according to an administrative punishment of revocation of confirmation of his or her satisfaction of office qualifications. (4) A decision to remove a director, supervisor, or senior executive from office and terminate the employment relationship with him or her according to an administrative punishment of prohibition from access to the insurance industry. (5) A decision to designate or remove a temporary person in charge. (6) A decision on office suspension under article 40 or 41 of the Provisions 2018. The directors, supervisors, and senior executives of an insurance institution shall participate in training in accordance with the rules of the CBIRC.49 An insurance institution shall conduct auditing of the chairman of the board of directors and the senior executives in accordance with the rules of the CBIRC.50 Where any director, supervisor, or senior executive of an insurance institution commits a crime or receives an administrative punishment from any other agency during his or her term of office, the insurance institution shall, within ten days after it knows or should have known the sentence or administrative punishment decision, report it to the CBIRC.51 Where an insurance institution falls under any of the following circumstances, the CBIRC may issue a letter of alert to major risks to the directly liable director, supervisor, or senior executive, hold a regulatory interview with the same, require the same to provide an explanation of the relevant matter, and according to the circumstances, order the insurance institution to take corrective action during a specified period:52 (1) There may be any major risk in the operations, use of funds, corporate governance structure, or internal control system, among others. (2) Any director, supervisor, or senior executive violates the duties of loyalty and diligence as prescribed in the Company Law, causing any serious damage to the operations of the insurance company; or (3) Any other circumstances as set out by the CBIRC. 48 49 50 51 52

Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36. Ibid., art.37.

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Where an insurance institution frequently changes its senior executives, having an adverse effect on its operations, the CBIRC may take the following regulatory measures:53 (1) (2) (3) (4)

Ordering its superior institution to provide a written explanation. Issuing a letter of alert to major risks. Holding a regulatory interview with the relevant person. Taking other measures according to the law.

The CBIRC shall establish and improve an information system for the administration of directors, supervisors, and senior executives of insurance institutions. The information system for the administration of directors, supervisors, and senior executives of insurance institutions shall record the following information:54 (1) The basic content of the application materials for confirmation of satisfaction of office qualifications. (2) Any change of office. (3) Risk alert letters and regulatory interview records related to such persons. (4) Exit audit reports. (5) Criminal and administrative punishments. (6) Other information as set out by the CBIRC. Where a director, supervisor, or senior executive of an insurance institution is suspected of involvement in any serious violation of law or crime and is under formal investigation by an administrative agency or judicial authority, the insurance institution shall suspend the office of the relevant person.55 Where an insurance institution falls under any of the following circumstances, the CBIRC may, pending investigation, order it to suspend the office of the director, supervisor, or senior executive related to the investigated event:56 (1) Its solvency is seriously impaired. (2) It is suspected of seriously damaging the lawful rights and interests of the insured. (3) It fails to set aside or carry forward liability reserves as required. (4) It fails to conduct reinsurance as required. (5) It fails to use insurance funds as required. During the period of overhaul, receivership, or abolition liquidation of an insurance institution or upon occurrence of any major risk, the CBIRC may take the following measures against the directly liable director, supervisor, or senior executive of the institution:57 (1) Notifying the exit administrative authority of preventing him or her from leaving the country. 53 54 55 56 57

Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid., art.41. Ibid., art.42.

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(2) Requesting the judicial authority to prohibit him or her from disposing of his or her property by displacement, assignment, or any other means or from setting any other rights in his or her property. (d) Legal liability Where an institution or an individual applies for confirmation of satisfaction of office qualifications by concealing relevant information or providing false materials, the CBIRC shall reject the application or decide not to grant confirmation, and shall, within one year, not accept any application for the confirmation of the person’s satisfaction of office qualifications for a director, supervisor, or senior executive.58 Where a confirmation of satisfaction of office qualifications is acquired by fraud, bribery, or any other illegal means, the CBIRC shall revoke the confirmation granted to the director, supervisor, or senior executive, and shall, within three years, not accept any application for the confirmation of his or her satisfaction of office qualifications.59 Where an insurance institution violates the provisions of the Insurance Law, in addition to punishing the institution in accordance with the Insurance Law, the CBIRC shall issue a warning to the directly liable supervising executive and other directly liable persons, and impose a fine of not less than ¥10,000 yuan but not more than ¥100,000 yuan on such a person; and if the circumstances are serious, the confirmation of satisfaction of office qualifications or the practicing qualification of such a person shall be revoked.60 Where an insurance institution or its employee violates the Provisions 2018, the CBIRC shall impose a punishment in accordance with laws and administrative regulations; provided that laws and administrative regulations are silent, the CBIRC shall order the violator to take corrective action, issue a warning to the violator, and impose a fine of not less than the amount of but not more than three times the illegal income and not exceeding ¥30,000 yuan on the violator if there is any illegal income or a fine of not more than ¥10,000 yuan on the violator if there is no illegal income. If the violator is suspected of any crime, the case shall be transferred to the judicial authority for criminal investigation.61 The Provisions 2018 shall apply to the administration of the office qualifications for the directors, supervisors, and senior executives of insurance group companies and insurance holding companies, except as otherwise provided for by a law, administrative regulation, or the rules of the CBIRC.62 The Provisions 2018 shall apply to the administration of the office qualifications for the directors, supervisors, and senior executives of wholly foreign-funded insurance companies and Chinese-foreign equity joint venture insurance companies,

58 59 60 61 62

Ibid., art.43. Ibid., art.44. Ibid., art.45. Ibid., art.46. Ibid., art.47.

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except as otherwise provided for by a law, administrative regulation, or the rules of the CBIRC.63 Where any rules of the CBIRC provide otherwise for the office qualifications for an independent director, chief financial officer, chief actuary, chief compliance officer, or chief auditor of an insurance company, such provisions shall prevail.64 7.4.2 The office qualification examination for directors, supervisors, and senior executives of insurance institutions The Interim Measures for the Administration of the Office Qualification Examination for Directors, Supervisors and Senior Executives of Insurance Institutions (the Interim Measures 2016) was issued by the CIRC on 18 January 201665 for the purposes of strengthening the organization and administration of the office qualification examination for directors, supervisors, and senior executives of insurance institutions and improving the scientific and standardized level of the office qualification examination. The office qualification examination is an institutional arrangement to evaluate whether the to-be directors, supervisors, and senior executives of insurance institutions possess the knowledge and capacity required for the office. The examination result is an important basis for the confirmation of the office qualifications for directors, supervisors, and senior executives of insurance institutions.66 Insurance institutions are divided into seven categories, namely, insurance group companies, property insurance companies, personal insurance companies, asset management companies, reinsurance companies, captive companies, and mutual insurance organizations.67 The posts are divided into ten categories, namely, director, supervisor, general manager (vice general manager and assistant general manager), board secretary, chief compliance officer, chief actuary, chief financial officer, chief auditor, chief executive officer for risk management of an insurance asset management company, and chief representative of the representative office of a foreign insurance institution in China.68 (a) Examination content and question database management The examination covers three parts, namely, public knowledge, professional knowledge, and job requirements.69

63 Ibid., art.48. 64 Ibid., art.49. 65 Bao Jian Fa No. 6 [2016]. 66 The Interim Measures for the Administration of the Office Qualification Examination for Directors, Supervisors and Senior Executives of Insurance Institutions 2016, art.2. 67 Ibid., art.3. 68 Ibid., art.4. 69 Ibid., art.5. “Public knowledge” mainly refers to basic economic and financial knowledge, insurance principles, and the relevant insurance policies and general laws, regulations and regulatory rules of the state. “Professional knowledge” mainly refers to professional insurance knowledge and regulatory rules corresponding to the relevant various types of insurance institutions. “Job requirements” mainly refers

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Examination questions consist of objective questions and subjective questions. The objective questions include single choice questions, multiple choice questions, and True or False questions, which shall, at the time of examination, be randomly and automatically extracted by computer to form an examination paper that is scored by computer. The subjective questions include essay questions and case study questions, which shall, at the time of examination, be randomly extracted by computer to form an examination paper that is scored manually.70 The CBIRC establishes an examination question database and updates it on a regular basis. The question database is updated at any time according to the revisions of and adjustments to the relevant laws and regulations.71 (b) Examination method and standards for examination results The office qualification examinations are differentiated according to the nature of the institutions and the categories of posts and shall be organized in a centralized manner on a periodical basis.72 The office qualification examination shall be held in an unseen and computerbased manner. The total score of the examination paper is 100 points, and those scoring 60 points or higher shall be deemed to have passed the examination.73 The office qualification examination results shall be valid for one year.Those who have passed the examination may apply for confirmation of the corresponding office qualifications within one year after having passed the examination. Those who fail to file an application within one year or fail to obtain confirmation or whose office discontinues for more than one year are required to take the examination again.74 Where a director, supervisor, or senior executive of an insurance institution whose office qualification has been confirmed is transferred to a similar post in an insurance institution of the same kind, he or she is not required to take the examination again.Where a senior executive of an insurance institution whose office qualification has been confirmed is transferred to or is to concurrently hold a post of senior executive of the same or lower level in the same insurance institution, he or she is not required to take the examination again, unless the CBIRC has any special provisions on the qualification requirements for the post he or she is to hold.75 (c) Organization and implementation The Department of Personnel and Education of the CBIRC shall be responsible for the overall management of the office qualification examination, the training centre shall be responsible for the specific implementation, and the relevant business departments shall be responsible for the building and updating of the question database.76 to the requirements set forth by various types of posts for the knowledge structure and capacity of the persons to hold the posts. 70 Ibid., art.6. 71 Ibid., art.7. 72 Ibid., art.8. 73 Ibid., art.9. 74 Ibid., art.10. 75 Ibid., art.11. 76 Ibid., art.12.

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The to-be directors, supervisors, and senior executives of insurance institutions shall pass the office qualification examination before filing applications for confirmation of office qualifications.77 Insurance institutions shall effectively arrange examinees and designate persons to be responsible for examination registration matters. Insurance institutions shall recommend examinees in strict accordance with the relevant job requirements. The registration shall be conducted through the office qualification examination system. Insurance institutions shall submit registration information in accordance with the requirements of the system. For foreign examinees who are not proficient in Chinese, examination sessions shall be arranged separately for them, and each of them is allowed to take the examination with one interpreter, and the examination time may be extended appropriately.78 The office qualification examination shall generally be held once every two months, and the examination schedule may be temporarily adjusted or arranged separately under special circumstances.79 The training centre shall, according to the registration, work out the current examination arrangements, release them at least seven working days in advance, and designate persons to be responsible for the implementation of the examination.80 The scores of the objective questions shall be produced on spot at the back office of the system after the examination, and the subjective questions shall be scored by the scoring experts without the examinees’ names being known.81 The training centre shall release examination results within seven days after the examination. Insurance institutions and examinees may inquire about the results through the office qualification examination system.82 A person who has failed the examination may apply for a resit, but not more than two resits per year.83 (d) Examination discipline Examinees shall enter the examination room on the basis of their valid certificates and strictly comply with examination discipline. Those who fail to carry their valid certificates shall not take the examination.84 Where an examinee conducts any of the following acts, he or she shall be disqualified for the examination on the spot. He or she shall not take an office qualification examination within one year, and a notice of criticism shall be circulated on the relevant person and the insurance institution for which he or she works.85

77 78 79 80 81 82 83 84 85

Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21.

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(1) Having any other person take the examination in his or her stead. (2) Copying the materials carried, copying any other examinee’s answers, providing his or her answers to any other examinee for copying, or conducting any other cheating act. (3) Looking at or using mobile phones or any other means of communication during the examination. (4) Violating the examination room discipline, affecting the order of examination room, and not obeying the administration of invigilators. (5) Other acts in serious violation of examination discipline. Where a person is unable to take the examination for some reason, the department of human resources of the insurance institution shall submit a written application for leave. Anyone missing the examination without any justified reason shall be deemed to have waived the examination. A person who has missed the examination twice in a year without any justified reason shall not register for the examination within one year from the date when he or she has missed the examination for the second time.86 The training centre shall notify the industry of the information on office qualification examinations, and report in a timely manner the handling of violations of discipline and other information.87 (e) Office qualification examination for senior executives of insurance branches The local offices of the CBIRC are responsible for the office qualification examination for senior executives of insurance branches and shall organize examination under the principles of “streamlined scope, centralized management, separation between examination and confirmation, and unified method.”88 The office qualification examination results are recognized nationwide and are valid for one year.89 Where a senior executive of an insurance branch whose office qualification has been confirmed is transferred to a similar post in an insurance branch of the same kind at the same level, he or she is not required to take the examination again; where a senior executive of an insurance branch whose office qualification has been confirmed is transferred to or is to concurrently hold a post of senior executive at the same or lower level in the same insurance institution, he or she is not required to take the examination again unless the CBIRC has any special provisions on the qualification requirements for the post he or she is to hold.90 7.4.3 Post-holding qualification examinations of directors, supervisors, and senior executives of insurance institutions For the organization and administration of the post-holding qualification examinations of directors, supervisors, and senior executives of insurance institutions, the 86 87 88 89 90

Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26.

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CIRC released the Notice on Issuing the Implementation Plans for Regulating the Work on the Post-Holding Qualification Examinations of Directors, Supervisors and Senior Executives of Insurance Institutions on 24 December 2015,91 which came into force on 1 January 2016. (a) Basic principles92 First, simplification of administrative procedures and optimization thereof. The spirit of the Communist Party of China Central Committee and the State Council on transformation of functions and simplification of administrative procedures and delegation of powers to lower levels shall be implemented; the post-holding qualification examinations of certain senior executives shall be cancelled; the examination scope shall be gradually streamlined; the allocation of examination resources shall be optimized; and the level of the examination work shall be improved.93 Second, centralization and unification. The examination mechanism featuring centralized administration, consistency between higher and lower levels, and standardized operation shall be established and improved; examination question databases and examination forms shall be unified; and the examination results shall be recognized nationwide.94 Third, separation of examination from confirmation. Post-holding qualification examination and post-holding qualification confirmation shall be divided into two steps, and be organized and implemented, respectively. The examination step shall be taken first, followed by confirmation.95 Fourth, regulation in accordance with the law. Laws and regulations shall be strictly complied with; fairness and impartiality shall be adhered to; and discipline requirements shall be strictly enforced so as to ensure the seriousness and authority of examinations.The work standards shall be specified and the examination procedures shall be optimized so as to improve the regulation of examinations.96 (b) Major objectives97 Through the overall planning, review and consolidation, and centralized administration, the problems of inconsistency in standards, low efficiency, and repeated examinations shall be resolved, and the workflow for post-holding qualification confirmation shall be effectively rationalized. The regulation and unification of post-holding qualification examinations shall be promoted by unifying the examination forms, optimizing the examination process, and regulating the examination mechanisms.

91 Bao Jian Fa No. 122 [2015]. 92 The Implementation Plans for Regulating the Work on the Post-Holding Qualification Examinations of Directors, Supervisors and Senior Executives of Insurance Institutions 2015, s.1. 93 Ibid., s.1(1). 94 Ibid., s.1(2). 95 Ibid., s.1(3). 96 Ibid., s.1(4). 97 Ibid., s.2.

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(c) Regulation contents98 (1) Streamlining the examination scope. For the directors, supervisors, and senior executives of insurance institutions whose post-holding qualifications have been confirmed, the examinations of the qualifications which need to be confirmed anew when they are to hold the posts of the same kind in the insurance institutions of the same kind shall be cancelled. Where any senior executive whose post-holding qualification has been confirmed in an insurance institution is transferred to or holds concurrently any post at the same or a lower level within the institution, the re-examination of the senior executive is not required unless the CBIRC specifies otherwise the qualifications for the post to be held. According to the nature of business operation, insurance institutions are classified into seven categories of companies, namely, insurance group companies, property insurance companies, life insurance companies, asset management companies, reinsurance companies, proprietary captive insurance companies, and mutual insurance organizations. According to the nature of work, post categories are divided into ten categories, namely, directors, supervisors, general manager (deputy general manager or assistant to the general managers), secretary of the board of directors, chief compliance officer, chief actuary, chief financial officer, chief auditor, chief executive officer of risk management of an insurance asset management company, and the chief representative of the representative office of a foreign insurance institution in China. (2) Centralized examination administration.The Department of Personnel and Education of the CBIRC shall make overall arrangements on and be responsible for the resource integration and standard development of the work on post-holding qualification examinations so as to ensure that the examination work is conducted in a lawful, regulated, scientific, and effective manner. Training centres shall undertake the specific examination work and effectively conduct the routine examination administration. The Department of Development and Reform, the Department of Finance and Accounting, and other relevant departments shall undertake the construction and updating of the corresponding examination question databases and shall not be responsible for the specific examination work. (3) Conducting the separation of examination from confirmation. The examination and confirmation processes shall be adjusted by dividing post-holding qualification examination and post-holding qualification confirmation into two independent work steps, and post-holding qualification examination shall be taken first. Regular centralized examinations shall be conducted, and the personnel to assume the posts shall pass the post-holding qualification examinations before submitting the post-holding qualification application materials. The post-holding qualification examination results shall be valid within one year, and a relevant person may, within one year 98 Ibid., s.3.

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after passing an examination, apply for the confirmation of the corresponding post-holding qualification; or where the person fails to file an application within one year or his or her qualification fails to be confirmed, or his or her term of office interrupts for over one year, he or she shall reregister for an examination. (4) Unifying examination methods.The post-holding qualification examination system shall be established; the electronic examination shall be conducted; the examination process shall be unified; and the examination question databases shall be improved. (5) Regulating the work mechanism. The measures for the administration of the post-holding qualification examinations of directors, supervisors, and senior executives of insurance institutions shall be developed, and the examination scope, reference personnel, examination standards and process, database management, and examination disciplines, among others, shall be specified so as to improve the systematic and scientific level of the examination work. (d) Work measures99 (1) Establishing electronic examination sites. Under the principle of being thrifty, the existing resources shall be utilized to construct the special examination sites. Examination sites shall be equipped with computers and other examination equipment in accordance with the standard requirements and satisfy the requirements for the construction of standardized examination sites. (2) Developing the post-holding qualification examination system. The examination registration, score inquiry, examination question database management, random extraction of examination questions and preparation of examination papers, automatic scoring, transcript printing, and statistical analysis of examination results and other functions shall be primarily achieved. (3) Establishing and improving the examination question databases. (i) Examination contents and classification. The corresponding examination question databases shall be established according to the examination contents. The examination contents shall take into consideration both the popularization of basic knowledge and the pertinence of professional knowledge, including three parts, namely, public knowledge, professional knowledge, and knowledge on post requirements. (ii) Question types and the automatic formation of and scoring of examination papers. Examination questions shall consist of objective and subjective questions. Objective questions shall be automatically extracted and scored by computers. Subjective questions shall be extracted and formed by computers and scored manually. The examination paper scoring expert databases consisting of the relevant business backbones 99 Ibid., s.4.

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of the departments under the CIRC and the experts in the insurance industry shall be established. The points for objective examination questions and for subjective examination questions are 60 points and 40 points, respectively, and those who have obtained 60 points or more from the aforesaid two examination items shall be deemed as passing the examination. For certain special posts, the score ratio for subjective examination questions and objective examination questions may be adjusted in light of the actual circumstances. (4) Optimizing the examination process. (i) Examination registration. Insurance institutions shall assign special persons to be responsible for the matters on examination registration, and the examination registration work shall be conducted through the post-holding qualification examination system. After the examination arrangements are released, where any examinee needs to ask for leave, the human resources department of an insurance institution shall submit a written letter on the request for leave. Whoever misses an examination without justifiable reason shall be deemed as waiving the examination, and the CBIRC shall circulate a notice of criticism. Any person who misses examinations without justifiable reason twice within one year shall not register for examination within one year from the date when he or she misses an examination for the second time. (ii) Examination arrangements. The CBIRC shall, according to the information on examination registration, arrange a qualification examination every two months and may appropriately increase the examination frequency according to the situation on examination registration. In case of any other circumstance, the CBIRC may make adjustments or arrange separately. (iii) Examination implementation. Training centres shall assign special persons to be responsible for the examination implementation work. Examinations on the spot shall strictly follow the principles of impartiality and confidentiality.The examination results of objective question examinations shall be generated on the spot at the back office after such examinations are concluded, and examinees’ information in subjective question examination papers shall be sealed. For the foreign examinees who are not proficient in Chinese, the examination sessions shall be arranged separately, and each of them is allowed to take an examination with one translator accompanying. (iv) Announcement of results. After the conclusion of an examination, the training centre shall organize experts to score the subjective question examination papers and enter the examination results by summing up the objective and subjective question results in the system. The relevant departments, insurance institutions, and persons who take examinations may inquire about examination results according to different authorities. 186

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(v) Follow-up administration. Those who fail to pass examinations may apply for taking make-up examinations, and each of them may take make-up examinations at a maximum of twice each year. (e) Work guarantee100 (1) Strengthening organization and leadership. A leading group for post-holding qualification examinations shall be formed. In this leading group, the deputy-chairman in charge shall serve as the group leader, the persons in charge of the relevant departments and training centres shall serve as members, and the Department of Personnel and Education shall assume the functions of the office of the leading group to make overall arrangements and be responsible for the regulation of post-holding qualification examinations. (2) Clarifying the division of responsibilities. The work tasks shall be broken down and the responsible departments and time limit for completion shall be clarified. Training centres shall summarize the experience in the organization and implementation of post-holding qualification examinations, improve the work mechanisms, and report problems in a timely manner. All relevant departments shall, according to the division of tasks, further intensify the consciousness of responsibility, strengthen coordination, and join hands in effectively conducting the regulation of post-holding qualification examinations. (3) Strengthening coordination and cooperation. The regulation of the work on post-holding qualification examinations involves multiple departments. The relevant departments shall perform their respective functions, assume their respective responsibilities, conduct work to the best of their abilities, and cooperate with each other so as to effectively handle the connection between the organizational forms of old and new examinations and achieve smooth transition. 7.4.4 The training of directors, supervisors, and senior executives of insurance institutions In order to promote the training of directors, supervisors, and senior executives of insurance institutions and cultivate a team of directors, supervisors, and senior executives with the concept of regulatory compliance in business operations, risk prevention awareness, and scientific development capacity, the CIRC developed and published the Notice on Issuing the Administrative Measures for the Training of Directors, Supervisors and Senior Executives of Insurance Institutions on 19 April 2015.101 100 Ibid., s.5. 101 Bao Jian Fa No. 43 [2015]. “Insurance institutions” means insurance group (holding) companies, insurance companies and their branch offices, insurance asset management companies, and so on, formed with the approval of the CBIRC.The Measures 2015 shall also apply to the national specialized insurance agencies and their branch offices, insurance brokers and their branch offices, insurance adjustors and their branch offices, and other insurance organizations formed with the approval of the CBIRC.The Measures

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(a) The principles for the training The training of directors, supervisors and senior executives of insurance institutions shall conform to the following principles:102 (1) Taking into consideration the actual circumstances and learning for practice. Training content shall focus on the development and features of the insurance sector so as to enhance the capability to resolve practical problems. (2) Categorized and graded training and on-demand teaching. On the basis of effectively providing comprehensive training and based on different work nature and posts of trainees, training shall be provided by category and grade so as to make it more pertinent. (3) Making overall planning and promoting the work as a whole. Uniform planning shall be made for the training of directors, supervisors and senior executives of insurance institutions so as to specify the corresponding responsible parties and work focuses and form a joint force to promote the work. (4) Keeping in pace with the times and conducting reformation and innovation. The requirements for the reform and development of the insurance sector shall be proactively satisfied to promote innovations in such aspects as training contents, forms, methods, and systems. The CBIRC shall uniformly direct and oversee the training of directors, supervisors, and senior executives of insurance institutions, while the CBIRC and its local offices and insurance institutions shall perform their respective duties and cooperate with each other and jointly organize and complete the work.103 (b) Trainees The directors, supervisors, and senior executives of insurance institutions shall accept the training organized by the CBIRC and its local offices and satisfy the relevant requirements during their terms of office, and based on the requirements for the performance of functions, actively participate in all kinds of trainings provided by the insurance institutions where they work, social organizations of the insurance sector, and other social organizations.104 For the purpose of these Measures, “senior executives of an insurance institution” include:105 (1) the general manager, deputy general manager, and assistant to the general manager of the head office;

2015 replaced the Interim Measures for the Training Management of Directors, Supervisors and Senior Executives of Insurance Companies (Bao Jian Fa No.27 [2008]). 102 The Notice of the CIRC on Issuing the Administrative Measures for the Training of Directors, Supervisors and Senior Executives of Insurance Institutions 2015, art.3. 103 Ibid., art.4. 104 Ibid., art.5. 105 Ibid., art.6.

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(2) the secretary of the board of directors, the chief compliance officer, the chief actuary, the chief financial officer, the chief auditor, and the chief risk manager of the head office; (3) the general manager, deputy general manager, and assistant to the general manager of the branch companies and central sub-branch companies; (4) managers of the sub-branch companies and business departments; and (5) managers with the same power as the aforesaid senior executives. The directors, supervisors, and senior executives of insurance institutions shall participate in the corresponding training in light of the different circumstances:106 (1) All kinds of on-duty training to update knowledge and enhance capability during the term of office. (2) Office training of directors, supervisors, and senior executives of the corresponding level before taking their positions for the first time. (3) Special business training targeting at key and difficult issues in industry development. (4) Other training. The directors, supervisors, and senior executives of insurance institutions shall participate in training for no fewer than 100 hours each year, and directors, supervisors, and senior executives of head offices, branch companies, and central sub-branch companies shall participate in the trainings held by the CBIRC and its local offices for no fewer than ten hours each year.107 The directors, supervisors, and senior executives of insurance institutions shall abide by the requirements of training disciplines and complete required training assignments. The CBIRC shall take corresponding measures, such as notifying the directors, supervisors, and senior executives of insurance institutions of relevant information, holding regulatory talks, and issuing regulatory letters to the individuals that fail to participate in training as required and to the institutions where they work.108 (c) Training content The training content for directors, supervisors, and senior executives of insurance institutions mainly shall cover current situations and policies, laws and regulations, professional knowledge, professional norms, and so on.:109 (1) The training on current situation and policies mainly covers the national economic and financial situations and policies, the Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry, the reform and development and policies of the insurance sector, the theories on the development of the insurance sector,

106 107 108 109

Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10.

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and the development trends and experience of the international insurance sector, among others. (2) The training on laws and regulations mainly covers the Insurance Law, other laws and regulations, and the relevant regulatory provisions of the CBIRC. (3) The training on professional knowledge mainly covers the business management, internal control, risk management, innovation and development, and so on, of insurance institutions. (4) The training on professional norms mainly covers the social responsibilities of insurance institutions, the protection of rights and interests of insurance consumers, professional ethics and honesty, and the rights and obligations of directors, supervisors, and senior executives, among others. The training contents for directors shall focus on national economic and financial situations and policies, theories on the reform and development of the insurance sector, development of the insurance sector, the compliance with laws and regulations, corporate governance, fund operation and strategic management, analysis of investment decisions, and the basic rights, obligations, and legal liability of directors, among others.110 The training contents for supervisors shall focus on the compliance with laws and regulations, corporate governance, development strategies, internal audits and internal control of insurance institutions, interpretation of financial statements of insurance institutions, and the basic rights and obligations, and legal liability of supervisors, among others.111 The training contents for general managers shall focus on national economic and financial situations and policies, theories on the reform and development of the insurance sector, development of the insurance sector, the compliance with laws and regulations, corporate governance, protection of rights and interests of insurance consumers, fund operation and strategic management, and the analysis of investment decisions, among others.112 The training contents for the deputy general manager and the assistant to the general manager shall focus on the theories on the reform and development of the insurance sector, development of the insurance sector, compliance with laws and regulations in business operations, status quo and trend of development of the domestic and international insurance market, protection of rights and interests of insurance consumers, fund operation and strategic management, analysis of investment decisions, and professional knowledge on the fields under their charge, among others.113 The training contents for the secretaries of the boards of directors shall focus on the compliance with laws and regulations, corporate governance, standardized operation of insurance institutions, analysis of financial statements, information

110 111 112 113

Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14.

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disclosure of insurance companies, and the basic rights and obligations and legal liability of the secretary of the board of directors, among others.114 The training contents for the chief compliance officers shall focus on the laws and regulations on the operation of insurance institutions and the relevant regulatory provisions, the internal standardized operation of insurance institutions, the preparation of regulatory compliance reports, the identification and standardization of regulatory compliance risks, and the basic rights and obligations and legal liabilities of the chief compliance officers, among others.115 The training contents for the chief actuaries shall focus on the risk management and asset-liability matching management, actuarial financial rules, product development and pricing principles, solvency management, and the basic rights and obligations and legal liability of the chief actuary of insurance institutions, among others.116 The training contents for the chief financial officers shall focus on the accounting and financial management, preparation of financial reports, accounting standards, the implementation of accounting rules for enterprises and the selection of accounting policies, solvency management, and the basic rights and obligations and legal liabilities of the chief financial officers of insurance institutions, among others.117 The training contents for the chief auditors shall focus on the compliance with laws and regulations, corporate governance, the financial management of insurance institutions, auditing principles and requirements of insurance institutions, and the basic rights and obligations and legal liability of the chief auditor, among others.118 The training contents for the chief risk managers shall focus on the allocation of insurance assets, investment and financing decisions, procedures for the utilization of insurance funds, the management of risks in the utilization of insurance funds, and the basic rights and obligations and legal liabilities of the chief risk managers, among others.119 The training contents for the senior executives of the branch offices of insurance institutions shall focus on the laws and regulations on insurance supervision and practical operation in the standardized operation of branch offices of insurance institutions, among others.120 (d) Training organization and implementation A training plan and an implementation plan shall be prepared to strengthen the management and control of the promotion and implementation progress of the training work.121

114 115 116 117 118 119 120 121

Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

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Overall planning on training resources shall be made to coordinate and allocate resources of all aspects such as appropriate courses, teachers, places, and facilities based on different training topics.122 A variety of training methods shall be used, such as class-based, research-based, case analysis, simulation, and actual participation.123 Training methods shall be innovated so as to make full use of modern information technologies, and new channels and new means, such as online courses, micro learning, and so on, shall be actively developed.124 Training assessment shall be strengthened, and multiple means, such as graduation tests, quizzes, online testing and paper submission, shall be taken to promote the obtainment of information on training contents by the personnel participating in the trainings.125 The rules for the investigation and research of training demands shall be established, and the mechanism shall be established for updating training contents.126 The assessment of training effects shall be improved, the testing of curriculum, provision of teachers, organization and management, teaching effects, and other aspects shall be strengthened, and the training work shall be improved.127 (e) Responsibilities of insurance regulatory authorities In the training of directors, supervisors, and senior executives of insurance institutions, the CBIRC shall make overall planning, provide macro guidance and coordination services, urge inspection, standardization of rules and integration of resources, and based on the functions of regulatory authorities, provide training on industry development, laws and regulations, regulatory policies, risk prevention, and so on.128 The training centre of the CBIRC is the principal entity responsible for the training of directors, supervisors, and senior executives of insurance institutions undertake all specific management functions of the CBIRC on the training of directors, supervisors, and senior executives of insurance institutions and is responsible for organizing the implementation of relevant training sessions. Its major responsibilities include:129 (1) preparing the overall planning, industry standards, detailed implementing rules, and annual training focuses, among others, for the training of directors, supervisors, and senior executives of insurance institutions. (2) establishing the CBIRC’s online training platform for directors, supervisors, and senior executives of insurance institutions. (3) providing training to the directors, supervisors, and senior executives of the head office and exemplary training to the principal persons-in-charge 122 123 124 125 126 127 128 129

Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30.

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(4) (5) (6) (7) (8) (9)

of the departments of the head offices and general managers of provincial branch companies, undertaking training sessions for directors, supervisors, and senior executives held by all departments of the CBIRC, and including the relevant information in the online training platform for directors, supervisors, and senior executives of insurance institutions. providing business guidance and making overall resource planning for the trainings provided by local CBIRC offices to senior executives. guiding, examining, overseeing, and assessing the training of directors, supervisors, and senior executives provided by insurance corporate institutions. organizing the compilation of teaching materials for the training of directors, supervisors, and senior executives of the insurance sector. making overall planning on establishing the teacher base and course base for the training of directors, supervisors, and senior executives of the insurance sector. appraising and granting recordation of social organizations undertaking the training sessions of the CBIRC and its local offices. undertaking other work on the training of directors, supervisors, and senior executives.

All local offices of the CBIRC shall direct and oversee the training of senior executives of branch offices of insurance institutions within their respective jurisdictions, and provide the relevant training based on the functions of regulatory authorities. Their major responsibilities include:130 (1) holding training sessions for the senior executives of the branch offices of the insurance institutions or organizing them to participate in trainings through the CBIRC’s online training platform for the directors, supervisors, and senior executives of insurance institutions and recording the relevant training information. (2) guiding, examining, overseeing, and assessing the training of senior executives provided by branch offices of insurance institutions within their respective jurisdictions. (3) preparing specific training methods and detailed implementing rules based on the actual circumstances of their jurisdictions. (4) undertaking other work on the training of senior executives. All local offices of the CBIRC shall specify a department responsible for the training of senior executives and effectively conduct the work, such as system building and staffing.131 The CBIRC and its local offices may independently organize or authorize independent organizations to undertake the specific training of directors, supervisors, and senior executives of insurance institutions. Where they authorize independent organizations to undertake trainings, they shall effectively conduct the supervision 130 Ibid., art.31. 131 Ibid., art.32.

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from such aspects as curriculum, teaching quality, organization level, and charging standards.132 The entities participating in the training for directors, supervisors, and senior executives of insurance institutions provided by the CBIRC and its local offices shall assume the relevant expenses for the recruitment of teachers and lease of places, among others, and strictly observe the principle of “basing collection on expenditure, and balancing income and expenditure.”133 The CBIRC and its local offices shall regard whether the directors, supervisors, and senior executives of insurance institutions participate in training as required as an element of the follow-up confirmation of their office qualifications.134 (f) Functions of insurance institutions Insurance institutions shall, based on development requirements, actively provide trainings to directors, supervisors, and senior executives by focusing on the companies’ strategies, management practice, skill development, leadership improvement, and other content.135 Insurance institutions shall actively utilize good-quality social training resources to enhance the level and practical effects of training to directors, supervisors, and senior executives by multiple means;136 shall establish training archives for directors, supervisors and senior executives to faithfully record all kinds of training participated by directors, supervisors, and senior executives;137 shall ensure sufficient staff and funds, among others, for the training of directors, supervisors, and senior executives;138 shall include the training information in the assessment of directors, supervisors, and senior executives and take it as a reference for their remuneration, office appointment, and other matters;139 and shall determine the department and contact person responsible for the training of directors, supervisors, and senior executives and strengthen working contact with the CBIRC and its local offices.140 All insurance institutions that provide trainings to directors, supervisors, and senior executives shall accept the guidance and supervision of the CBIRC and its local offices and complete the work, such as information feedback and submission of materials on schedule.141 Associational organizations of the insurance sector shall provide the relevant specialized technical training based on their professional advantages, accept the guidance and supervision of the CBIRC and its local offices, and complete the work such as information feedback and material reporting on schedule.142

132 133 134 135 136 137 138 139 140 141 142

Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid., art.41. Ibid., art.42. Ibid., art.43.

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7.5 The regulation of corporate governance structure According to the Organisation for Economic Co-operation and Development (OECD), the governance structure should have an appropriate allocation of oversight and administrative responsibilities; stipulate and delineate clearly the duties, responsibilities, and qualifications of persons having responsibilities; and protect the rights of shareholders (or member-policyholders) and the interests of policyholders.143 A similar principle is also provided by the IAIS. The insurance supervisor should require insurers to establish and implement a corporate governance framework which provides for sound and prudent management and oversight of the insurer’s business and adequately recognizes and protects the interests of policyholders.144 In the Provisions on the Administration of Insurance Companies 2015, it is provided that an insurance company shall establish a sound corporate governance structure, enhance internal management, and establish rigid internal control rules.145 In order to strengthen and improve regulation of corporate governance, the CIRC promulgated the Guiding Opinion on Regulating the Insurance Company Corporate Governance Structure on 5 January 2006.146 It is applicable to all insurance companies and insurance asset management companies. The Guiding Opinion 2006 sets out guidelines in six aspects in respect of insurance company corporate governance: (1) (2) (3) (4) (5)

Strengthen the obligations of the major shareholders; Strengthen the construction of the board of directors; Ensure the functioning of the supervisory board; Regulate the operations of the management; Strengthen the management of related-party transactions and information disclosure; and (6) Corporate governance structure supervision and administration.

7.5.1 Strengthen the obligations of major shareholders147 The main shareholders who have a greater influence on the operation and management of the insurance company must have a good financial status and the ability to continue to invest and support the insurance company to improve its solvency and must not use its special position to damage the legitimate rights and interests of the insurance company, the insureds, the minority shareholders, and other interested parties. Where an insurance company’s shareholders are in an affiliated relationship with one another, they must take the initiative to report to the board of directors. An 143 The OECD, Guidelines on Insurer Governance, 2017 edition (see accessed on 14 October 2020). 144 ICP 7 Corporate Governance. 145 The CIRC Order No. 3 [2015], the Provisions on the Administration of Insurance Companies 2015, art.55. 146 Bao Jian Fa No.2 [2006] (see accessed on 14 October 2020). 147 The Guiding Opinion on Regulating the Insurance Company Corporate Governance Structure 2006, s.1.

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insurance company shall promptly report to the CBIRC the relationship between shareholders. 7.5.2 Strengthen the construction of the board of directors148 (a) Clarify the duties and functions of the board149 In addition to performing the duties conferred by laws and regulations and the company’s Articles of Association, the board of directors of an insurance company shall also be ultimately responsible for the following matters: (1) Internal control. To enable insurance companies to establish an internal control system that suits their business nature and asset scale and to regularly check and evaluate the integrity and effectiveness of insurance companies’ internal controls. (2) Risk management. To enable insurance companies to establish mechanisms for identifying, assessing, and monitoring risks and regularly check and evaluate risks in insurance companies’ business, finance, internal control, and governance structures (3) Compliance. To enable insurance companies to establish compliance management mechanisms and to regularly inspect and evaluate insurance companies’ compliance with laws and regulations, regulatory requirements, and internal management systems. (b) Strengthen the directors’ duties and functions150 (1) A director must have good conduct and reputation, professional knowledge, and corporate management experience appropriate to his or her duties. (2) A director must be honest and diligent, continue to pay attention to the company’s operation and management, and ensure that he or she has enough time to perform his or her duties. (3) A director must have the right to request the management to provide all kinds of information reflecting the company’s operation and management or make explanations on relevant issues in a comprehensive, timely, and accurate manner. (4) A director must fully review the resolutions of the board of directors and independently vote on the basis of prudent judgment. (5) Where the resolution of the board of directors violates the laws and regulations or the company’s Articles of Association, causing serious losses to the company, the directors who voted for or abstained from voting such resolution shall be liable according to law. (6) The board of directors shall report the directors’ due diligence to the shareholders’ general meeting every year and at the same time report to the CBIRC.

148 Ibid., s.2. 149 Ibid., s.2(1). 150 Ibid., s.2(2).

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(c) Establish an independent director system151 In order to improve the independence of the board of directors and promote scientific decision-making and full supervision, insurance companies should gradually establish and improve the independent director system. (1) APPOINTMENT AND DISMISSAL OF INDEPENDENT DIRECTORS Persons who have relationships with insurance companies, controlling shareholders, or actual controllers which may affect their independent and objective judgment of company affairs shall not serve as independent directors. Independent directors shall make public statements about their independence and due diligence commitments. The board of directors of an insurance company should have at least two independent directors and gradually increase the proportion of independent directors to more than one-third of the board members. Except for dereliction of duty and other situations where it is unsuitable to hold positions, independent directors shall not be removed from office before their terms expire. If the independent director resigns or is removed in advance for special reasons, the insurance company shall explain the situation to the CBIRC, and the independent director may state his opinion to the CBIRC. (2) RIGHTS AND OBLIGATIONS OF INDEPENDENT DIRECTORS Independent directors must carefully review and submit written comments to the board of directors regarding the insurance company’s appointment and dismissal of insurance senior management personnel executives and their remuneration and incentive measures, major affiliated transactions, and other matters that may have a significant impact on the interests of the insureds or minority shareholders. If the board of directors does not accept the opinions of independent directors, more than half and no fewer than two independent directors may propose to the board of directors to convene an extraordinary general meeting. If the board of directors does not agree to convene an extraordinary general meeting of shareholders or the general meeting of shareholders does not accept the opinions of independent directors, the independent directors shall report to the CBIRC. If more than half and no fewer than two independent directors consider it necessary, an external audit agency may be hired to provide audit opinions at the expense of the insurance company. (d) Special committee152 In order to effectively improve the efficiency and level of decision-making of the board of directors, insurance companies shall at least set up an audit committee and a nomination and remuneration committee under the board of directors.

151 Ibid., s.2(3). For the regulation of independent directors of insurance companies, the CBIRC provided a separate set of rules in the Measures for the Administration of Insurance Institutions’ Independent Directors (Yin Bao Jian Fa No. 35 [2018]) on 30 June 2018. 152 The Guiding Opinion on Regulating the Insurance Company Corporate Governance Structure 2006, s.2(4).

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(1) AUDIT COMMITTEE The audit committee is composed of three or more directors who do not hold any management positions with an independent director serving as committee chairman. The members of the audit committee shall have professional knowledge in financial and legal aspects appropriate to their duties. The audit committee is responsible for regularly reviewing the internal control assessment report submitted by the internal audit department, the risk assessment report submitted by the risk management department, and the compliance report submitted by the compliance management department, and must provide to the board of directors opinions and suggestions for improvement on the issues regarding the company’s internal control, risk, and compliance. The audit committee is responsible for nominating external audit institutions. (2) NOMINATION AND REMUNERATION COMMITTEE The nomination and remuneration committee is composed of three or more directors who do not hold management positions, with an independent director serving as the committee chairman. The nomination and remuneration committee is responsible for reviewing the selection and appointment system of directors and senior management personnel and the appraisal standards and remuneration and incentive measures; reviewing the candidates for directors and senior executives and making recommendations to the board of directors; conducting performance reviews of senior executives; and making comments to the board of directors. The Nomination and Remuneration Committee should adapt the remuneration and incentive measures for senior executives of insurance companies which are commensurate with the company’s operating efficiency and personal performance. 7.5.3 Ensure the functions of the board of supervisors153 Insurance companies must correctly formulate the work rules of the board of supervisors, clarify the duties and functions of the board of supervisors, and provide necessary work guarantees for the board of supervisors. The supervisor must have professional knowledge and work experience appropriate to the relevant responsibilities and perform his or her duties prudently and diligently. When the board of supervisors finds that the resolution of the board of directors violates the laws and regulations or the Articles of Association, it shall require the board of directors to correct it immediately. If the board of directors refuses or delays the adoption of corrective measures, the board of supervisors shall propose to convene an extraordinary general meeting. If the general meeting of shareholders does not accept the opinions of the board of supervisors, the board of supervisors shall report to the CBIRC. The board of supervisors shall report the due diligence of the supervisors to the shareholders’ meeting and submit it to the CBIRC at the same time. 153 Ibid., s.3.

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7.5.4 Regulate management-level operations154 (a) Improve the operational mechanisms155 Insurance companies must formulate management-level working rules, clarify the duties and functions of the management level, and clearly define the relationship between the board of directors and the management level. The general manager of an insurance company is fully responsible for the daily operation and management of the company, and his responsibility is not reduced or relieved by the duties of other management members. Insurance companies should, in accordance with the requirements of the modern enterprise system, gradually improve the establishment of the chairman and general manager and improve the mechanism of checks and balances. (b) Strengthen key position duties and functions156 (1) Chief actuary. The personal insurance company shall set up the position of chief actuary. The chief actuary is responsible to both the management level and the board of directors, and reports to the CBIRC on the company’s major risks and hidden dangers in a timely manner. The chief actuary must take part in risk management, product development, and asset and liability-matching management of the insurance companies.157 (2) Regulation-compliance officer. The insurance company shall establish the position of regulation-compliance officer.The regulation-compliance officer is responsible to both the management level and the board of directors, and must report to the CBIRC on major violations of the company in a timely manner. The regulation-compliance officer is responsible for the company’s compliance management and regularly makes corrective and improvement suggestions to the board of directors on the problems in regulation-compliance. (c) Establish relevant working departments158 In order to strengthen the work of internal control, risk, and compliance, insurance companies should set up the following functional departments. (1) Audit department. The audit department is responsible for auditing the business and finance of the insurance company, inspecting the internal control, and regularly submitting internal control evaluation reports. The audit department must be an independent working department, specifically responsible for the audit work. 154 Ibid., s.4. 155 Ibid., s.4(1). 156 Ibid., s.4(2). 157 Actuaries are regulated by the Administrative Measures for Chief Actuaries of Insurance Companies (2010 Amendment) which was issued by the CIRC Order No. 3 [2007] on 28 September 2007 and amended according to the Decision of CIRC on Amending Some Rules by the CIRC Order No. 10 [2010] on 3 December 2010. 158 The Guiding Opinion on Regulating the Insurance Company Corporate Governance Structure 2006, s.4(3)

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(2) Risk management department.The risk management department is responsible for checking the company’s risk status and submitting risk assessment reports on a regular basis. The risk assessment report shall be reviewed and signed by the general manager or its designated management members. The risk management department can be either a full-time work department or a comprehensive coordination organization composed of related business departments. (3) Compliance management department. The compliance management department is responsible for conducting compliance reviews on important business activities such as product development, marketing, and foreign investment, identifying, evaluating, monitoring, and submitting compliance reports on the compliance risks of the company’s management systems, business procedures, and operating behaviours. The compliance report shall be reviewed and signed by the regulation-compliance officer. The compliance management department must be independent of the business and financial departments. An insurance company with a small business capacity and without the ability to establish a full-time compliance management department shall adopt other methods to strengthen the compliance management function. 7.5.5 Strengthen the management of related-party transactions and information disclosure159 (a) Related-party transactions (or affiliated transactions)160 Insurance companies must formulate internal management systems for related-party transactions and submit them to the CBIRC for recording. The internal management system of related-party transactions includes the definition, reporting, and confirmation of related parties, the scope and pricing methods of related-party transactions, internal approval procedures for related-party transactions, voting abstention methods, and handling of violations, and others. An insurance company’s major related-party transactions must be reviewed by the audit committee of the board of directors and then submitted to the board of directors for approval. Insurance companies must promptly report the related-party transactions to the CBIRC in accordance with regulatory provisions. (b) Information disclosure161 Insurance companies must disclose financial, risk, and governance structure information in accordance with relevant laws, regulations, and regulatory provisions and ensure the truthfulness, accuracy, and completeness of the disclosed information. Insurance companies must establish an internal management system for information disclosure and appoint a special person to be responsible for information disclosure. 159 Ibid., s.5. 160 Ibid., s.5(1). 161 Ibid., s.5(2).

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7.5.6 Corporate governance structure supervision and administration162 (a) Qualification management and training163 The qualifications of shareholders of insurance companies and the qualifications of directors, supervisors, and senior executives shall be reported to the CBIRC for examination and approval. If insurance company directors, supervisors, and senior management personnel neglect to perform their duties or have major misconduct, the CBIRC may order the insurance company to replace or cancel their appointment qualifications. Insurance company directors, supervisors, and senior executives must strengthen the learning of relevant knowledge and skills and participate in training in accordance with regulations. (b) Off-site monitoring164 (1) Major resolutions of the general meeting of shareholders of the insurance company and the board of directors shall be reported to the CBIRC within 30 working days after the resolution is made. (2) The board of directors of an insurance company shall submit an internal control evaluation report to the CBIRC every year. The internal control evaluation report shall include the contents of the implementation of the internal control system, existing problems, and improvement measures. (3) The board of directors of an insurance company shall submit a risk assessment report to the CBIRC each year. The risk assessment report shall evaluate the solvency risk, investment risk, product pricing risk, provision of reserve funds risk and interest rate risk of the insurance company and propose corrective and improvement measures. (4) The board of directors of an insurance company shall submit a compliance report to the CBIRC each year. The compliance report shall include major violations, problems in compliance management, and improvement measures. (c) On-site inspection.165 Insurance companies must actively cooperate with the inspection of the governance structure of the CBIRC and make rectifications as required. (d) Communication mechanism166 If the CBIRC deems it necessary, it may attend the general meeting of shareholders of the insurance company, the board of directors, and its professional committees and may directly provide feedback regulatory opinions to the shareholders of the insurance company.

162 163 164 165 166

Ibid., s.6. Ibid., s.6(1). Ibid., s.6(2). Ibid., s.6(3). Ibid., s.6(4).

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7.6 Regulation of the operation of the board of directors of insurance companies The regulatory rules for the operation of the board of directors are provided in the Notice of CIRC on Issuing the Guidelines on the Operation of the Board of Directors of Insurance Companies (hereinafter, the Guidelines 2008) on 8 July 2008, which became effective on 1 October 2008.167 Consisting of 91 articles in seven chapters, the Guidelines 2008 were formulated in accordance with the Insurance Law, the Company Law, and other relevant laws, administrative regulations, departmental rules, and regulatory documents. We consider these Guidelines in detail in this section. The Guidelines 2008 applies to the insurance companies and insurance asset management companies lawfully established within the territory of China in which there is a board of directors. If any law, administrative regulation, or regulatory provision provides otherwise for wholly state-owned insurance companies, foreignfunded companies, and listed insurance companies, the said law, administrative regulation, or regulatory provision shall prevail.168 The board of directors of an insurance company is the decision-making body of the company. The principle of compliance, collective decision-making, professionalism, and high efficiency shall be observed in the operation of the board of directors.169 7.6.1 Directors (a) Appointment and dismissal of directors The non-employee directors shall be elected by the general assembly of shareholders.The employees’ representative directors shall be elected by the general assembly of employees’ representatives, by the general assembly of employees, or by other democratic means. Each term of office of directors shall not exceed three years. The directors may be reappointed upon re-election. The term of office of directors shall be computed from the date of formal appointment to the expiration of the term of office of the board of directors. In the case of failure to re-elect directors in a timely manner at the expiration of the term of office of directors, the incumbent directors shall continue performing their duties until the new board of directors assumes office.170 An insurance company shall, in the Articles of Association, set forth how to nominate and elect directors, expressly describing the nominators’ qualifications, nomination and examination procedures, election measures, and so on. An insurance company is encouraged to elect directors through the accumulative voting system.171 167 Bao Jian Fa No. 58 [2008] (see accessed on 14 October 2020). 168 The Notice of CIRC on Issuing the Guidelines on the Operation of the Board of Directors of Insurance Companies 2008, art.2. 169 Ibid., art.3. 170 Ibid., art.4. 171 Ibid., art.5.

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The secretary of the board of directors shall, no later than three months prior to the expiration of the term of office of the board of directors, give a written notice to all directors, and the chairman of the board of directors shall initiate the procedures for changing the board of directors. The secretary of the board of directors shall send a notice to the shareholders or other nominators with the nominating power. The said notice shall cover the name of the members of the incumbent board of directors, the start and end time of the term of office of the board of directors, the nomination rules, and the deadline, and so on.172 The shareholders or other nominators with the nominating power shall, prior to the deadline, submit to the secretary of the board of directors a name list of the nominated director candidates and the personal references thereof in writing.173 The nominations and remuneration committee of the board of directors shall, in accordance with the provisions of laws, administrative regulations, regulatory provisions, and Articles of Association on the requirements for the appointment of directors, examine the candidates and submit to the board of directors its examination opinions and a name list of qualified candidates.174 The board of directors shall, in light of the name list of qualified candidates submitted by the nominations and remuneration committee, propose the holding of a general assembly of shareholders so as to elect directors. Besides the accumulative voting system, the general assembly of shareholders shall, during the election of directors, deliberate and vote on the candidates one by one.175 The measures for the candidate directors of an insurance company during the preparatory phase shall be decided by the capital contributors and preparatory establishment institution upon negotiation. The directors shall be elected by the initial meeting of the company.176 Where it is impossible to elect a new board of directors on time at the expiration of the term of the current board of directors as a result of unqualified shareholders, disputes over stock trading or any force majeure, the secretary of the board of directors of the insurance company shall submit in a timely manner a report to the CBIRC. The report shall state the term of office and members of the current board of directors, causes for the impossibility to elect a new board of directors, a plan on the election of a new board of directors, and other matters necessary to be described.177 When dismissing a director, the shareholder or institution which proposes the dismissal shall send a written notice to the board of directors. After the nominations and remuneration committee issues its independent prudent opinions on the dismissal of such director, the said notice shall be submitted to the general assembly of shareholders for deliberation.The dismissed director may make a statement and make an argument to the board of directors at the general assembly of

172 173 174 175 176 177

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11.

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shareholders and has the obligation to warn other directors and shareholders of the risks that may exist in the company.178 Where a director requests resignation prior to the expiration of his or her term of office, he or she shall submit a written resignation report to the board of directors and has the obligation to state in the said report the matters to which other directors and shareholders should pay attention.179 The secretary of the board of directors shall notify in a timely manner other directors and shareholders of the company about the director who has resigned from the board of directors. If the number of members of the board of directors will become lower than the minimum number as prescribed by the Company Law or two-thirds of the number as required by the Articles of Association as a result of the resignation of a director, the director who requests resignation shall continue performing his or her duties before a new one assumes his or her position. Except for the circumstance as described in the preceding paragraph, the resignation of a director shall take effect when the resignation report is served on the board of directors.180 If the number of members of the board of directors becomes lower than the minimum number as prescribed by the Company Law or the minimum number required for the board of directors to take a vote as a result of the dismissal of a director by the general assembly of shareholders, the death of a director, or other circumstances in which a director is unable to perform his or her duties, the company may stipulate in its Articles of Association that the functions of the board of directors will be exercised by the general assembly of shareholders until the number of members of the board of directors meets the relevant requirement.181 If the number of members of the board of directors will become lower than minimum number as prescribed by the Company Law or two-thirds of the number as required by the Articles of Association, the company shall initiate the procedures for re-electing directors within five working days and hold a general assembly of shareholders to elect directors within two months.182 The term of office of the newly elected directors shall end with the expiration of the term of the board of directors.183 The chairman and deputy chairman of a board of directors shall be elected and dismissed by more than half of all the members of the board of the company.184 (b) Qualifications for appointment of directors A director of an insurance company shall, prior to the appointment, acquire the CBIRC’s approval of qualifications for appointment. The reappointment of a

178 179 180 181 182 183 184

Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18.

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director upon re-election does not require re-application for approval of qualifications for appointment.185 Where an insurance company applies for approval of qualifications for appointment of a director, it shall follow the following procedures:186 (1) The general assembly of shareholders of the company accepts the candidate director by vote; (2) The company applies for approval of the qualifications for appointment of the director; and (3) The company makes a formal appointment after it obtains approval of the qualifications for appointment. A formally appointed director without approval shall not perform the director’s duties. Where a director without the qualifications for appointment participates in a vote, his or her vote has no legal effect. After an independent director obtains approval of qualifications for appointment, a statement on his or her independence shall be made through the media which has a nationwide influence in accordance with relevant regulatory provisions.187 An insurance company shall, within ten working days after the aforesaid statement is published, submit a written report to the CBIRC for archival purposes and accompany it with a photocopy of the statement. The nominations and remuneration committee of the board of directors shall pay attention to whether the directors incessantly meet the appointment qualifications. Where a director loses the qualifications for appointment during his or her term of office, the nominations and remuneration committee shall propose to the board of directors his or her dismissal, and the board of directors shall submit the matter to the general assembly of shareholders for deliberation.188 (c) Duties and obligations of directors A director shall, according to the Articles of Association, make decisions within the scope of power of the board of directors through board meetings and by other lawful means, supervise the senior managers, and earnestly protect the legitimate rights and interests of the insurance company, shareholders, the insureds, and other interested parties. A director shall bear personal liability for resolutions made by the board of directors.189 A director has the right to know the company’s affairs. The insurance company shall guarantee the directors’ right to knowledge.190

185 Ibid., art.19. 186 Ibid., art.20. 187 Ibid., art.21. Article 21 has been modified by the Notice of China Banking Regulatory Commission on Abolishing and Modifying Some Regulatory Documents (Yin Bao Jian Fa No. 5 [2020]). This is the modified version. 188 The Notice of CIRC on Issuing the Guidelines on the Operation of the Board of Directors of Insurance Companies 2008, art.22. 189 Ibid., art.23. 190 Ibid., art.24.

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A company shall establish an information reporting system for directors, which shall regulate the contents, frequency, form, liable subjects, confidentiality, and so on in order to ensure that the directors have full knowledge of the business management of the company. The directors may investigate into and do research on the company so as to know in a timely manner the financial status, internal control, compliance, risk management, and other business information of the company.191 The chairman and the deputy chairman of the board of directors, and members of the professional committees of the board of directors shall, besides performing the duties of directors, fulfil other duties as required by any law, administrative regulation, regulatory provisions, and Articles of Association for their posts.192 When a director exercises his or her power, the relevant personnel of the insurance company shall be cooperative. No one may reject or hinder his or her exercise of power, conceal relevant information, or improperly interfere with his or her exercise of power. Where a director encounters barriers when he or she normally exercises his or her power, he or she shall report it to the CBIRC.193 A director has the obligation of fidelity to the insurance company. A director shall strictly follow the provisions of articles 21,194 148,195 and 149196 and other relevant articles of the Company Law on the director’s obligation of fidelity and

191 192 193 194

Ibid., art.25. Ibid., art.26. Ibid., art.27. Article 21 of the Company Law: Neither the controlling shareholder, nor the actual controller, nor any of the directors, supervisors or senior management of the company may injure the interests of the company by taking advantage of its connection relationship. Anyone who causes any loss to the company due to violating the preceding paragraph shall be liable for the compensation.

195 Article 148 of the Company Law: “No director or senior manager may commit any of the following acts: (1) Misappropriating the company’s fund; (2) Depositing the company’s fund into an account under his own name or any other individual’s name; (3) Without consent of the shareholders’ meeting, shareholders’ assembly, or the board of directors, loaning the company’s fund to others or providing any guaranty to any other person by using the company’s property as in violation of the bylaw; (4) Entering a contract or trading with this company by violating the bylaw or without consent of the shareholders’ meeting or shareholders’ assembly; (5) Without consent of the shareholders’ meeting or shareholders’ assembly, seeking business opportunities that belong to the company for himself or any other persons by taking advantages of his powers, or operating similar business of the company for which he works for himself or for any other persons; (6) Taking commissions on the transactions between others and the company into his own pocket; (7) Illegally disclosing the company’s confidential information; (8) Other acts inconsistent with the obligation of fidelity to the company.

The income of any director or senior manager from any act in violation of the preceding paragraph shall belong to the company. 196 Article 149 of the Company Law: “Where any director, supervisor or senior manager violates any law, administrative regulation, or the bylaw during the course of performing his duties, if any loss is caused to the company, he shall be liable for compensation.”

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shall not seek any improper benefit by taking advantage of the power relating to his or her position in the company.197 A director has the obligation of due diligence to the insurance company. A director shall strictly guarantee adequate time and energy to perform his or her duties prudently and diligently. A director shall always pay attention to the business management of the company and shall attend the meetings of the board of directors on time.198 Where a director fails to attend two consecutive meetings of the board of directors in person, if he or she does not authorize any other director to attend the meetings on his or her behalf, he or she shall be deemed to be unable to perform his or her duties, and the board of directors, board of supervisors, or shareholders may propose to the general assembly of shareholders that he or she be replaced by a new director.199 Where a director fails to attend two meetings of the board of directors within one year, the company shall issue to him or her a written reminder. Where an independent director is given two reminders within a term of office, he or she shall not be reappointed as an independent director. Where an independent director is under the aforesaid circumstance within his or her second term of office, he or she shall not be hired to assume the post of independent director of any other insurance company. A director shall actively attend the trainings organized by the company and regulatory bodies so as to incessantly have the professional knowledge and capacity necessary to perform his or her duties.200 (d) Due diligence evaluation of directors An insurance company shall establish a system of due diligence evaluation of directors, regulating the subjects, the manner, contents, criteria, and procedures for the due diligence evaluation of directors. The board of directors shall conduct a due diligence evaluation of the directors each year and submit a director’s due diligence report to the general assembly of shareholders and the board of supervisors.201 A director’s due diligence report shall cover:202 (1) The information about the directors attending the meetings of the board of directors, including the number of meetings which they have failed to attend, and why; (2) The information about votes taken and opinions expressed by the directors at the meetings of the board of directors, including the information about their waiver of the right to vote or opposite votes, and why;

197 The Notice of CIRC on Issuing the Guidelines on the Operation of the Board of Directors of Insurance Companies 2008, art.28. 198 Ibid., art.29. 199 Ibid., art.30. 200 Ibid., art.31. 201 Ibid., art.32. 202 Ibid., art.33.

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(3) The efforts which the directors made in order to understand the company’s operation and management status, and the feedback which the directors gave to the company; (4) The trainings which the directors attended; (5) Other efforts which the directors made for improving the business management of the company and other contents which the company deems necessary to be evaluated. An insurance company shall formulate by-laws on the directors’ remuneration, clarifying the remuneration or allowances to the executive directors, non-executive directors, and independent directors. It shall implement the said by-laws upon deliberation and adoption by the general assembly of shareholders.203 Where a non-executive director enjoys remuneration for his or her work in the board of directors of an insurance company, how to distribute his or her remuneration shall be decided by the shareholder entity where he or she works or which recommended him or her to serve as a non-executive director. A state-owned company shall handle relevant matters under pertinent policies of the state. An insurance company may sign a service contract with each director, stipulating the directors’ power, obligations, responsibilities, and remuneration in detail. No service contract may be contrary to the Articles of Association or any resolution of the general assembly of shareholders.204 Where a director violates any law, administrative regulation, regulatory provisions, or Articles of Association, if he or she causes any loss to the insurance company, he or she shall be liable for compensation. An insurance company may establish a director occupational accountability insurance system.205 Where the CBIRC believes that any director or the board of directors of an insurance company commits any act in violation of the due diligence requirement, it may supervise by:206 (1) ordering him, her, or it to make an explanation; (2) arranging a supervisory talk; and (3) ordering, by issuing a supervisory letter to him, her, or it to make a correction. 7.6.2 Board of directors and professional committee The number of directors shall conform to requirements of the Company Law and the Articles of Association. An insurance company is encouraged to set up a professional and highly efficient board of directors consisting of 7–13 members. The board of directors consists of executive directors, non-executive directors, and independent directors, the proportion of which shall be prescribed by the Articles of Association.207 203 Ibid., art.34. 204 Ibid., art.35. 205 Ibid., art.36. 206 Ibid., art.37. 207 Ibid., art.38. The term “executive director” refers to a director who assumes another business management position besides the director’s or whose wage and benefits are paid by the company. The term “non-executive director” refers to a director who does not assume any post except for the director’s post, and the company does not pay him any wage or benefits except for the remuneration for his work in

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The functions of a board of directors shall be described in the Articles of Association in accordance with the laws, administrative regulations, and regulatory provisions and in light of the actual situation of the company. The functions of the board of directors shall be exercised by the board of directors as a collective.208 In principle, the statutory functions of the board of directors shall not be delegated to the chairman, any director, or any other individual or institution. Where it is necessary to authorize any of the aforesaid persons or institutions to make a decision on a specific matter, it shall be done under the resolution of the board of directors. The board of directors shall follow the principle of “one authorization for one matter” and shall not authorize any other institution or individual to exercise all of its functions or to exercise its functions permanently. No statutory function of the board of directors shall be changed or deprived of by the Articles of Association, by resolution of the general assembly of shareholders, or by other means. An insurance company shall, in accordance with the regulatory provisions and actual needs, set up professional committees under the board of directors. The professional committees are supportive decision-making bodies of the board of directors which shall offer professional opinions on resolutions of the board of directors or make decisions on professional matters upon authorization of the board of directors. A professional committee shall be composed of directors. There shall be no fewer than one financial or audit professional in the audit committee.209 An insurance company shall formulate rules of procedures for the board of directors and for the professional committees of the board so as to regulate the procedures for the operation of the board of directors and its professional committees.210 7.6.3 Rules on meetings of the board of directors (a) The convening of meetings The meetings of the board of directors are classified into regular meetings and temporary meetings. At least four regular meetings shall be convened each year. A meeting shall be named on the basis of the serial number of terms of office of the board as well as the sequential number of the meeting. The regular meetings and temporary meetings shall be numbered in sequence.211 For purposes of ensuring that directors are able to attend the board meetings on time and improving the decision-making efficiency and quality at the meetings, the secretary of the board of directors may, during the fourth quarter of each year, work out a plan on the board’s meetings to be convened the next year, setting the probable dates and ordinary discussion topics and notifying the company’s the board of directors.The term “independent directors” refers to a director who does not hold a position other than the director in the insurance institution, and there is no relationship with the shareholders of the insurance institution and the actual controller that may affect his or her independent and objective judgments on company affairs. There shall be financial and legal professionals in the board of directors. The insurance company is encouraged to hire actuarial professionals to assume the director’s position. 208 Ibid., art.39. 209 Ibid., art.40. 210 Ibid., art.41. 211 Ibid., art.42.

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directors, supervisors, senior managers, and other relevant personnel of the plan through the company’s website, office system, or by other means.212 The institutions and individuals who have the right to make proposals to the board of directors, as well as the departments, intermediary agencies, and other relevant entities responsible for making proposals may, in light of the plan on meetings of the board of directors, put forward proposals and should make good preparations in advance. The meetings of a board of directors shall be convened by the chairman of the board of directors. If the chairman of the board of directors fails to perform or is unable to perform his or her duties, the deputy chairman or a director shall, in accordance with the Company Law and the Articles of Association, be named to perform the chairman’s duties.213 A company shall convene a temporary meeting of the board of directors under any of the following circumstances:214 (1) At the request of shareholders who represent one-tenth or more of the voting rights; (2) At the request one-third or more of the directors of the board of directors; (3) At the request of no fewer than two independent directors; (4) At the request of the board of supervisors; (5) The chairman of the board of directors deems it necessary. A request for convening a temporary meeting of the board of directors shall, unless it is made by the chairman of the board of directors, indicate the following matters and shall be served in writing on the chairman directly or via the secretary of the board of directors:215 (1) the name of the institution or individual who makes the request; (2) the reasons; (3) the form of meeting; and (4) other requirements. Except for the regular meetings and temporary meetings as requested by the chairman of the board of directors, the chairman of the directors shall, within ten working days after he or she receives a request, convene and chair a temporary meeting of the board of directors.216 (b) Proposals and meeting notices A proposal for a board meeting shall specify the matters which are obviously necessary to be deliberated on and put to vote and which fall within the scope of functions of the board of directors.217 The proposals are classified into formal proposals and temporary proposals. The term “formal proposal” refers to a proposal which is determined as a topic for 212 213 214 215 216 217

Ibid., art.43. Ibid., art.44. Ibid., art.45. Ibid., art.46. Ibid., art.47. Ibid., art.48.

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discussion at the meeting prior to the convocation of the meeting and is served on the directors within the specified time limit. The term “temporary proposal” refers to a proposal which has not been served on the directors within the specified time limit or which is made during a meeting of the board of directors. Where a company convenes a regular meeting of the board of directors, the chairman of the board of directors shall, prior to the transmission of the meeting notice, negotiate directly or via the secretary with the institutions or individuals with the right to make proposals, asking whether they have proposals to be listed in the agenda of the board meeting for deliberation. Anyone who requests convening a temporary meeting shall simultaneously submit a written proposal.218 During the period after a proposal is served on directors until the meeting of the board of directors is convened, if any director thinks that the proposal is ambiguous and unspecific or lacks adequate related materials, he or she may directly or via the secretary of the board of directors require the proposer to make supplements or offer further details.219 A director may, prior to the convocation of a meeting, ask the secretary of the board of directors, convener of the meeting, professional committees, accounting firms, law firms, or other relevant persons and institutions about the information necessary to make a decision. The company shall assist him or her to acquire such information.220 In principle, no decision shall, at a meeting of the board of directors, be made on a proposal which is not listed in the meeting notice.221 For a temporary proposal made for a special matter by an institution or individual with the right to make proposals, it may be deliberated on and put to vote if the procedural flaws for temporary proposal are ignored upon full consent of all directors of the company. Where a company convenes a regular meeting, it shall, at least ten working days prior to the convocation, transmit a written notice to directors and simultaneously notify the supervisors as observers. In the meantime, the meeting notice shall be sent to the CBIRC in writing and by e-mail.222 A company shall, in its Articles of Association or the rules of procedures for board meetings, specify how and when the notice for the temporary meetings should be made. Where a company convenes a temporary meeting, it shall report to the CBIRC in a manner as mentioned in the preceding paragraph while it transmits a meeting notice to the directors. If it is urgent, it may report to the CBIRC by a phone call first. A meeting notice of the board of directors shall cover:223 (1) the date, place, and form of the meeting; (2) convener of the meeting; (3) proposals to be deliberated at the meeting; (4) contact person and information; and (5) date of issuance of the notice. 218 219 220 221 222 223

Ibid., art.49. Ibid., art.50. Ibid., art.51. Ibid., art.52. Ibid., art.53. Ibid., art.54.

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Where the materials relevant to the meeting are transmitted later than the issuance of the notice, the company shall give the directors enough time to acquaint themselves with the said materials. (c) Convocation of meetings No meeting of the board of directors shall be held unless it is attended by more than half of the directors (including those who authorize other directors to attend on their behalf).224 A director shall attend the board meetings in person. If he or she is unable to attend a meeting for a special reason, he or she may authorize in writing another director to do so on his or her behalf. His or her power of attorney shall indicate:225 (1) the name of the authorizer and the authorized director; (2) scope of authorization; and (3) signature of the authorizer. The authorized director shall submit the written power of attorney to the chair of the meeting prior to the convocation of the meeting and shall exercise the rights within the scope of authorization. In principle, one director shall not accept the authorization of more than two directors who fail to attend the meeting in person.226 An independent director can only authorize another independent director to attend the meeting on his or her behalf. When deliberating on an affiliated transaction, no non-affiliated director shall authorize any affiliated director to attend the meeting on his or her behalf. The supervisors and general manager of the company may attend board meetings as observers. Other senior managers and relevant working personnel as well as intermediary agencies may attend a board meeting as observers, subject to the consent of the chair and provided that no objection is raised by any director.227 If the secretary of the board of directors does not concurrently assume the director’s post, he or she shall attend the meetings of the board of directors as an observer. In principle, no director shall attend a meeting with any escort. If it is really necessary for him or her to do so, he or she shall acquire the consent of all directors attending the meeting and shall submit a valid identity certificate.228 No escort shall make any statement or answer any question on behalf of the director or vote on his or her behalf. If any matter to be deliberated at the meeting of the board of directors involves any trade secrets of the company, the chair of the meeting may require the escort to leave the venue at any time. The CBIRC may assign supervisors as observers to attend a meeting. The company shall provide them with all relevant materials of the meeting. When an observer attends a meeting, he or she may not express any view on any of the

224 225 226 227 228

Ibid., art.55. Ibid., art.56. Ibid., art.57. Ibid., art.58. Ibid., art.59.

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matters discussed or deliberated on at the meeting and shall keep the trade secrets of the company rigidly to himself or herself.229 In principle, a meeting of the board of directors shall be convened on-site so as to enable the directors to fully communicate and discuss with each other. A meeting convened by video, telephone, or any other means, which can ensure that all directors present at the meeting can communicate and discuss with each other in a real-time manner, shall be deemed as a meeting convened on-site.230 For a proposal which requires deliberation and adoption by a resolution of the board of directors but is unnecessary to be discussed by the directors, it may be put to vote by correspondence. The notice of correspondence vote, the service thereof, and other relevant matters shall be specified in the Articles of Association or rules of procedures.231 No correspondence meeting shall be held for any proposal involving any profit distribution plan, wages and salaries plan, major investment and asset disposal, hiring and dismissal of any senior manager, or the risk management of the company. The concrete scope shall be specified in the Articles of Association or rules of procedures. The specific agenda of a meeting shall be decided by the chair of the meeting, but the chair shall not arbitrarily add or cut the topics for discussion or change their sequential order.232 Prior to the formal start of a board meeting, the secretary of the board of directors shall introduce to the attendees information about the attendees, observers, proposals, arrangements for the topics for discussion, voting requirements, and so on. When deliberating on a topic for discussion at the meeting, the proposer or relevant working personnel shall introduce the contents of the topic for discussion with lantern slides or by other means and point out the contents to which the directors should pay attention to during the deliberation.233 The directors present at a meeting shall carefully read the relevant materials of the meeting and independently, objectively, and prudently express their views on the basis of full knowledge. For a proposal which requires examination by a professional committee, the professional committee shall submit its written opinions to the board of directors.234 The chair of a meeting shall effectively maintain the order at the venue so as to fully guarantee the directors’ rights to speech, discussion, and inquiry.235 (d) Voting and resolutions The board of directors may vote by putting up their hands, giving an oral vote, or casting written ballots.236 229 230 231 232 233 234 235 236

Ibid., art.60. Ibid., art.61. Ibid., art.62. Ibid., art.63. Ibid., art.64. Ibid., art.65. Ibid., art.66. Ibid., art.67.

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The board of directors shall follow the principle of “one person, one vote” in making a resolution. Each director, including the chairman of the board of directors, has the right to vote with only one vote. The board of directors shall adopt a resolution by more than half of the directors. The Articles of Association may lay down special requirements for the adoption of special resolutions.237 When the board of directors deliberates or votes on matters, it shall ensure that the proposal has been fully discussed and try its best to deliberate and vote on them one by one.238 The meanings of a director’s vote include consent, objection, and waiver of right to vote. Where a director withdraws from the venue during the meeting, if he or she fails to authorize in writing any other director to vote on his or her behalf, he or she shall be deemed to have waived his or her right to vote, but the other votes he or she has made shall be valid.239 Where a meeting is convened on-site, the chair of the meeting shall announce the voting result on the site.240 Where a meeting is convened by video, telephone, or other means, the directors may vote by putting up their hands or orally. The company shall finish signing the resolution in writing within five working days after the end of the meeting. If there is any discrepancy between the signed resolution in writing and the voting result of the meeting, the voting result of the meeting shall prevail. Where a meeting is held by correspondence, the correspondence votes shall, on the basis of ensuring that the directors can fully express their views, take one vote on one matter and shall not require the directors to take only one vote on two or more matters. The secretary of the board shall notify the directors of the voting results within five working days after the end of the time limit for voting. A resolution of the board of directors shall be invalid if it violates any law or administrative regulation.241 Where the convocation procedure or voting form of a board meeting is in violation of any law or administrative regulation, or where a resolution contravenes the Articles of Association, the shareholders may, in accordance with the Company Law, plead with the people’s court to revoke it. Where more than half of the directors or at least two independent directors believe that a topic for discussion at the meeting is ambiguous and unspecific or lacks adequate related materials so that they are unable to make a judgment, the chair of the meeting may announce suspension of voting on this topic and simultaneously set an express time limit and the conditions for resubmission of the said topic.242 Where the directors present at a meeting obviously hold different views on the deliberation opinions on a topic, the chair of the meeting shall, upon consent of more than half of all the directors, announce suspension of voting on this topic.

237 238 239 240 241 242

Ibid., art.68. Ibid., art.69. Ibid., art.70. Ibid., art.71. Ibid., art.72. Ibid., art.73.

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A company shall, within 30 days after the end of each meeting of the board of directors, report the resolutions of the meeting to the CBIRC in writing and by e-mail. The resolutions of the meeting shall cover:243 (1) the date, place, form, and chair of the meeting; (2) information about the directors who attended the meeting, directors who authorized others to attend the meeting, absent directors, and observers of the meeting; and (3) form and result of vote on each matter for resolution, including the name of the directors who waived the right to vote and of those who voted against it. A company shall, under the requirements of law, administrative regulations, and regulatory provisions, fulfil the information disclosure obligation relevant to the resolutions of the board of directors.244 (e) Minutes of meetings and preservation of archives A company shall make minutes for each board meeting, which shall bear the signatures of the directors who attend the meeting. If any director has a different view on the minutes of the meeting, he or she may add a note when he or she signs the minutes. The company is encouraged to simultaneously keep records of board meetings by audio or video recording or by any other means.245 The minutes of a board meeting shall cover:246 (1) the date, place, form, and chair of the meeting; (2) information about the directors who attended the meeting, directors who authorized others to attend the meeting, absent directors, and observers of the meeting; (3) agenda of the meeting; (4) key points of the directors’ speeches; (5) form and result of vote on each matter for resolution, including the name of the directors who waived the right to vote and of those who voted against it; (6) opinions of supervisors who attended the meeting as observers; and (7) other information necessary to be recorded. A company shall make archives for the meetings of the board of directors. The archival materials include the meeting notices, acknowledgement of receipts signed by directors, check-in books for meetings, power of attorney to directors who attend meetings on behalf of others, materials of meetings, minutes confirmed with signatures of directors, audio and video records of meetings, and so on. The archives of each board meeting shall be separately bound up into a volume and shall be numbered in sequence on the basis of the name of the meeting of the board of directors. The archives of the meetings shall be permanently kept by the company.247 A company shall, under these Guidelines, specify in the rules of procedures for meetings of professional committees the convocation procedures and archives preservation relevant to the meetings of the professional committees under the board of directors.248

243 244 245 246 247 248

Ibid., art.74. Ibid., art.75. Ibid., art.76. Ibid., art.77. Ibid., art.78. Ibid., art.79.

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7.6.4 Secretary of the board of directors and supporting working bodies of the board of directors An insurance company shall have a secretary of the board of directors. The secretary of the board of directors shall be a senior manager of the company to be responsible to the company and to the board of directors.249 The secretary of the board of directors shall be nominated by the chairman and hired by the board of directors. Before the secretary of the board of directors takes position, he or she shall be subject to the CBIRC’s approval of qualifications for appointment.250 A director or senior manager other than the chairman and general manager may concurrently serve as the secretary of the board of directors. No supervisor shall concurrently serve as the secretary of the board of directors. The secretary of the board of directors shall have corporate governance, legal, and other professional knowledge necessary for him or her to perform his or her duties and shall have good occupational ethics and personal quality.251 The duties of the secretary of the board of directors include:252 (1) making preparations for the general assembly of shareholders and meetings of the board of directors under the specified procedures and requirements of the chairman; (2) making and preserving the archives of the general meeting of shareholders and of the meeting of the board of directors as well as the materials and documents of other meetings, and keeping the name lists and relevant materials of the shareholders, directors, supervisors, and senior managers of the company; (3) reporting to the CBIRC the notices and resolutions of the general assembly of shareholders and of board meetings as required by the regulatory provisions; (4) assisting the shareholders, directors, and supervisors to exercise their rights and perform their duties; (5) taking charge of the information disclosures to outsiders, management of investors’ relationships, and other affairs; (6) helping the chairman of the board of directors of the company to draw up corporate governance reports; (7) under the requirements of the regulatory body, reporting the contradictions and problems in the corporate governance of this company; (8) organizing directors and other relevant persons to attend trainings as required by the regulatory body. A company shall grant corresponding power to the secretary of the board of directors and provide him or her with necessary work facilities so as to ensure that he or she can perform his or her duties.253 249 250 251 252 253

Ibid., art.80. Ibid., art.81. Ibid., art.82. Ibid., art.83. Ibid., art.84.

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A company shall set up an office of the board of the directors. The office of the board of directors shall be responsible to the secretary of the board of directors and assist the shareholders, directors, supervisors, and the secretary of the board of directors to carry out the relevant work. Where it is impossible for the office of the board of directors to operate independently, it may share an office with another department of the company.254 7.6.5 Corporate governance reports A corporate governance report is a self-check report reflecting the comprehensive information about the company’s annual improvements in its corporate governance. It shall cover:255 (1) The by-laws, including the information about the formulation of and amendments to the Articles of Association, rules of procedures for meetings, and major management by-laws; (2) Shareholders and equities, including the information about the stock trading of the company, guarantees, freezing, holding shares on behalf of others, equity disputes and lawsuits, and so on; information about the affiliated relationship between shareholders and whether there exists an actual controller; information about the convocation and resolutions of the general assembly of shareholders; information about the company’s increase of capital and shares, introduction to strategic investors, work plan on initial public offering (IPO), and information about dividends distributed to shareholders; (3) The board of directors, including the information about the composition and changes to the board of directors, by-laws on independent directors, due diligence evaluation of directors, setup, composition and operation of the professional committees of the board of directors, convocation and resolutions of the meetings of the board of directors; (4) the board of supervisors, including the information about the composition and changes to the board of supervisors, due diligence of supervisors, and meetings of the board of supervisors and resolutions thereof; (5) The management team, including the information composition and changes to the senior managers of the headquarters of the company, the division of and adjustments to the work of senior managers of the headquarters of the company, and the setup of and adjustments to the internal departments of the company; (6) The incentives and restraint mechanisms, including the information about the performance evaluation of directors and senior managers of the headquarters of the company as well as the punishments to the said directors and senior managers; information about the company’s equity incentives or employee stock options; all incomes, listed in a table item by item, 254 Ibid., art.85. 255 Ibid., art.86.

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which each director or senior manager of the headquarters of the company obtains from the company during the current year, including but not limited to the basic wages and salaries, bonuses, allowances, benefits, exercise gains, and other cash income; (7) Related-party transactions, including the number and amounts of significant related-party transactions, whether or not these related-party transactions were examined and reported under relevant provisions; (8) Information disclosure, including the information about the formulation, amendments and implementation of the information disclosure by-laws of the company; and (9) Other aspects required for self-check under the corporate governance evaluation rules of the regulatory body. After a corporate governance report has been drawn up or has been gathered together with the chairman of the board of directors taking the lead, it shall be submitted to the board of directors for deliberation. The company shall, prior to 30 April each year, submit to the CBIRC the previous-year corporate governance report deliberated by the board of directors.256 7.7 Administration of auditing of directors and senior managers of insurance companies The Notice of CIRC on Issuing the Measures for the Administration of Auditing of Directors and Senior Managers of Insurance Companies (the measures 2010) was published by the CIRC on 2 September 2010 and came into force on 1 January 2011.257 The Enactment of the Measures 2010 is intended to strengthen the supervision and administration of directors and senior managers of insurance companies, promote the establishment and improvement of the risk prevention mechanism in insurance companies, and regulate the relevant audit work. The Measures 2010 also applies to insurance group companies and insurance asset management companies. The Measures 2010, except the relevant provisions involving the board of directors or the chairman of the board of directors, also applies to branches of foreign insurance companies.258 “Auditing of directors and senior managers” refers to the audit inspection of the business operation and management conducted by directors and senior managers of insurance companies during their term of office and the audit activities to objectively assess the liabilities they shall assume according to their functions, including incumbent audit, leaving-office audit, and special audit. “Incumbent audit” refers to the periodical audit of an incumbent director or senior manager at the prescribed intervals. “Leaving-office audit” refers to the appraisal audit of the duty-related acts of a director or senior manager during his or her term of office when he or she leaves his or her post for the expiration of his or her term 256 Ibid., art.87. 257 Bao Jian Fa No. 78 [2010] (see accessed on 14 October 2020). 258 Ibid., art.19.

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of office, job transfer, resignation, removal of a title, removal from office, retirement or any other reason. “Special audit” refers to the specific audit of a director or senior manager who may be liable for a serious regulatory violation, financial irregularity, fraud, or any other circumstance in a company.259 The audit objects of directors and senior managers of an insurance company shall include the following personnel:260 (1) chairman of the board of directors and other executive directors; (2) members of the management of the head office; (3) the general manager, deputy general managers, and assistants to the general manager of a provincial branch company; (4) the general manager of a branch company or central sub-branch company; and (5) any other person who has the same power as any of the aforesaid personnel. An insurance company shall be encouraged to audit any other senior manager or manager at a key position according to the provisions of these Measures. The auditing of a director or senior manager of an insurance company shall mainly cover the audit object’s responsibilities for the following matters during a specific period within the scope of his or her functions:261 (1) authenticity of business performance; (2) compliance of business operations; and (3) effectiveness of internal control. An insurance company shall be encouraged to appraise the scientificity of business decisions made by the audit object and his or her business performance when the aforesaid audit is completed. An insurance company shall, according to the requirements of these Measures, formulate the detailed rules for the implementation of auditing of directors and senior managers of this company, strengthen the audit planning of directors and senior managers, rationally allocate audit resources, and avoid repeated audit and omissions in audit. An insurance company shall link audit results with the assessment, appointment, and punishment and reward of directors and senior managers and make the audit more authoritative.262 7.7.1 Organization and implementation of auditing An insurance company shall hire an external audit institution to conduct an audit of the chairman of the board of directors, the general manager, or the chief auditor. The audit department of an insurance group company may organize an audit of the chairman of the board of directors or the general manager of a subordinate insurance company or insurance asset management company thereof. The internal audit department of an insurance company or an external audit institution shall organize an audit of any other senior manager. For an insurance company which has not implemented the centralized audit system, the specific audit institution

259 The Notice of CIRC on Issuing the Measures for the Administration of Auditing of Directors and Senior Managers of Insurance Companies 2010, art.2. 260 Ibid., art.3. 261 Ibid., art.4. 262 Ibid., art.5.

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and personnel shall be determined under the principle of auditing the personnel at the next lower level.263 The board of directors of an insurance company shall be responsible for hiring an external audit institution to audit a director or senior manager of the company. The audit committee of the board of directors shall issue written opinions on the independence of the external audit institution.264 An external audit institution hired to audit a director or senior manager of an insurance company shall meet the following conditions:265 (1) Having enough professional personnel who have good understanding of the insurance business and insurance regulatory provisions and are competent for the audit; (2) Having no interest relation with the audit object; (3) Having good professional reputation and having not been punished for its practice in the most recent three years; and (4) Meeting other conditions as prescribed by the CBIRC. An insurance company shall make an annual plan on the incumbent audit of its directors and senior managers. The time between every two incumbent audits of a senior manager shall not exceed three years. The leaving-office audit shall be timely conducted according to personnel changes under the principle of auditing before leaving post.Where the audit cannot be conducted in advance for good reasons, the audit shall be completed and an audit report shall be issued within three months after the audit object leaves his or her post. Where an external audit institution is hired to conduct an audit, the time for audit may be properly extended, but the time shall not exceed six months. For the special audit, a company shall determine the audit time and time limit according to its actualities.266 Where a leaving-office audit is necessary within three months after the on-site incumbent audit of a director or senior manager of an insurance company ends, the said leaving-office audit may not be organized separately. In the audit of a director or senior manager of an insurance company, the audit conclusions on the contents which have been audited in another audit project may be taken for reference as a general rule, and no repeated audit is necessary, except when there is a clue proving any possible flaw in the original audit.267 7.7.2 Audit report After an audit is completed, the audit institution shall issue an audit report of the director or senior manager, which shall include the following contents:268 (1) audit basis, audit object and the scope of his or her functions, and the auditor; (2) scope,

263 264 265 266 267 268

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11.

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contents, and methods of the audit; and (3) audit results, which mainly refer to the problems found in the audit and the liabilities defined. An audit institution shall solicit opinions of the audit object before issuing an audit report. The feedback of the audit object shall be an annex to the audit report. An audit institution shall be responsible for the authenticity, legality, and objectiveness of the audit report. The direct liabilities of the audit object shall be distinguished from his or her leading liabilities in the audit report of a director or senior manager of an insurance company. The term “direct liabilities” refers to the liabilities that the audit object shall assume within the scope of his or her functions when any of the following acts occurs:269 (1) Directly committing any conduct in violation of any law or regulation, or regulatory provision of the state and any internal management rule of the insurance company; (2) Enforcing, instigating, inciting, or harbouring his or her subordinate staff to commit any of the aforesaid conducts, or conniving at their aforesaid conducts; (3) Neglecting his or her duties or having malfeasance; or (4) Any other direct violation of law or regulation. The term “leading liabilities” refers to the management liabilities other than direct liabilities assumed by the audit object during his or her term of office and within the scope of his or her functions. The audit report of the chairman of the board of directors or member of the management of the head office shall be submitted to the board of directors of the company according to the prescribed procedures and within the prescribed time limit and submitted to the board of supervisors at the same time. The audit report shall be submitted to the CBIRC within 20 working days upon the deliberation of the board of directors. The audit report of any other senior manager shall be submitted to the local office of the CBIRC according to the procedures and prescribed time limit prescribed in the Notice on the Relevant Matters concerning Submitting the Internal Audit Report of Branches of Insurance Companies to the Local Offices of China Insurance Regulatory Commission (Bao Jian Fa No.56 [2008]).270 An insurance company shall include the audit report of a director or senior manager in the personnel information of the audit object for management, which shall serve as a crucial basis for the appraisal, appointment, and punishment and reward thereof. An insurance company shall deal with the liabilities of the relevant person(s) liable for any problem found in audit according to the prescribed procedures and organize rectification in a timely manner.271 The CBIRC and its local offices shall include the audit reports of directors and senior managers of insurance companies in the senior manager information system 269 Ibid., art.12. 270 Ibid., art.13. 271 Ibid., art.14.

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for archival management. The CBIRC or its local office may, when examining the post-holding qualification of a director or senior manager, require the insurance company where he or she used to hold a post to submit the leaving-office report when he or she left his or her last post, or take for reference the audit conclusions of the audit report during his or her previous term of office.272 7.7.3 Legal liabilities An insurance company, external audit institution, or the relevant personnel shall not commit any of the following conduct when auditing a director or senior manager:273 (1) The insurance company fails to audit its director or senior manager and submit an audit report to the CBIRC or its local office according to the scope, time limit, and requirements prescribed in these Measures 2010; (2) The insurance company makes any false statement, intentionally conceals, or omits any problem revealed in the audit from the audit report and the relevant materials submitted to the CBIRC or its local office; (3) The CBIRC or its local office requires the insurance company where the senior manager subject to examination used to hold a post to submit the leaving-office audit report when examining his or her post-holding qualification, but this insurance company fails to submit the report on time or submits a false report; (4) During the audit process, an auditor fails to find out the major liabilities of the audit object due to intent or gross negligence or intentionally conceals any problem found in the audit process; or (5) An audit object or the insurance company where he or she holds a post refuses or obstructs the audit, or transfers, conceals, forges, or destroys any material or certificate needed for the audit or retaliates against any audit personnel, prosecutor, witness or anyone that provides the material. Where an insurance company or the relevant person commits any of the aforesaid conducts, the CBIRC or its local office shall punish it, him or her according to article 169274 and article 171275 of the Insurance Law and

272 Ibid., art.15. 273 Ibid., art.16. 274 Article 169 of the Insurance Law: Where anyone, in violation of this Law, commits any of the following conduct, the insurance supervision and regulation authority shall order it to make correction within a prescribed time limit; and, if it fails to make correction within a prescribed time limit, shall impose a fine of ¥10,000 yuan up to ¥100,000 yuan upon it: (1) failing to file or keep reports, statements, documents and materials as required or failing to provide the relevant information or materials as required; (2) failing to file the insurance clauses or premium rates as required; or (3) failing to disclose information as required.

275 Article 171 of the Insurance Law: Where an insurance company, insurance asset management company, professional insurance agency or insurance broker violates this Law, the insurance supervision and regulation authority shall punish it according to the provisions of article 160 through article 170 respectively. For its directly responsible person in charge or any other directly liable person, the competent insurance supervision and regulation authority shall admonish him or her and impose a fine of ¥10,000 yuan up to ¥100,000 yuan upon him

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other regulatory provisions. Where an external audit institution falls under the circumstances mentioned in subparagraph 4 of the preceding paragraph, the CBIRC or its local office may notify its competent department, announce the name of this audit institution within the industry, and no other insurance company may authorize this audit institution to conduct an audit. Regarding the violation of regulatory provisions revealed by the audit report, or if it is believed that the audit report submitted by an insurance company does not truly reflect the problems of the audited object, the CBIRC or its local office may take the following methods to investigate:276 (1) Requiring the audit institution to make explanations; (2) Listening to the statement of the audit object; (3) Authorizing an external audit institution to re-examine the audit, and the audit expenses shall be assumed by the insurance company; and (4) Filing a case for investigation. The CBIRC or its local office may, after investigating and taking evidence on a violation of the regulatory provisions revealed in the audit report, deal with it by the following methods according to the relevant provisions of the Administrative Punishment Law:277 (1) If the violation is minor and has not done any harm, administrative punishment shall be exempted. (2) If the insurance company makes rectification in a timely manner, properly handles the case, actively eliminates or alleviates the harm of the violation, the punishment may be mitigated or exempted after consideration of the actual situation. (3) If anyone does any meritorious act in cooperating with the regulatory organ in the investigation of a regulatory violation, a lighter punishment may be imposed, or the punishment may be mitigated; or (4) If the company fails to deal with the liabilities of the relevant personnel or earnestly organize rectification for any problem found in audit, it shall be given a heavier punishment according to law. 7.8 Internal audit of insurance companies To regulate the internal audit of insurance institutions, enhance the risk prevention capability of insurance institutions, and improve corporate governance, the CIRC promulgated and implemented the Notice of the CIRC on Issuing the Work Rules for the Internal Audit of Insurance Institutions (the Rules 2015) on 7 December or her; and, if the circumstances are serious, cancel his or her post-holding qualification or practicing qualification.

276 The Notice of CIRC on Issuing the Measures for the Administration of Auditing of Directors and Senior Managers of Insurance Companies 2010, art.17. 277 Ibid., art.18.

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2015.278 These Rules replaced the Guidelines for the Internal Audit of Insurance Companies (for Trial Implementation) issued by the CIRC on 9 April 2007.279 “Insurance institutions” means insurance group (holding) companies, insurance companies, insurance asset management companies, and reinsurance companies formed within the territory of China in accordance with the law and their branch offices, among others. The Rules 2015 may apply, mutatis mutandis, to other insurance institutions formed with the approval of insurance regulatory authorities. Where insurance regulatory authorities have special rules and requirements for an IT audit, the IT audit of insurance institutions shall be governed by their rules.280 Internal audit of insurance institutions refers to independent and objective confirmation and consulting activities during which systemic and standardized methods are adopted to examine, evaluate, and improve the suitability and validity of business activities, internal control, and risk management of insurance institutions so as to promote the governance improvement, value increase, and objective realization of insurance institutions.281 Insurance institutions shall improve internal audit systems, conduct internal audits according to the relevant requirements, find out problems in a timely manner, and effectively prevent business risks so as to promote the sound development of companies.282 7.8.1 General principles An insurance institution shall establish an internal audit system which is relatively independent of its company objective, governance structure, management and control mode, business nature and scale, budget management, human resources management, and operation management, among others.283 The work of internal audit departments shall not be intervened in or affected by other departments. Internal auditors shall not participate in the relevant decisionmaking and implementation of decisions relating to the business activities, internal control, and risk management, among others, of the audit object.284 The internal audit of an insurance institution shall cover its affiliated insurance institutions and domestic and overseas insurance branch offices and non-insurance subsidiary companies directly or indirectly controlled by the insurance institution.285 An insurance institution shall gradually establish and improve an internal audit information system covering off-site internal audit monitoring, operations, and management functions. Insurance institutions are encouraged to explore the innovation

278 Bao Jian Fa No. 113 [2015] (see accessed on 14 October 2020). 279 Bao Jian Fa No. 26 [2007]. 280 The Notice of the CIRC on Issuing the Work Rules for the Internal Audit of Insurance Institutions 2015, art.2. 281 Ibid., art.3. 282 Ibid., art.4. 283 Ibid., art.6. 284 Ibid. 285 Ibid., art.7.

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of scientific and technical means and technical methods for internal audit and improve the information level and audit efficiency of the internal audit.286 An insurance institution shall establish and improve internal audit quality control systems and procedures; conduct systemic guidance, supervision, graded review, and internal audit quality assessment; conduct self-assessment of internal audit quality on a periodical basis; and accept the external assessment of internal audit quality.287 An insurance institution shall establish and implement human resources management rules for the recruitment of internal auditors, continuing education, training, assessment and evaluation, and incentives and restraint, among others so as to ensure that internal auditors have the professional competency commensurate with their relevant businesses.288 Internal auditors shall, by such means as continuing education and vocational practice, obtain, learn, and master the development and change of the relevant laws and regulations, professional knowledge, technical methods, and audit practice so as to guarantee and improve professional competence. The insurance institution shall guarantee that internal auditors receive continuing education for not fewer than 40 hours on average each year. Internal auditors shall observe professional ethics, maintain and improve professional competency, conduct internal audits in a faithful and honest manner, make professional audit judgments in an objective and impartial manner, observe the confidentiality principle, and use as required the information obtained when performing functions.289 7.8.2 Internal audit department and personnel An insurance institution shall specify the functions and powers of the board of directors, the audit committee, the chief auditor, and the internal audit department and personnel in the form of systems. It shall also uniformly develop the management rules of internal audit departments at all levels and personnel, including position arrangement, post responsibilities, office-taking conditions, examination methods, remuneration rules, work shift rules, and training rules, among others.290 The board of directors of an insurance institution shall assume ultimate responsibility for the establishment, operation, and maintenance of its internal audit rules. If there is no board of directors, the legal representative, or the person in charge of the insurance institution shall perform the relevant functions.291 An insurance institution shall establish an independent internal audit system and conduct vertical management of internal audits, and qualified insurance institutions are encouraged to conduct centralized management of internal audits and further strengthen the independence of the internal audit system. The branch office of an 286 287 288 289 290 291

Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13.

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insurance company at or below the provincial level which has a relatively small scale or conducts centralized management is not required to set a separate audit department or posts under the premise of satisfying the requirements of internal audits. If the internal audit arrangements of listed companies are otherwise prescribed by any law or regulation, the said relevant provisions shall prevail.292 (1) “Vertical management of internal audit” means that an insurance institution sets independent internal audit departments based on levels, the head office conducts uniform management of, and makes uniform planning and arrangements for, internal audit departments at all levels, and internal audit departments at all levels assume internal audit functions based on their levels and report audit results. (2) “Centralized management of internal audit” means that an insurance institution sets a special internal audit body or department to uniformly develop internal audit management rules for budget management, human resources management, and operation management, among others, and other institutions at all levels (including insurance subsidiary companies and all branch offices) are not required to set internal audit departments and positions. (3) The personnel of audit departments of all insurance institutions conducting vertical management shall implement the appointment system. The recruitment, examination, and remuneration of the persons in charge of audit departments of institutions at all levels shall be subject to uniform management and graded examination by superior authorities or the head office, and the audit object shall not participate in the examination of internal audit departments and internal auditors. An insurance institution shall set the audit committee under the board of directors. There shall be no fewer than three members of the audit committee who do not hold positions of directors at the management level. If independent director rules have been established, an independent director shall serve as the chairman of the audit committee. The members of the audit committee shall have the professional knowledge and experience required for performing work functions.293 The functions performed by the audit committee of the board of directors of an insurance institution in internal audit shall include but not be limited to:294 (1) Examining the internal audit management rules of the insurance institution and offering suggestions to the board of directors. (2) Directing the effective operation of internal auditing of the insurance institution; examining annual internal audit plans, internal audit budgets and human resources plans of the insurance institution; offering suggestions to the board of directors, and the board of directors shall be responsible for managing and implementing the plans after adopting them through deliberation.

292 Ibid., art.14. 293 Ibid., art.15. 294 Ibid., art.16.

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(3) Reviewing internal audit work reports, assessing internal audit results, and urging the rectification of major problems. (4) Assessing the work of the chief auditor and offering opinions to the board of directors, and listening to the reports on the progress of the audit work made by the chief auditor at least once each quarter. An insurance institution shall set up the position of chief auditor. The chief auditor shall be included in the confirmation scope of office qualifications of senior executives of the insurance institution, be responsible to the board of directors, and report work to the audit committee of the board of directors; and at the same time, be responsible for communicating with the management and notifying audit results.295 The chief auditor shall be nominated by the chairman of the board of directors or the audit committee and be reported to the board of directors for recruitment. If an insurance company does not set the board of directors, the chief auditor shall be retained by the management. The chief auditor shall not serve concurrently on the leading position for the financial or business work of an insurance institution. The post change of the chief auditor shall be reported to the CBIRC afterwards according to the relevant provisions. The chief auditor shall obtain the office qualification confirmed by the CBIRC before assuming his or her or her position, meeting the following conditions:296 (1) He or she shall have a university diploma or above or the bachelor’s degree or above. (2) He or she shall have five or more years of auditing, accounting, or financial work experience or eight or more years of financial work experience and be familiar with the financial insurance business. (3) He or she shall have the experience of assuming leading or management functions in an enterprise, a public institution, or a state authority. (4) He or she shall meet other provisions on the office qualifications of senior executives. The functions performed by the chief auditor of an insurance institution shall include but not be limited to:297 (1) Directing the formulation of annual internal audit plans, internal audit budgets, and human resources plans of the insurance institution. (2) Organizing the implementation of internal audit projects and guaranteeing internal audit quality. (3) Reporting to the audit committee, communicating with the management, and reporting the progress of internal audit work. (4) Reporting in a timely manner the major problems and major hidden safety dangers found in an internal audit to the audit committee or the management. 295 Ibid., art.17. 296 Ibid., art.18. 297 Ibid., art.19.

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(5) Coordinating and handling the relationship between the internal audit department and other institutions and departments. The functions performed by the internal audit department of an insurance institution shall include but not be limited to:298 (1) Drafting the internal audit system of the insurance institution. (2) Making annual internal audit plans, internal audit budgets, and human resources plans. (3) Implementing annual internal audit plans, tracking rectification, and conducting follow-up audit. (4) Performing other internal audit functions determined by laws, regulations, and regulatory provisions and the insurance institution. An insurance institution shall assign a sufficient number of internal auditors. In principle, the number of full-time internal auditors shall not be fewer than 5‰ of the number of employees of the insurance institution and no fewer than three full-time internal auditors shall be assigned.299 The number of personnel who hold certificates for registered internal auditors and certified public accountants, among others, or the professional technical qualifications at the intermediate level or above relating to accounting, audit, information technology, investment, and other internal audit work, shall not be fewer than 35% of the number of full-time internal auditors. Internal auditors shall have the following professional occupation qualifications:300 (1) Professional level. Internal auditors shall have a university diploma or above, have the professional knowledge relating to internal auditing of insurance institutions, and be familiar with the laws and regulations on financial insurance and internal control rules. (2) Code of ethics. Internal auditors shall have upright, objective, honest, and impartial ethics and have no bad records. The general manager of an insurance institution shall guarantee the independence of the internal audit department and the resources and powers required for the performance of functions thereof. The resources required for the performance of functions by the internal audit department and internal auditors include internal audit budgets and human resources plans approved by the audit committee and necessary office premises, systems, and equipment, among others. The internal audit department and internal auditors shall have the following authorities when performing functions:301 (1) Consulting on real time the documents and materials, among others, relating to the business activities of the audit object, including electronic data.

298 299 300 301

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23.

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(2) Attending or being present at important meetings managed by the insurance institution and attending the relevant business training. (3) Having the authority to conduct on-site investigation, or investigate, inquire of, or obtain evidence from the relevant institutions and individuals on the issues concerning audit matters. (4) Having the authority to take corresponding measures to preserve the materials and assets that may be transferred, concealed, falsified, destroyed, or abandoned. (5) Impeding the violations of laws, regulations, regulatory provisions, or internal management rules found in internal audit and offering accountability or punishment suggestions concerning the relevant institutions and personnel. (6) Offering opinions or suggestions on improving management and enhancing benefits to the board of directors or the management. The board of supervisors of an insurance institution may direct and oversee internal audits.302 An insurance institution may, after obtaining the approval of the audit committee, offer special rewards to internal auditors who diligently perform their functions, find any significant case, or disclose any major risk.303 The chief auditor of an insurance subsidiary company of which the shares are controlled by an insurance group (holding) company that conducts the centralized management of internal audit shall be assigned by the parent company. The chief auditors of other insurance institutions that conduct the centralized management of internal audit may be set separately based on the independent legal person.304 Where an insurance institution that conducts the centralized management of internal audit basically satisfies the internal audit business requirements by applying the audit information platform, enhancing the professional competency of their internal auditors, or retaining an intermediary institution to undertake internal audit projects, the number of full-time internal auditors may be not less than 4‰ of the number of employees of the insurance institution. 7.8.3 Administration of internal audit The internal audit department and internal auditors shall pay comprehensive attention to the risks of the insurance institution and organize risk-oriented internal audits.305 Internal auditors shall fully utilize the principle of importance, consider the factors such as the nature and quantity of differences or defects, and rationally determine the level of importance.306 The internal audit department shall, in accordance with laws and regulations and in light of the company’s development strategies, develop annual internal audit 302 303 304 305 306

Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28.

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plans on the basis of risk assessment, and the audit focus and audit frequency shall be commensurate with the business nature, complexity, risk status, and management level of the insurance institution. The annual internal audit plan shall cover the audit content required by regulatory rules.307 The internal audit department and internal auditors shall conduct audit in strict accordance with standardized audit process and appropriate audit methods, as follows:308 (1) They shall make project audit plans and make good preparations before the implementation of audit projects according to annual internal audit plans. (2) They shall, according to the company’s rules, issue the audit notice to the audited entity or personnel within a certain time before conducting the audit. In particular circumstances, the audit notice may be served when the audit is conducted. (3) They shall, according to project audit plans, adopt examination, observation, supervision, interview, external confirmations, computing, and analysis procedures and other methods to obtain the relevant reliable and sufficient audit evidence, and record the implementation process of audit procedures, audit evidence, and conclusions in audit working sheets. There shall not be fewer than two persons who conduct an internal audit. (4) They shall, in a timely manner, prepare, review, and submit audit reports according to audit quality control rules and procedures. The internal audit department shall issue audit reports in a timely manner after implementing necessary audit procedures. The audit report shall comply with the following requirements:309 (1) It shall be objective, complete, clear and concise, be constructive and reflect the principle of importance. (2) It shall cover the audit information, audit scope, audit content, audit methods, audit basis, audit results, audit conclusions, and audit opinions or audit suggestions. (3) It shall not contain any false records, misleading statements, or material omissions. The internal audit department shall establish and improve the rules for the graded review of audit reports and expressly provide for the requirements for and responsibilities of reviewers at all levels.310 The internal audit department shall establish and improve audit quality control rules and procedures, form audit reports on audit results, and after soliciting the opinions of the audit object, submit the reports to the chief auditor or its authorized person for signature and issuance and send the reports to the audit object

307 308 309 310

Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid., art.32.

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and appropriate management, and the chief auditor shall assume the ultimate responsibility for the audit reports.311 The internal audit department shall establish and improve management rules for internal audit archives, review and file the relevant information, and on a periodical basis, submit archives to the archives management department or archives personnel to properly keep internal audit archives in a centralized manner for no fewer than five years as of the date when the audit report is made.312 The internal audit department shall establish and improve management rules for the outsourcing of internal audit projects. The internal audit department may, as required for work, retain an external institution to undertake internal audit projects after obtaining the approval of the board of directors or the management. The retained external institution shall have sufficient independence, objectiveness and professional competency and abide by the provisions of these Rules on the management of the relevant audit operation. The board of directors or the management shall issue written opinions on the independence of the external audit institution. If it authorizes any institution to conduct an internal audit, it shall report to the CBIRC.313 Internal auditors are encouraged to maximize the advantages of independence, objectiveness, and professionalism under the premise of not assuming management responsibilities and improve the business activities, internal control, and risk management of insurance institutions through the provision of suggestions, training, value-added services, and other consulting activities.314 7.8.4 Utilization of internal audit results The board of directors and the management of an insurance institution shall take effective measures to ensure the sufficient utilization of internal audit results. Internal audit results include audit conclusions, audit opinions or audit suggestions, and the results of consulting activities, among others. Internal audit results may be taken as the reference basis for the daily supervision of the CBIRC and its local offices.315 An insurance institution shall organize the rectification of problems found in an audit in a timely manner and strictly investigate the liabilities of the relevant liable persons as required. If the problems found in an audit fail to be rectified and handled in a timely manner as required, the insurance institution shall hold the relevant person in charge liable.316 An insurance institution shall take the internal audit result as an important basis in assessing the economic objective or appointing or removing the person in charge of the affiliated entity. The insurance institution shall, before appointing

311 312 313 314 315 316

Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36. Ibid., art.37. Ibid., art.38.

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any principal person in charge of a company at or above the level of a branch company, listen to the opinions of the chief auditor.317 The audited entity shall assume the liability and risks for failing to correct any problem found in an audit in a timely manner. Internal auditors shall perform the functions and powers granted by laws and regulations and through follow-up audits track and evaluate whether the correction measures are taken by the management of the audited entity in a timely, rational, and effective manner, and they may take follow-up audits as a part of the audit work next time.318 7.8.5 Internal audit supervision The CBIRC and its local offices shall, in accordance with the law, direct, inspect, and evaluate the internal audit of insurance institutions, as follows:319 (1) The CBIRC shall uniformly direct and inspect insurance institutions that conduct centralized management of internal audit. (2) The CBIRC shall, in conjunction with local offices, conduct corresponding guidance and inspection of insurance institutions that conduct vertical management of internal audit. (3) The CBIRC shall, in accordance with these Rules, organize the evaluation of internal audit of insurance institutions. An insurance institution shall report to the CBIRC according to the following requirements:320 (1) It shall submit the internal audit work report of the last year to the CBIRC before 15 May each year, and the report shall cover the company’s annual audit work plan and internal audit work summary. (2) It shall report major risks and problems found in the audit to the CBIRC in a timely manner. (3) The provincial branch company shall submit to the local CBIRC office the audit report made by the internal audit department on it and its branch offices within ten working days after the completion of the report. (4) If the insurance institution fails to effectively rectify and handle any major problem found in the internal audit, the chief auditor shall directly report the relevant circumstances to the CBIRC. (5) Other matters as required by the CBIRC. 7.8.6 Investigation of internal audit liability Where any director or senior executive of an insurance institution falls under any of the following circumstances when organizing an internal audit, the CBIRC shall investigate the liability in accordance with the relevant provisions:321 317 318 319 320 321

Ibid., art.39. Ibid., art.40. Ibid., art.41. Ibid., art.42. Ibid., art.43.

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(1) If the board of directors of the insurance institution fails to effectively perform functions in accordance with article 13 of the Rules 2015, the CBIRC shall hold liable the relevant personnel of the board of directors of the insurance institution. (2) If the audit committee of the insurance institution fails to effectively perform functions in accordance with article 16 of the Rules 2015, the CBIRC shall hold the members of the audit committee liable. (3) If the chief auditor of the insurance institution fails to effectively perform functions in accordance with article 19 of the Rules 2015, the CBIRC shall hold the chief auditor liable. (4) If the general manager of the insurance institution fails to effectively perform functions in accordance with article 23 of the Rules 2015, the CBIRC shall hold the general manager liable. (5) If the insurance institution fails to investigate the liability for any problem found in audit in accordance with article 38 of the Rules 2015 in a timely manner, the CBIRC shall investigate the liabilities of the management and the relevant directors. Where an auditor falls under any of the following circumstances, the insurance institution shall punish him or her:322 (1) If a case for which the liability shall be investigated occurs to an insurance institution, according to the relevant provisions of the CBIRC, the insurance institution shall, in addition to investigating the liabilities of the directly liable persons and indirectly liable persons, hold the relevant person liable if any internal auditor fails to disclose the relevant risks due to serious negligence, unless there is any evidence proving that the auditor has performed post functions. (2) The insurance institution shall, in accordance with the relevant provisions of the state and of the insurance institution, punish any internal auditor who abuses power, practices favouritism, or makes falsification, or conceals any problem, neglects duty, or divulges any secret, and the institution shall transfer anyone suspected of a crime to the judicial authority in accordance with the law. Where an audit object falls under any of the following circumstances, the insurance institution shall impede in a timely manner and seriously punish the relevant entities and personnel, and investigate the management responsibility and indirect liabilities of the relevant personnel:323 (1) Refusing to accept or failing to cooperate in the internal audit. (2) Refusing to provide or delaying the provision of materials relating to internal audit matters, or providing false or incomplete materials. (3) Maliciously retaliating against or framing any auditor. Anyone suspected of a crime shall be transferred to the judicial authority in accordance with the law. 322 Ibid., art.44. 323 Ibid., art.45.

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Insurance institutions shall develop detailed implementing rules in accordance with the Rules 2015.324 7.9 Guidelines for salary management rules of insurance companies The management of the salary system is an important aspect of corporate governance. In order to strengthen the governance of and supervision over insurance companies, improve incentive and restraint mechanisms, and regulate the salary management of insurance companies, the CIRC developed and issued the Notice of the CIRC on Issuing the Guidelines for Remuneration Management Rules of Insurance Companies (for Trial Implementation) on 2 November 2012 (hereinafter, the Guidelines 2012).325 The Guidelines 2012 applies to the insurance companies, insurance group companies, and insurance asset management companies legally registered within China. Where any provisions otherwise prescribe the remuneration management of state-owned insurance companies, such provisions shall apply.326 An insurance company shall manage remuneration under the following principles:327 (1) Be scientific and rational. The insurance company shall, for purposes of enhancing market competitiveness and achieving sustainable development, formulate a scientific performance evaluation mechanism and reasonable remuneration benchmarks based on the company’s development strategy. (2) Be standardized and strict. The insurance company shall formulate standardized remuneration management procedures based on the requirements for corporate governance so as to ensure a strict remuneration management process in compliance with relevant regulations. (3) Be steady and effective.The remuneration system of the insurance company shall not only effectively motivate staff members but shall also be linked with regulatory compliance and risk management and be conducive to preventing risks and enhancing regulatory compliance.

324 Ibid., art.47. 325 Bao Jian Fa No. 101 [2012] (see accessed on 14 October 2020). In the Guidelines 2012, the term “remuneration” means economic award in monetary form and non-monetary form obtained by staff members of an insurance company from the company for providing services to the company. The term “staff members” means persons who have concluded written labour contracts with an insurance company, excluding non-executive directors, independent directors, external supervisors, independent supervisors, and work consultants. The term “directors” means directors, supervisors (excluding employees’ supervisors), and senior managers (being limited to senior managers of the head office) who receive remuneration from an insurance company. The term “staff members at key posts” means persons who have a direct or significant impact on an insurance company’s operational risks.The scope of such members is determined by the company and such members include, but are not limited to, the main persons in charge of the head office’s departments which directly engage in sales business or investment business and the main persons in charge of provincial branches of the company. 326 The Notice of the CIRC on Issuing the Guidelines for Remuneration Management Rules of Insurance Companies 2012, art.3. 327 Ibid., art.4.

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(4) Be fair and appropriate. The remuneration policies of the insurance company shall balance the interests of shareholders, management, employees, the insured, and other related interested parties and be in line with China’s national conditions and the actual development of the insurance industry. 7.9.1 Remuneration structure The term “remuneration of an insurance company” as mentioned in the Guidelines 2012 includes the following four parts:328 (1) basic salary; (2) merit pay; (3) welfare income, allowances, and subsidies; and (4) mid- and long-term incentives. An insurance company shall, based on its actual circumstances and market level, reasonably determine and, at appropriate times, make adjustments to the basic salary for different posts in strict accordance with standard procedures.329 The merit pay to the directors, supervisors, and senior managers of an insurance company shall be determined based on the performance evaluation results of the current year. Merit pay shall be controlled at not more than three times basic salary, and target merit pay shall not be less than basic salary. Where an insurance company has set up a minimum bonus, such bonus shall be only applicable to staff members who have worked in the company for not more than one year or a company which has been established for not more than one year.330 An insurance company shall pay welfare, allowances, and subsidies to its staff members by reference to relevant provisions of the state and industry standards. The cash welfare, allowances, and subsidies paid by an insurance company to its directors, supervisors, and senior managers each year shall not exceed 10% of their basic salary. The cash welfare and allowances and subsidies paid otherwise to the shareholders of a foreign-funded insurance company shall not be restricted by the aforesaid two paragraphs.331 Mid- and long-term incentives include equity incentives and cash incentives. An insurance company that adopts mid- and long-term incentives shall file such incentives with the CBIRC.332 The administrative measures for mid- and long-term incentives of insurance companies shall be otherwise formulated by the CBIRC in accordance with relevant provisions of the state. An insurance company shall reasonably determine the remuneration paid to its directors, supervisors, and senior managers based on multiple factors such as the company’s financial status, business operation results, and risk control. Where an insurance company has inadequate solvency, the CBIRC shall restrict the remuneration paid to its directors, supervisors, and senior managers in accordance with relevant regulatory provisions on solvency. No insurance company shall pay unreasonably high remuneration without consideration to national conditions, industry development stage, or its actual circumstances.333 328 329 330 331 332 333

Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10.

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7.9.2 Remuneration payment An insurance company shall pay basic salary on a monthly basis. The insurance company may, based on its business operations and risk evaluation for different periods, reasonably determine that a certain proportion of merit pay will be paid together with the basic salary and the remaining portion will be paid according to the annual evaluation results after the end of the fiscal year.334 An insurance company shall prescribe the rules on the deferred payment of merit pay in remuneration management rules and promote consistency among the time limits for the deferred payment of merit pay, payment amount of each year, and the risks status of the corresponding businesses. The insurance company shall, on a regular basis, make adjustments to deferred payment rules on the basis of the realization of performance and risk changes.335 The rules on the deferred payment of merit pay shall include such details as the scope of the staff members involved, conditions, time limit, proportion, risks, losses, procedures, and suspension of payment. The deferred payment system shall apply to the merit pay to the directors, supervisors, senior managers, and staff members at key posts of an insurance company, and the proportion of deferred payment shall not be lower than 40%. The proportion of deferred payment made to the chairman and general manager shall not be lower than 50%. An insurance company shall determine the time limit for the payment of merit pay based on the duration of risks, which in principle shall be no fewer than three years. Where the payment term is three years, nondeferred payment shall be made in the current year when performance evaluation results are determined, and deferred payment shall be made in average during the corresponding periods in the next two years after the determination of evaluation results. Where the payment term exceeds three years, deferred payment shall be made under the equal division principle.336 Where any risk or loss occurs under the circumstances prescribed in the rules on the deferred payment of merit pay, the insurance company shall suspend the payment of unpaid merit pay to the relevant liable persons.337 7.9.3 Performance evaluation An insurance company shall establish a performance evaluation mechanism with complete scientific indicators, clear and standard procedures, and close relevance between results and actual remuneration.338 An insurance company shall establish overall performance evaluation indicators for the company and evaluation indicators for each work post. Overall performance indicators shall be assigned to specific business entities, management departments, and posts on a level-by-level basis.339 334 335 336 337 338 339

Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16.

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Post evaluation indicators shall be specific and clear, fully reflect performance contributions and risk compliance requirements for such posts, be quantified as much as possible so as to facilitate comparison and evaluation, and at the same time be linked with the overall performance of the business entity and company. Performance evaluation indicators shall comply with post features and shall not contravene post duties. During the performance evaluation process, risk compliance indicators may be taken as component indicators or adjustment indicators, but it shall be guaranteed that such indicators are clearly relevant to performance evaluation results. The performance evaluation indicator system of an insurance company shall include economic benefits indicators and risk compliance indicators. The selection of economic benefits indicators shall comply with relevant provisions of the state and the company’s strategies. Risk compliance indicators shall mainly reflect the following risks:340 (1) solvency adequacy ratio; (2) corporate governance risk indicators; (3) internal control risk indicators; (4) regulatory compliance risk indicators; (5) capital use risk indicators; (6) business operation risk indicators; and (7) financial risk indicators. The composition of each type of risk indicators shall be determined by reference to the relevant provisions of the CBIRC on categorized supervision. Insurance group companies, insurance asset management companies, and reinsurance companies shall determine risk compliance indicators in consideration of their actual circumstances and relevant regulatory provisions. An insurance company shall formulate standardized evaluation procedures and specify the evaluators, personnel being evaluated, and procedures under the principle of “assuming responsibilities and appraising on a level-by-level basis,” and reasonably determine the evaluation methods.341 The remuneration paid to directors, supervisors, and senior managers of an insurance company shall be adjusted based on the risk categories determined in the CBIRC’s categorized supervision.342 For a company determined to be Class C in categorized supervision, the average basic salary and merit pay paid to its directors, supervisors, and senior managers in the current year shall not be higher than those of the previous year. For a company determined to be Class D in categorized supervision, the average basic salary and merit pay paid to its directors, supervisors, and senior managers in the current year may decrease based on the remuneration in the previous year, and the rate of decrease shall not be lower than 5%. The rate of decrease for remuneration paid to the chairman and general manager shall be higher than the average. For a company successively determined to be Class D, the remuneration paid to its directors, supervisors, and senior managers shall decrease year by year to the average remuneration paid to the persons in charge of departments of the company. The remuneration paid to newly hired directors, supervisors, and senior managers of the company in the first two years shall not be restricted by this article. 340 Ibid., art.17. 341 Ibid., art.18. 342 Ibid., art.19.

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A company determined to be Class A or B in categorized supervision may, at its discretion, make adjustments to the remuneration paid to its directors, supervisors, and senior managers at corresponding posts based on the indicator evaluation results in categorized supervision. 7.9.4 Remuneration management Different management methods shall be adopted regarding the following different personnel in the remuneration management rules of an insurance company:343 (1) directors, supervisors and senior managers; (2) staff members at key posts; (3) staff members at other posts; and (3) work remuneration or expenses for the directors, supervisors, and permanent consultants who do not receive compensation. The board of directors of an insurance company shall assume ultimate responsibility for remuneration management. The directors shall, when performing remuneration management duties, have professional competence, provide opinions in an independent manner, and avoid negative impacts from the management.344 The board of directors shall examine the following details of the insurance company’s remuneration management: (1) basic rules on remuneration management; (2) annual remuneration incentive plan and total annual remuneration budget; (3) personal performance evaluation indicators and the weights for the indicators, the evaluation results, and the payment of remuneration regarding directors, supervisors, and senior managers; and (4) remuneration reports submitted in accordance with regulatory provisions. The board of directors of an insurance company shall establish a remuneration committee which shall have the corresponding professional competence, and the chairman of the committee shall be an independent director.345 The board of directors of the insurance company shall give full play to the supporting role of the remuneration committee in making decisions. The remuneration committee shall sufficiently study and discuss the resolution proposals of the board of directors and put forward professional opinions and suggestions to the board of directors. The remuneration committee of the board of directors may solicit the opinions of other relevant professional committees on the company’s remuneration management system’s impact on and relevance to risk and regulatory compliance management. The management of an insurance company shall be responsible for organizing the implementation of the company’s remuneration management rules and relevant resolutions of the board of directors.346 The human resources department and other departments of an insurance company shall be responsible for the routine work on remuneration management and provide support for the work conducted by the board of directors and its remuneration committee. 343 344 345 346

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23.

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The departments of risk and regulatory compliance management and auditing of an insurance company shall put forward opinions on the performance evaluation indicators and performance objectives relating to the company’s remuneration management rules and promote the linkage between the insurance company’s remuneration and risks.347 The remuneration paid to the staff members of the departments listed in the preceding paragraph shall be related to the regulatory compliance and risk status of the business fields monitored by such departments but shall be relatively independent from the financial performance of such fields. The remuneration paid to such staff members shall be appropriately guaranteed so as to attract professionals who can perform the corresponding duties. Where any staff member of an insurance company pays remuneration without approval, in violation of remuneration management procedures, adds any remuneration incentive item without approval, or practices fraud in performance evaluations, the insurance company shall establish a strict accountability system and recover the remuneration paid in violation of regulations.348 7.9.5 Remuneration supervision The CBIRC shall, in accordance with the law, supervise insurance companies’ remuneration management and shall not directly intervene in their remuneration level.The supervision shall mainly cover:349 (1) completeness and standardization of remuneration management procedures and the implementation thereof; and (2) the impact of the design of performance evaluation indicators and determination of performance objectives on the companies’ risk and regulatory compliance management. The board of directors of an insurance company shall evaluate its compensation management work each year, prepare remuneration management reports, and submit the reports to the CBIRC within the time limit under prescribed examination procedures. The remuneration management reports shall cover:350 (1) Whether remuneration management rules and procedures are sound and standardized; (2) Whether the design of the company’s overall performance evaluation indicators and performance objectives comply with the company’s strategies and whether post performance evaluation indicators can sufficiently and accurately reflect post contributions and risk compliance; (3) Whether the performance evaluation process and results are impartial and reasonable and whether they are conducive to motivating staff members and creating a corporate culture oriented by performance and risks; (4) Whether the remuneration paid to directors, supervisors, and senior managers of the company matches the company’s performance, business quality, and business structure; whether remuneration is highly sensitive to risks; 347 348 349 350

Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27.

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and whether remuneration would encourage excessive risk taking or lead to risk losses; (5) Whether there is any inappropriate management or non-compliance with regulatory provisions; and (6) Any other circumstance of remuneration management that may have a significant impact on the company’s strategies or risks. Where an insurance company falls under any of the following circumstances in remuneration management, the CBIRC may take such measures as ordering the company to submit written explanations, holding regulatory talks with the company, issuing risk warnings to the company, issuing regulatory opinions to the shareholders’ meeting or the board of directors, and requiring the company to disclose remuneration as major matters:351 (1) Changes performance evaluation indicators or performance objectives midway through the process, so that the actual total remuneration paid to the company’s chairman or general manager is higher than the original indicator evaluation result; (2) The remuneration level seriously mismatches the company’s risk status or is clearly higher than that of companies having equal scale and performance in the market; (3) Remuneration management does not comply with regulatory provisions; (4) The self-evaluation of remuneration management is inconsistent with the company’s actual circumstances; or (5) Any other circumstance under which possible risks exist or may be incurred, and risk warning is necessary. The CBIRC may, based on regulatory requirements, conduct special on-site inspections on insurance companies’ remuneration management or organize the supervisory evaluation thereon.352 An independent intermediary may be authorized to assist in supervisory evaluation, and the insurance company shall offer assistance and assume corresponding expenses. An insurance company shall not commit any of the following conduct during remuneration management:353 (1) fail to make explanations or fail to submit relevant reports or materials in accordance with regulatory provisions; or (2) practice fraud in performance evaluations or in the submission of reports and materials. Where an insurance company or any relevant staff member thereof commits any of the aforesaid conduct, the CBIRC or its local office shall punish the company or person in accordance with article 169, 170, or 171 of the Insurance Law354 or other regulatory provisions. 351 352 353 354

Ibid., art.28. Ibid., art.29. Ibid., art.30. Article 169 of the Insurance Law:

Where anyone, in violation of this Law, commits any of the following conduct, the insurance supervision and regulation authority shall order it to make correction within a prescribed time limit; and, if it fails

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Where an intermediary intentionally provides clearly false information when providing services to an insurance company which leads to erroneous decision-making on the part of the insurance company, the CBIRC may announce the name of the intermediary within the industry, and no other insurance company shall accept intermediary services provided by such an institution. Where an insurance company falls under any of the following circumstances, the remuneration paid to its directors, supervisors, and senior managers shall be determined by an aid institution and the insurance regulatory authority:355 (1) China Insurance Security Fund Co., Ltd. or any other statutory organ has offered assistance to the company or participated in risk disposal thereof; (2) the insurance company has been taken over by the CBIRC pursuant to law; or (3) the company applies for bankruptcy or is shut down. 7.9.6 Implementing the Guidelines 2012 The CIRC further provides some detailed rules for implementing the Guidelines 2012 in the Notice of the CIRC on Issues concerning Implementing the Guidelines for the Remuneration Management Rules of Insurance Companies (for Trial Implementation) on 2 November 2012.356

to make correction within a prescribed time limit, shall impose a fine of ¥10,000 yuan up to ¥100,000 yuan upon it: (1) failing to file or keep reports, statements, documents and materials as required or failing to provide the relevant information or materials as required; (2) failing to file the insurance clauses or premium rates as required; or (3) failing to disclose information as required.

Article 170 of the Insurance Law: Where anyone, in violation of this Law, commits any of the following conduct, the insurance supervision and regulation authority shall order it to make correction and impose a fine of ¥100,000 yuan up to ¥500,000 yuan upon it; and, if the circumstances are serious, may restrict its scope of business, order it to stop accepting new business or revoke its business operation permit: (1) compiling or providing any false report, statement, document or material; (2) refusing or obstructing any supervisory inspection conducted according to law; or (3) failing to use the approved or filed insurance clauses or premium rates as required.

Article 171 of the Insurance Law: Where an insurance company, insurance asset management company, professional insurance agency or insurance broker violates this Law, the insurance supervision and regulation authority shall punish it according to the provisions of article 160 through article 170 respectively. For its directly responsible person in charge or any other directly liable person, the competent insurance supervision and regulation authority shall admonish him or her and impose a fine of ¥10,000 yuan up to ¥100,000 yuan upon him or her; and, if the circumstances are serious, cancel his or her post-holding qualification or practicing qualification.

355 The Notice of the CIRC on Issuing the Guidelines for Remuneration Management Rules of Insurance Companies 2012, art.31. 356 Bao Jian Fa No. 101 [2012] (see accessed on 14 October 2020).

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(a) Cash welfare, allowances and subsidies357 (1) The “cash welfare, allowances and subsidies” as mentioned in article 8 of the Guidelines 2012 means travel, communication, and meal subsidies and holiday allowance granted in cash, excluding statutory welfare, such as the five components of social insurance and the housing provident fund, and fringe benefits paid in a non-cash form prescribed by relevant state policies, such as enterprise annuities, supplementary medical insurance, and supplementary housing provident funds. (2) The subsidies for lodge, board, business travel, relocation, language training, and child education in reasonable amounts provided to foreign senior managers in the form of “reimbursement of actual amounts” according to the relevant state provisions may be managed without inclusion in the limits for cash welfare, allowances, and subsidies. (b) Personnel at key posts Where the investment management department of an insurance group (holding) company is not directly engaged in the investment business, its primary person in charge may be managed not as personnel at key posts.358 (c) Deferred payment of merit pay Merit pay determined in performance evaluation shall be subject to deferred payment according to the requirements of the Guidelines 2012.359 (d) Risk compliance indicators The risk compliance indicators in the performance evaluation indicator systems of all companies shall be generally determined by reference to article 17 of the Guidelines and other provisions on categorized supervision. A company may, according to its business characteristics and actual risk circumstances, make appropriate adjustments to the risk compliance indicators and reasonably determine the weight of each category of indicators.360 (e) Remuneration risk adjustment (1) The “risk classes determined on the basis of categorized supervision” as mentioned in paragraph 1, article 19 of the Guidelines 2012, means the results of categorized evaluation of incorporated insurance companies conducted by the CBIRC in the fourth quarter each year. (2) The relevant provisions of article 19 of the Guidelines 2012 are not applicable to insurance group (holding) companies, insurance asset management companies, and reinsurance companies. Such companies may, on the basis

357 The Notice of the CIRC on Issues concerning Implementing the Guidelines for the Remuneration Management Rules of Insurance Companies (for Trial) 2012, s.1. 358 Ibid., s.2. 359 Ibid., s.3. 360 Ibid., s.4.

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of their actual circumstances and risk assessment results, adjust the remuneration for relevant personnel.361 (f) Remuneration management report (1) Each company shall, according to the content and form requirements of the Guidelines 2012, submit a remuneration management report of the previous year, which has been deliberated and adopted at the meeting of its board of directors, to the CBIRC before 30 April each year. (2) The remuneration management report shall be submitted to the CBIRC in both written and electronic forms at the same time.362 (g) Application to foreign-funded insurance companies (1) The relevant provisions of the Guidelines 2012 shall apply to entities incorporated in China by foreign-funded insurance companies. A foreignfunded insurance company which has no independent directors for the time being shall establish an independent director system as soon as possible according to the relevant provisions of the CBIRC. Before its independent directors are in place, the company may designate other directors to exercise the duties of independent directors in compensation management. (2) The relevant provisions of the Guidelines 2012 shall not apply to the unincorporated entities established in China by foreign-funded insurance companies.363 7.10 Compliance management of insurance companies To enhance the compliance management of insurance companies and maximize the role of corporate governance mechanisms, the CIRC developed and issued the Notice of the CIRC on Issuing the Measures for the Compliance Management of Insurance Companies (the Measures 2016) on 30 December 2016, which became effective on 1 July 2017.364 The Measures 2016 are applicable to insurance companies and insurance group (or holding) companies established in the territory of China.The branches of foreign insurance companies, insurance asset management companies, and other insurance organizations established with the approval of the CBIRC shall be governed, mutatis mutandis, by the Measures 2016. The branches of insurance companies365 in cities 361 Ibid., s.5. 362 Ibid., s.6. 363 Ibid., s.7. 364 Bao Jian Fa No. 116 [2016] (see accessed on 14 October 2020.The Measures 2016 replaced the Guidelines for the Compliance Management of Insurance Companies (Bao Jian Fa No. 91 [2007]) issued by the CIRC on 7 September 2007). 365 “Branch offices of an insurance company” includes the branches, central sub-branches, subbranches, business departments, marketing service departments, and various captive institutions legally established by an insurance company within China with the approval of the CBIRC and its local offices.

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under separate state planning are governed, mutatis mutandis, by the provisions of the Measures 2016 on the provincial branches of insurance companies.366 “Compliance” means that insurance companies and their insurance practitioners367 shall conduct insurance operations and management in accordance with the relevant laws and regulations, the regulatory provisions, their internal management rules, and the code of ethics that requires honesty and trustworthiness. “Compliance risk” means the risk of legal liability, financial loss, or reputational loss arising from the non-compliance of insurance operations and management conducted by insurance companies and their insurance practitioners.368 In compliance management, an insurance company prevents, identifies, assesses, reports, and responds to compliance risks by establishing compliance management mechanisms, developing and implementing compliance policy, and conducting compliance examination, compliance inspection, compliance risk monitoring, compliance assessment, and compliance training, among others. Compliance management is an integral part of the comprehensive risk management of insurance companies and a basis for implementing effective internal controls.369 An insurance company shall, in accordance with the provisions of these Measures, establish and improve its compliance management rules, improve its organizational structure of compliance management, specify the compliance management responsibilities, build a compliance management system, promote the development of a compliance culture, effectively identify and proactively prevent and resolve compliance risks, and ensure the robust operation of the company.370 An insurance company shall advocate and cultivate a good compliance culture, strive to raise the compliance awareness of all insurance practitioners of the company, and regard its compliance culture as an integral part of its enterprise culture development. The board of directors and the senior executives of an insurance company shall advocate ethics and values that require honesty and trustworthiness, pursue compliance philosophies such as voluntary compliance and compliance creating values, and promote effective interactions between the internal compliance management and the external supervision of the insurance company.371 An insurance group (or holding) company shall establish the group’s overall compliance management system; strengthen the planning, leadership, and oversight of the group’s compliance management; and improve the overall compliance management level of the group. All member companies shall implement the group’s overall compliance management requirements and be responsible for their respective compliance management.372

366 The Notice of the CIRC on Issuing the Measures for the Compliance Management of Insurance Companies 2016, art.39. 367 “Insurance practitioners” means the personnel of insurance companies and other insurance salespersons selling insurance products for insurance companies. 368 The Notice of the CIRC on Issuing the Measures for the Compliance Management of Insurance Companies 2016, art.2. 369 Ibid., art.3. 370 Ibid. 371 Ibid., art.4. 372 Ibid., art.5.

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The CBIRC and its local offices shall, according to the law, conduct supervisory inspection on the compliance management of insurance companies.373 7.10.1 Compliance duties of the board of directors, the board of supervisors, and the general manager The board of directors of an insurance company shall assume the ultimate responsibility for the compliance management of the company and perform the following compliance duties:374 (1) Deliberating and approving compliance policy, overseeing the implementation of compliance policy, and assessing the implementation on an annual basis. (2) Deliberating and approving the annual compliance report of the company, submitting the report to the CBIRC, and offering solutions to the problems reflected in the annual compliance report. (3) Deciding matters regarding the appointment, removal, and remuneration of the chief compliance officer. (4) Deciding the setup and functions of the company’s compliance management department. (5) Ensuring that the chief compliance officer communicates independently with the board of directors and the professional committees of the board of directors. (6) Other compliance duties as stated in the by-laws of the company. The board of directors of an insurance company may authorize a professional committee of it to perform the following compliance duties:375 (1) Examining the annual compliance report of the company. (2) Hearing reports of the chief compliance officer and the compliance management department on compliance issues. (3) Overseeing the compliance management of the company, gathering information on the implementation of compliance policy and existing problems, and offering opinions and recommendations to the board of directors. (4) Other compliance duties as stated in the by-laws of the company or as determined by the board of directors. The supervisors or board of supervisors of an insurance company shall perform the following compliance duties:376 (1) Overseeing the performance of compliance duties by directors and senior executives. (2) Overseeing the compliance of the decisions of the board of directors and the decision-making process. 373 374 375 376

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9.

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(3) Recommending the removal of a director or senior executive who has caused a significant compliance risk. (4) Recommending the replacement of the chief compliance officer by the board of directors. (5) Investigating according to the law circumstances that trigger compliance risks in the operation of the company, during which the relevant senior executives and departments of the company may be required to offer assistance. (6) Other compliance duties as stated in the by-laws of the company. The general manager of an insurance company shall perform the following compliance duties:377 (1) Establishing and improving the organizational structure of compliance management of the company according to the decision of the board of directors, setting up a compliance management department, and providing adequate conditions for the performance of duties by the chief compliance officer and the compliance management department. (2) Examining the compliance policy of the company, submitting it to the board of directors for deliberation, and implementing it after approval by the board of directors. (3) Organizing the identification and assessment of the company’s compliance risks at least once a year and examining the annual compliance management plan of the company. (4) Examining and submitting the company’s annual compliance report to the board of directors or the authorized professional committee. (5) Prohibiting and correcting in a timely manner any non-compliance in the operations and management of the company after discovery, holding the relevant persons accountable for the non-compliance, and reporting it as required. (6) Other compliance duties as stated in the by-laws of the company or as determined by the board of directors. The general manager of a branch or a central sub-branch of an insurance company shall perform the compliance duties as set forth in items (3) and (5) of the preceding paragraph and other compliance duties as determined by the insurance company. 7.10.2 Chief compliance officer and compliance department An insurance company shall have a chief compliance officer. The chief compliance officer shall be a senior executive of the insurance company. The chief compliance officer shall not also manage the operations, the finance, the capital utilization, the internal audit, or any other department of the company where there may arise any conflict of duties in compliance management, unless the general manager of 377 Ibid., art.10.

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the insurance company serves as the chief compliance officer. “Operations department” means a department of an insurance company responsible for the sales, underwriting, claim settlement, or other insurance business.378 To appoint its chief compliance officer, an insurance company shall apply for confirmation of his or her office eligibility in accordance with the Provisions on the Administration of the Office Qualifications for Directors, Supervisors and Senior Executives of Insurance Companies 2018379 and the relevant provisions issued by the CBIRC. An insurance company that removes its chief compliance officer shall report to the CBIRC within ten working days after the removal, explaining a good reason for the removal.380 The chief compliance officer of an insurance company shall answer to the board of directors, be under the leadership of the board of directors and the general manager, and perform the following duties:381 (1) Being comprehensively responsible for the compliance management of the company and leading the compliance management department. (2) Developing and revising the compliance policy of the company, developing the annual compliance management plan of the company, and submitting them to the general manager for examination. (3) Transmitting the compliance policy deliberated and approved by the board of directors to the insurance practitioners and organizing the implementation thereof. (4) Offering recommendations on improving compliance management to the general manager, the board of directors, or the authorized professional committee of it on a regular basis and reporting any gross violations committed by the company and the senior executives in a timely manner. (5) Examining the compliance reports and other compliance documents produced by the compliance management department. (6) Other compliance duties as stated in the by-laws of the company or as determined by the board of directors. The headquarters and provincial branches of an insurance company shall set up compliance management departments. An insurance company shall, according to its size of business, organizational structure, and needs in risk management, set up a compliance management department or a compliance position in any other branch office.382 The compliance management department or compliance position of an insurance company’s branch office shall answer both to the compliance management department or compliance position at the next higher level and to the person in charge of the branch office.

378 Ibid., art.11. 379 The CIRC Order No. 4 [2018]. 380 The Notice of the CIRC on Issuing the Measures for the Compliance Management of Insurance Companies 2016, art.12. 381 Ibid., art.13. 382 Ibid., art.14.

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An insurance company shall, in the form of compliance policy or other formal documents, establish the organizational structure, duties, and rights of a compliance management department and a compliance position and provide measures that guarantee the independence thereof. An insurance company shall guarantee the independence of a compliance management department and a compliance position and conduct independent budget and evaluation thereof. The compliance management department and compliance position shall be independent of the operations, finance, capital utilization, internal audit, and other departments where there may arise any conflict of duties in compliance management.383 A compliance management department shall perform the following duties:384 (1) Assisting the chief compliance officer in developing and revising the company’s compliance policy and annual compliance risk management plan, promoting the implementation thereof, and assisting senior executives in developing the compliance culture of the company. (2) Organizing and coordinating all departments and branch offices of the company in the development and revision of the compliance management rules and regulations of the company. (3) Organizing the implementation of compliance examination and compliance inspection. (4) Organizing the implementation of the monitoring of compliance risks to identify, assess, and report compliance risks. (5) Preparing the annual compliance report. (6) Providing compliance support for the development of the company’s new products and new business by identifying and assessing compliance risks. (7) Organizing the development and implementation of the anti-money laundering and other rules of the company. (8) Arranging for compliance training, prompting insurance practitioners to comply with the code of conduct, and providing compliance consulting to insurance practitioners. (9) Examining important internal rules and regulations as well as business rules and procedures of the company and offering recommendations on developing or revising the internal rules and regulations as well as business rules and procedures of the company in light of the changes and development of the laws and regulations, regulatory provisions, and self-regulatory rules of the industry. (10) Maintaining routine work contact with the regulators and providing feedback including relevant opinions and recommendations. (11) Organizing or participating in the implementation of compliance assessment and accountability. (12) Other compliance management duties as determined by the board of directors. 383 Ibid., art.15. 384 Ibid., art.16.

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The specific duties of a compliance position shall be determined by the company, mutatis mutandis, under the provisions of the preceding paragraph. An insurance company shall guarantee that the chief compliance officer, the compliance management department, and the compliance position have the following rights:385 (1) Obtaining information by attending meetings, consulting documents, retrieving data, interviewing relevant persons, accepting reports on compliance, and other means in order to perform compliance management duties. (2) Independently investigating persons involved in and events involving noncompliance or potential non-compliance and hiring external professional personnel or institutions to offer assistance. (3) Having clear reporting channels to report to the general manager, the professional committee authorized by the board of directors, and the board of directors according to the reporting lines as determined by the board of directors. (4) Other rights as determined by the board of directors. The board of directors and the senior executives shall support the compliance management department, the compliance position, and the compliance personnel in performing their duties and take measures to effectively ensure that they will not be unfairly treated for their performance of their duties. An insurance company shall, according to its size of business, number of personnel, risk level, and other factors, assign adequate full-time compliance personnel to the compliance management department or the compliance position.386 The headquarters and provincial branches of an insurance company shall assign part-time compliance personnel to all departments but the compliance management department.Where conditions permit, an insurance company shall assign part-time compliance personnel to its branch offices other than provincial branches. An insurance company shall establish an incentive mechanism for part-time compliance personnel to promote performance of duties by part-time compliance personnel. Compliance personnel shall have qualifications and experience corresponding to their performance of duties and have professional knowledge in law, insurance, accounting, finance, and other areas and proficiently understand the laws and regulations, regulatory provisions, self-regulatory rules of the industry, and the internal management rules of the company. An insurance company shall provide systematic education and training on a regular basis to improve the professional skills of compliance personnel.387 7.10.3 Compliance management An insurance company shall establish a compliance management framework based on three defence lines and ensure that the three defence lines perform their 385 Ibid., art.17. 386 Ibid., art.18. 387 Ibid., art.19.

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respective functions, cooperate with each other, effectively participate in compliance management, and form a joint force in compliance management.388 All departments and branch offices of an insurance company shall perform the duties of the first defence line for compliance management and assume the direct and primary responsibility for compliance management within the scope of their respective functions.389 All departments and branch offices of an insurance company shall proactively conduct routine compliance control, conduct compliance self-examination on a regular basis, provide compliance risk information or risk points to the compliance management department or compliance position, and support and cooperate with the compliance management department or compliance position in the monitoring and assessment of compliance risks. The compliance management department and compliance position of an insurance company shall perform the duties of the second defence line for compliance management. The compliance management department and compliance position shall, according to the duties as set forth in article 16 of the Measures 2016, provide compliance support for the operations of all departments and branch offices of the company and organize, coordinate, and oversee the compliance management work of all departments and branch offices.390 The internal audit department of an insurance company shall perform the duties of the third defence line for compliance management and independently audit the compliance management of the company on a regular basis.391 An insurance company shall establish a specific cooperation and information exchange mechanism between the compliance management department and the internal audit department. After the end of an audit, the internal audit department shall notify the compliance management department of the audit process and conclusion; the compliance management department may also offer recommendations on the audit to the internal audit department based on information on the monitoring of compliance risks.392 An insurance company shall develop a compliance policy and submit it to the CBIRC for recordation after it is deliberated and adopted by the board of directors. As a programmatic compliance management document of an insurance company, the compliance policy shall include the following:393 (1) The objectives and basic principles of compliance management of the company. (2) The compliance culture advocated by the company. (3) The compliance responsibilities of the board of directors and senior executives.

388 389 390 391 392 393

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25.

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(4) The compliance management framework and reporting lines of the company. (5) The status and duties of the compliance management department. (6) The primary procedures of the company for the identification and management of compliance risks. An insurance company shall assess its compliance policy on a regular basis and revise it as needed in its compliance work. An insurance company shall develop relevant rules and regulations to specify the code of conduct of insurance practitioners, implement the company’s compliance policy, and provide guidelines for the implementation of compliance policy by insurance practitioners. An insurance company shall develop operating procedures and norms for work positions.394 An insurance company shall organize the identification, assessment, and monitoring of compliance risks in the following on a regular basis:395 (1) Operations; (2) Financial conduct; (3) Capital utilization conduct; (4) Institutional management conduct; (5) Other conduct that may trigger compliance risks. An insurance company shall specify the compliance risk reporting lines, the responsibilities of each person and each institution involved in the reporting lines, and the contents, methods, and frequency of reporting and the requirements for report recipients to directly handle reports or further report them to a higher level.396 The compliance management department of an insurance company shall conduct compliance examination of the following:397 (1) Important internal rules and regulations as well as and business rules and procedures. (2) Important operations, financial conduct, capital utilization conduct, and institutional management conduct. The compliance management department of an insurance company shall, as required by the chief compliance officer, general manager, board of directors, or the professional committee authorized by the board of directors, conduct compliance investigation within the company. After the end of a compliance investigation, the compliance management department shall prepare a report on the investigation process and conclusion and submit it to the institution requiring the investigation.398 An insurance company shall establish an effective compliance assessment and accountability system and regard compliance management as an important indicator for the annual assessment of the company. It shall assess and evaluate the performance of compliance duties by all departments, branch offices, and their personnel and hold relevant persons involved in non-compliance events accountable.399

394 395 396 397 398 399

Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31.

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The compliance management department of an insurance company shall establish a collaboration mechanism with the relevant training department of the company to develop compliance training plans and on a regular basis, organize and provide compliance training. The directors, supervisors, and senior executives of an insurance company shall participate in the compliance training relevant to their duties. Insurance practitioners shall receive compliance training on a regular basis.400 An insurance company shall establish effective information systems to ensure timely and accurate access to the information on the company’s operations, finance, capital utilization, and institutional management, among others, as needed in compliance management work.401 The primary persons in charge of all branch offices of an insurance company shall, according to the Measures 2016 and the compliance management rules of the company, implement the requirements from institutions at higher levels and enhance compliance management.402 7.10.4 External supervision of compliance The CBIRC shall, based on the actual development of insurance companies and under the principle of categorized guidance, strengthen supervision and guidance and propel insurance companies to establish and improve their compliance management systems.403 The CBIRC shall supervise and evaluate the compliance management work of insurance companies by means such as compliance reporting or on-site inspection and regard the evaluation results as an important basis for the implementation of comprehensive risk rating.404 An insurance company shall, before 30 April each year, submit its annual compliance report for the previous year to the CBIRC. The board of directors of an insurance company shall be responsible for the veracity, accuracy, and integrity of the compliance report.405 An annual compliance report of the company shall include the following: (1) A summary of compliance management status. (2) The development, assessment, and revision of compliance policy. (3) Information on the chief compliance officer and the compliance management department. (4) The compliance of important operations. (5) The operation of the compliance assessment and monitoring mechanisms. (6) The major compliance risks existing and countermeasures. (7) Gross non-compliance events and the handling thereof. (8) Information on compliance training. 400 401 402 403 404 405

Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36. Ibid., art.37.

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(9) The problems existing in compliance management and the improvement measures. (10) Others. The CBIRC may, as needed in supervision, require insurance companies to submit comprehensive or special compliance reports. The local offices of the CBIRC may, according to the regulatory needs within their respective jurisdictions, require the provincial branches of insurance companies to report their compliance work in writing. Where an insurance company and its relevant personnel violate the provisions of the Measures 2016, the CBIRC may, according to the specific circumstances, take the following regulatory measures:406 (1) (2) (3) (4) (5) (6)

Ordering corrective action to be taken during a specified period. Adjusting the comprehensive risk rating. Adjusting the corporate governance rating. Regulatory interview. Notification of the industry. Other regulatory measures.

Those that refuse to take corrective action shall be punished according to the law. 7.11 Related-party transactions of insurance companies The Insurance Law provides three articles (articles 108, 109, and 151) regarding related-party transactions. The insurers are required to establish rules for the management and information disclosure of related-party transactions according to the provisions of the insurance supervision and regulation authority of the State Council.407 None of the controlling shareholders, actual controllers, directors, supervisors, and senior managers of insurance companies shall damage the interests of the companies through related-party transactions.408 Where a shareholder of an insurance company seriously damages the interests of the company through related-party transactions, which endanger the company’s solvency, the insurance supervision and regulation authority of the State Council shall order the shareholder to make correction. Before the shareholder makes correction as required, the insurance supervision and regulation authority of the State Council may restrict the rights of such a shareholder, and if the shareholder refuses to make correction, may order the assignment of the shareholder’s shares in the insurance company.409 In accordance with the requirements of the Insurance Law and the Company Law, and other relevant provisions, in order to regulate the related-party transactions of insurance companies, prevent the risks of related-party transactions, and safeguard the independence of insurance companies and the interests of insurance 406 407 408 409

Ibid., art.38. The Insurance Law, art.108. Ibid., art.109. Ibid., art 151.

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consumers, the CBIRC formulated the Measures for the Administration of RelatedParty Transactions of Insurance Companies (hereinafter, the Measures 2019), which were issued and implemented on 25 August 2019.410 The Measures 2019 consists of 64 articles in seven chapters aiming to strengthen the supervision of relatedparty transactions and the internal control of insurance companies. Insurance companies that carry out related-party transactions shall abide by laws and regulations, national accounting systems and insurance regulations and take effective measures to prevent related parties from using their special status to infringe upon the interests of insurance companies or insurance consumers through related-party transactions.411 7.11.1 Related parties and related-party transactions A related party of an insurance company refers to a natural person, legal person, or other organization that has a relationship with an insurance company that is controlled or significantly influenced by one party.412 Any one of the following circumstances is a related legal person or other organization of an insurance company:413 (1) The controlling shareholder and actual controller of the insurance company; (2) Legal persons or other organizations that hold or control more than 5% of the equity of the insurance company, as well as their controlling shareholders and actual controllers, except those specified in item (1) of this article; (3) A legal person or other organization controlled by the directors, supervisors, or senior management personnel in items (1) and (2) of this article; (4) Legal persons or other organizations controlled or significantly influenced upon by the related parties listed in items (1) and (2) of this article; (5) Legal persons or other organizations controlled or significantly influenced upon by the insurance company; (6) Legal persons or other organizations controlled or exerted significant influence upon by the related parties listed in article 6 (1) to (4) of the Measures 2019. 410 Yin Bao Jian Fa No. 35 [2019] (see accessed on 14 October 2020). The Measures 2019 has repealed the previous five pieces of regulations issued by the CIRC regarding the administration of related-party transactions of insurance companies: the Interim Measures for the Administration of Related-Party Transactions of Insurance Companies (Bao Jian Fa No.24 [2007]), the Notice of the CIRC on Issues Concerning the Implementation of the Interim Measures for the Administration of RelatedParty Transactions of Insurance Companies (Bao Jian Fa No. 88 [2008]), the Notice of the CIRC on Issues Concerning Further Regulating Related-Party Transactions of Insurance Companies (Bao Jian Fa No. 36 [2015]), the Notice of the CIRC on Issues Concerning Further Strengthening the Disclosure of Information of Related-Party Transactions of Insurance Companies (Bao Jian Fa No. 52 [2016]), and the Notice of the CIRC on Matters Concerning Further Strengthening the Management of Related-Party Transactions of Insurance Companies (Bao Jian Fa No. 52 [2017]). 411 The Measures for the Administration of Related-Party Transactions of Insurance Companies 2019, art.2. 412 Ibid., art.4. 413 Ibid., art.5.

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A natural person under any of the following circumstances is a related natural person of an insurance company:414 (1) The natural person controlling shareholder and actual controller of the insurance company; (2) Natural persons who hold or control more than 5% of the equity of the insurance company, except those specified in item (1) of this article; (3) Directors, supervisors, or senior managers of the insurance company; (4) Close relatives of the related parties listed in items (1) to (3) of this article; (5) Directors, supervisors, or senior managers of the related parties listed in article 5(1) and (2) and the legal persons or other organizations controlled by them; (6) Directors, supervisors, or senior managers of legal persons or other organizations controlled by the insurance company. An insurance company may, based on the principle that substance is more important than form, determine that the following natural persons, legal persons, or other organizations that may lead to tilted interests are related parties:415 (1) Internal staff of the insurance company and their legal persons or other organizations controlled by them; (2) The concerted-action person of the insurance company, its controlling shareholder, and actual controller; (3) Legal persons or other organizations whose directors, supervisors, or senior managers exert significant influence under article 5 (1) and (2) of the Measures 2019; (4) Other closely related family members of the related parties listed in article 6 (1) to (3) of the Measures 2019; (5) Natural persons, legal persons, or other organizations that hold more than 10% of the shares of the insurance company’s holding subsidiaries (6) The actual equity holders or other ultimate beneficiaries of financial products such as trust plans or other agreement arrangements; (7) Enterprises that are dependent on the insurance company in terms of loans, guarantees, and so on; (8) Those that have had an agreement with the insurance company in terms of funds, operations, purchases, and sales for three or more consecutive years. The CBIRC may, based on the principle that substance is more important than form, determine that any natural person, legal person or other organization that may lead to an insurance company’s interests being tilted is a related party, including but not limited to the relevant circumstances specified in article 7 of the Measures 2019.416 414 Ibid., art.6. 415 Ibid., art.7. 416 Ibid., art.8.

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In the past 12 months or in accordance with the relevant agreement in the next 12 months, if there is one of the circumstances specified in articles 5 and 6 of the Measures 2019, it shall be deemed to be a related party of the insurance company.417 Related-party transactions of insurance companies refer to the transfer of resources or obligations between insurance companies and related parties, including the following types:418 (1) Investment and shareholding category: including related-party investment in the insurance company (including capital increase, capital reduction, merger and acquisition, and so on.) and related party investment in preferred shares, bonds, or other securities issued by the insurance company; (2) Fund utilization category: including handling bank deposits with related parties, investing in equity, real estate, and other assets of related parties; investing in financial products issued by related parties or investing in financial products whose underlying assets include assets of related parties; joint investment with related parties (including new establishment, capital increase, capital reduction, merger, acquisition, and so on.); (3) Interest transfer category: including granting or receiving financial assistance, gift, sale or lease of assets, transfer of rights, guarantees, transfer of creditor’s rights and debts, signing of permission agreements, waiver of priority transfer rights, of equal rights to increase capital or other rights, and so on; (4) Insurance business categories: including insurance business and insurance agency business, reinsurance ceding and accepting, entrust or entrusted management of assets and business, and so on; (5) Providing goods or services category: including audit, actuarial, legal, asset evaluation, fund custody, advertising, daily procurement, workplace decoration, and so on; (6) Other matters that may lead to the transfer of resources or obligations of the insurance company as determined by the CBIRC based on the principle that substance is more important than form. The above matters occurring between the insurance company’s holding subsidiary and the related party of the insurance company shall be managed in accordance with the related-party transactions of the insurance company unless the holding subsidiary is a listed company or a financial institution which has been supervised by the industry supervision. Related-party transactions of an insurance company are divided into major related-party transactions and general related-party transactions. Major relatedparty transactions refer to transactions in which a single or annual cumulative transaction amount between an insurance company or a holding subsidiary of an insurance company and a related party reaches more than ¥30 million yuan and accounts for more than 1% of the insurance company’s audited net assets at the end of the previous year. After the incremental transaction amount between 417 Ibid., art.9. 418 Ibid., art.10.

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an insurance company or a holding subsidiary and a related party within a year reaches the standard of the preceding paragraph, subsequent related transactions that occur again, if they reach the standard of the preceding paragraph again, will be reconfirmed as a major related-party transaction. The amount of the same insurance company and multiple related parties in the same transaction shall be combined for calculation. General related-party transactions refer to those related-party transactions other than the major related-party transactions.419 7.11.2 Calculation and proportion of related-party transactions The amount of related-party transactions is calculated based on the transaction consideration of the insurance company, its controlling subsidiary, or the transferred interest. The specific calculation method is as follows:420 (1) If investing in an insurance company, the transaction amount is calculated based on the investment amount; if the registered capital of the insurance company is reduced, the transaction amount is calculated based on the reduced capital; if the investor invests in insurance company’s preferred shares, bonds, or other securities, the transaction amount is calculated based on the investment amount; (2) For fund utilization, the transaction amount is calculated based on the investment amount of insurance funds; if the investment is in financial products issued by related parties and the underlying assets do not involve other related parties, the transaction amount is calculated based on the issue fee or investment management fee; where an asset is purchased, the transaction price is calculated as the transaction amount; (3) Where the financial assistance is granted or accepted in the interest transfer category, the amount of the transaction is calculated based on the amount of assistance; where the asset is sold or leased, the right is transferred, or a permission agreement is signed, the transaction amount is calculated based on the transaction price; where the guarantee is provided or accepted, the amount of guarantee is used to calculate the transaction amount; where the insurance company waives the relevant rights, the transaction amount is calculated based on the amount involved in the right; the transaction amount for a gift is calculated based on the market value of the gift subject; (4) In the insurance business category, the insurance business uses the premium to calculate the transaction amount; the insurance agency business uses the agency fee to calculate the transaction amount; where the financial institution is entrusted to manage assets or the trustee investor manages the asset, the entrust fee or the entrusted management fee shall be used to calculate the transaction amount; 419 Ibid., art.11. 420 Ibid., art.12.

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(5) Where goods or services are provided, the transaction amount is calculated based on the amount incurred. The calculation standard of the related-party transaction amount of an insurance company shall be in accordance with the relevant regulations of the CBIRC, and the principle of substance being more important than form shall be applied for penetrating calculation.421 The related transactions of fund utilization of an insurance company shall meet the following proportion requirements:422 (1) The total investment balance of the insurance company to all related parties shall not exceed 30% of the total assets of the insurance company at the end of the previous year and the net assets at the end of the previous year, whichever is the lower; (2) Among the book balances of insurance companies investing in unlisted equity assets, real estate assets, other financial assets, and overseas investments, the amount of investment in related parties shall not exceed 50% of the aforementioned asset investment limits; (3) The total investment balance of an insurance company in a single related party shall not exceed 15% of the total assets of the insurance company at the end of the previous year; (4) Where an insurance company invests in a financial product, if the underlying assets involve the controlling shareholder or a related party of the controlling shareholder, the share of the insurance company purchasing the financial product shall not exceed 60% of the total issuance of the product. The investment amount of an insurance company and its holding subsidiary shall be calculated in combination and meet the above proportion requirements. Where the amount of pledged equity of shareholders which hold more than 5% of the equity of an insurance company exceeds 50% of the total equity which they hold of the insurance company, the CBIRC may restrict them from conducting related-party transactions with the insurance company.423 The related-party transactions involving the use of funds between an insurance company and the related party and other members of its group shall be combined to calculate the amount, and the provisions of article 14 of the Measures 2019 shall apply, except the aforementioned entities which are not related parties of insurance companies. Article 14 of the Measures 2019 shall not apply to related transactions between an insurance company and its holding subsidiaries or among the holding subsidiaries.424 An insurance company shall dynamically monitor the various amounts and proportions of the related-party transactions, establish an early warning and

421 422 423 424

Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16.

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management control mechanism, and adjust in a timely manner its operating behaviour to comply with the relevant provisions of the Measures 2019.425 The CBIRC may make appropriate adjustments to the regulatory proportion in article 14 of the Measures 2019 according to the corporate governance status, solvency status, and administrative supervision measures and administrative penalties of insurance companies.426 7.11.3 Internal control of related-party transactions The management of related-party transactions of insurance companies shall follow the following principles:427 (1) active management and clear responsibilities; (2) penetrating management and tracking funds; and (3) total control and clear structure. An insurance company shall formulate a related-party transaction management system. A related-party transaction management system includes related-party identification, reporting, verification and information management, related-party transaction initiation, pricing, review, reporting, disclosure, audit, and accountability.428 The board of directors of an insurance company shall establish a related-party transaction control committee to be responsible for the identification and maintenance of related parties, related-party transaction management, review, approval, and risk control. The related-party transaction control committee consists of more than three directors, with an independent director as the person in charge. The related-party transaction control committee shall focus on the compliance, fairness, and necessity of related-party transactions.429 The related-party transaction control committee shall establish an inter-department related-party transaction management office whose members shall include the heads of compliance, personnel, and finance departments, and so on, and appoint a senior manager as the person in charge of the daily management of related-party transactions and other specific affairs.430 An insurance company shall establish related-party information files, which shall be updated at least once every six months and shall be reported to the CBIRC at the end of June and December each year.431 The related-party transaction control committee and its office have the active management responsibility for the updating and maintenance of related-party information archives and shall conduct necessary verification of relevant information through public channel inquiries, and so on, and shall pay attention to suspicious information and relevant media report.432 The directors, supervisors, and senior management personnel of an insurance company shall, within 15 working days from the date of taking office, report to the 425 426 427 428 429 430 431 432

Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24.

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insurance company on its related parties in accordance with the relevant provisions of the Measures 2019.433 Natural persons, legal persons, or other organizations shall report to the insurance company their related parties within 15 working days from the date of holding or controlling more than 5% of the equity of the insurance company, in accordance with the relevant provisions of the Measures 2019. When an insurance company submits applications for the appointment qualifications of directors, supervisors, and senior management personnel, changes in shareholders, and so on, it shall undertake to report on the status of its major related parties in accordance with regulations. Relevant reporters shall report truthfully, and shall not conceal, omit, or misreport. A related-party transaction shall conclude a written transaction agreement. The signing of the agreement shall follow the principles of equality, voluntariness, equivalence and consideration, and the content of the agreement shall be clear, specific, and enforceable.434 Related-party transactions shall be fair and clarify the principle for determining the transaction consideration and pricing methods. When necessary, the relatedparty transaction control committee may hire an independent third party such as a financial consultant to issue a report as the basis for judgment.435 An insurance company shall improve the internal control mechanism of relatedparty transactions and optimize the related-party transaction management process. The review opinions of key links such as compliance, business, and finance, as well as the resolutions and records of related-party transaction control committee meetings and other meetings, shall be clear and accessible.436 An insurance company shall actively monitor the flow of insurance funds in accordance with the relevant regulations of the CBIRC, grasp the status of basic assets in a timely manner, identify penetratingly and inspect related-party transactions, and establish an effective related-party transaction risk control mechanism.437 General related-party transactions are reviewed in accordance with the company’s internal management system and authorization procedures and reported to the related-party transaction control committee for record or approval.438 For general related-party transactions with small amounts and simple structures, the related-party transaction control committee may periodically review the transactions and issue opinions. After a major related-party transaction is reviewed by the related-party transaction control committee, it shall be approved by the board of directors or the shareholders (general) meeting. The related-party transaction control committee shall express written opinions on the compliance, fairness, and necessity of major related-party transactions and on whether they will damage the interests of the insurance company and insurance consumers.439 433 434 435 436 437 438 439

Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31.

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When the board of directors of an insurance company considers a related-party transaction, the related-party directors shall not exercise their voting rights, nor shall they act on behalf of other directors. The meeting of the board of directors can be held if more than half of the non-related-party directors are present. Resolutions of the board meeting must be approved by more than two-thirds of the non-relatedparty directors participating in the meeting. If the number of non-related-party directors attending the board meeting is fewer than three, the insurance company shall submit the transaction to the shareholders (general) meeting for deliberation.440 When shareholders (or the general assembly) meeting of the insurance company consider related transactions, the related-party shareholders shall not participate in voting unless otherwise specified by the CBIRC. If the insurance company does not set up a shareholders’ meeting, or if the ratio of voting rights is lower than that as provided in the Bylaws of the Insurance Company or the legal ratio due to avoidance, the board of directors shall still consider related party transactions and the provisions on avoidance in paragraph 1 of this article are not applicable, but the related party shall issue a statement of non-existence of improper interest transfer. An insurance company and its related parties may sign a unified transaction agreement for the following related-party transactions that last for a long time, and the agreement period generally does not exceed three years:441 (1) Insurance business; (2) Providing goods, services, or financial assistance. The signing, renewal, and substantive changes of the unified transaction agreement shall be subject to internal review, reporting, and information disclosure in accordance with major related-party transactions. The related-party transactions under the unified transaction agreement do not need to be reviewed, reported, and disclosed one by one, but the implementation status shall be stated in the quarterly report. The unified transaction agreement shall specify or estimate the amount of related-party transactions. Independent directors shall carefully express their opinions on the fairness and compliance of major related-party transactions. If two or more independent directors deem it necessary, they may hire an independent third party such as an intermediary agency to provide opinions, and the cost shall be borne by the insurance company.442 An insurance company shall organize a special audit on related-party transactions at least once a year and report the audit results to the board of directors and the board of supervisors.443 For situations in which related parties are not reported in accordance with the regulations, or related-party transactions are carried out in violation of regulations, the related-party transaction control committee, independent directors, or board

440 441 442 443

Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35.

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of supervisors may propose accountability recommendations, which will be implemented after deliberation and approval by the board of directors.444 An insurance company’s board of directors, the related-party transaction control committee, independent directors, or board of supervisors may make correction suggestions in the daily supervision or special audit of related-party transactions and may make recommendations for the removal of directors and senior managers who have committed negligence.445 7.11.4 Report and disclosure of related-party transactions An insurance company shall report and disclose related-party transaction information in a true, accurate, complete, and timely manner in accordance with the relevant provisions of these Measures, and there shall be no false records, misleading statements, or major omissions.The related-party transaction control committee shall coordinate the management of related-party transaction information disclosure and improve the transparency of related-party transactions.446 The following related-party transactions shall be reported to the CBIRC one by one within 15 working days after signing the transaction agreement:447 (1) Major related-party transactions; (2) Signing, renewal, or substantial change of the unified transaction agreement; (3) Other transactions requested by the CBIRC. Related-party transactions that must be reported one by one in accordance with the provisions of article 39 of the Measures 2019 shall include at least the following content:448 (1) An overview of related-party transactions and the situation of the subject matter of the transaction; (2) The counterparty situation. Including the basic situation of the related natural person, the name of the related legal person, type of enterprise, business scope, registered capital, and the existing relationship with the insurance company; (3) The specific situation of the related-party transaction, including the penetrating transaction structure, transaction purpose, transaction conditions or consideration, pricing policy, impact on financial status and operating results, and so on. If the difference between the transaction price and the market price is large, the reason shall be explained. For investment trust plans, debt or real estate investment plans, asset management plans, equity investment funds, asset support plans, and other financial products, the investment target and basic assets shall be stated. 444 445 446 447 448

Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39. Ibid., art.40.

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When buying or selling assets, equity, or other equity from related parties, the price for the last transaction shall be stated. In case of joint investment with related parties, the name of the invested enterprise, business model, profit forecast, main assets, and the investment income distribution and loss sharing plan between the insurance company and the related parties shall be stated. (4) If the related-party transaction involves the controlling shareholder of the insurance company and its related parties, the controlling shareholder and its related parties shall provide materials such as the audited financial statements of the previous year and the credit rating at the end of the last quarter; (5) The accumulated amount of related-party transactions with the related party during the year; (6) Transaction agreements and related legal documents related to the transaction of underlying assets, relevant approval documents related to the transaction, and professional reports issued by intermediary service agencies; (7) Resolutions of shareholders’ (general assembly) meeting and of the board of directors, and opinions or resolutions of the related-party transaction control committee; (8) Written opinions of independent directors; (9) Other documents required by the CBIRC. An insurance company shall make statistics on the amount and proportion of related-party transactions in accordance with the relevant provisions of the Measures 2019 and report the relevant situation of related-party transactions within 30 days after the end of each quarter.449 An insurance company shall disclose the overall situation of related-party transactions for the year in accordance with industry regulatory standards in its annual report.450 The board of directors of an insurance company shall form an annual special report on the overall situation of related-party transactions and submit it to the CBIRC along with the annual report.451 In accordance with article 39 of the Measures 2019, it is necessary to report the related-party transactions one by one. The insurance company shall disclose the following contents one by one on the company website and the public website that meets the regulatory requirements within 15 working days after signing the transaction agreement:452 (1) Counterparty situation. Including the basic situation of the related natural person, the name of the related legal person, type of enterprise, business

449 450 451 452

Ibid., art.41. Ibid., art.42. Ibid., art.43. Ibid., art.44.

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(2) (3) (4) (5) (6)

scope, registered capital, and the existing relationship with the insurance company; Types of related-party transactions and the situation of the subject matter of the transaction; The main contents of the transaction agreement, including the transaction price, transaction settlement method, agreement effective conditions, effective time, performance period, and so on; Pricing policy for related-party transactions. If the difference between the transaction price and the fair market price is large, the reason shall be explained; Transaction decision-making and review, including decision-making organization, time, conclusion, review method, and process; Other matters required by the CBIRC to be disclosed.

Related-party transactions other than those specified in article 39 of the Measures 2019 shall be classified and disclosed quarterly according to the type of transaction. Insurance companies shall disclose on the company’s website and public websites that meet regulatory requirements within 30 days after the end of each quarter.453 The following related-party transactions carried out by an insurance company may be exempted from review and disclosure in the form of related-party transactions, but they shall be taken into account when calculating the amount and proportion of related-party transactions:454 (1) A single transaction with a related natural person with a transaction amount of less than ¥500,000 yuan or a related legal entity with a single transaction with a transaction amount of less than ¥5 million yuan; (2) One party subscribes to the other party’s publicly issued stocks, corporate bonds or enterprise bonds, convertible bonds or other derivative products in cash; (3) Subsequent redemption, compensation, repayment of principal and interest, distribution of interest and dividends, reinsurance amortization of compensation, adjustment of reinsurance handling fees, and other transactions in accordance with the related-party transaction agreement; (4) Carrying out current account deposit business with related parties; (5) Other circumstances as prescribed by the CBIRC. The following related-party transactions conducted by insurance companies may be exempted from review and disclosure in the form of related-party transactions, but they must be reported to the CBIRC within 15 working days after the transaction agreement and explain the reasons, and they shall be taken into account when calculating the amount and proportion of related-party transactions:455 (1) Where the same natural person serves as an independent director of an insurance company and an independent director of another legal persons 453 Ibid., art.45. 454 Ibid., art.46. 455 Ibid., art.47.

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at the same time and there is no other situation that constitutes a related party, the transaction is between the legal person and the insurance company; (2) The pricing of the transaction is prescribed by the state; (3) Other situations as specified by the CBIRC. Where the related-party transaction information of an insurance company involves state secrets, business secrets, or other circumstances recognized by the CBIRC if disclosure or performance of relevant obligations in accordance with the Measures 2019 may result in violation of state laws and regulations on confidentiality or serious damage to the company’s interests, the insurance company may apply to the CBIRC for exemption from disclosure or fulfilment of relevant obligations in accordance with these Measures.456 7.11.5 Supervision and administration of related-party transactions An insurance company shall maintain the independence of the company’s operations, increase market competitiveness, and reduce the number and scale of relatedparty transactions. An insurance company’s related-party transactions shall not deviate from the price or charging standards of independent third parties in the market, shall not formulate transaction conditions that are clearly unfavourable to the insurance company, and shall not transfer interest through related-party transactions.457 Related-party transactions shall have a clear structure and avoid complicated arrangements such as multiple levels of nesting. It is not allowed to evade the internal review, external supervision, reporting, and disclosure obligations of related-party transactions by concealing related-party relations and other inappropriate means.458 Shareholders, directors, supervisors, senior management personnel, and other related parties of insurance companies shall truthfully disclose related information of related relations, shall not conceal or provide false statements, and shall be responsible for the truthfulness, accuracy, and completeness of the information provided.459 The board of directors of an insurance company shall bear the ultimate responsibility for the management of related-party transactions. The person in charge of the related-party transaction control committee, the relevant business department, and the person in charge of compliance bears direct responsibility for the compliance of the related-party transactions.460 When examining the related-party transactions, the CBIRC may take the following review measures as appropriate:461

456 457 458 459 460 461

Ibid., art.48. Ibid., art.49. Ibid., art.50. Ibid., art.51. Ibid., art.52. Ibid., art.53.

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(1) To require the insurance company and its related parties to provide supplementary explanations or provide relevant materials such as legal opinions and financial advisory opinions; (2) To raise open questions about relevant issues of related-party transactions; (3) To require internal audits on specific transactions and issue audit reports; (4) To designate a third party to reassess the transaction assets, conduct external audits, or issue professional reports such as profit forecast reports; (5) Other review measures taken by the CBIRC in accordance with law. If an insurance company violates the provisions of the Measures 2019, the CBIRC shall order it to make corrections and take the following supervisory measures as appropriate:462 (1) (2) (3) (4) (5)

Order to modify the trading conditions; Order to stop, cancel, or terminate related-party transactions; Orders to prohibit transactions with specific related parties; Limit the form and proportion of fund utilization; Other regulatory measures taken by the CBIRC in accordance with law.

Where an insurance company violates the provisions of the Measures 2019, the CBIRC may impose fines, limit the scope of business, order to stop accepting new business, or revoke business licenses and other administrative penalties, and may warn, fine, and revoke the appointment qualification or prohibition of entering into insurance industry of the relevant persons in charge according to law. Those suspected of committing crimes shall be transferred to judicial institutions to pursue criminal liability according to law.463 If a director, supervisor, senior manager, or other relevant employee of an insurance company violates the provisions of the Measures 2019, the CBIRC may take the following supervisory measures against the relevant responsible persons:464 (1) (2) (3) (4) (5)

Order corrections; Record in the performance record and circulate in the industry; Order the insurance company to hold the person accountable; Identify the person as an inappropriate candidate; Other regulatory measures taken by the CBIRC in accordance with law.

If an insurance company’s shareholders and actual controllers use related-party transactions to seriously damage the interests of the insurance company, the CBIRC may take regulatory measures such as ordering corrections, restricting shareholder rights, and instructing the transfer of equity. If other related parties of an insurance company violate the provisions of the Measures 2019, the CBIRC may take supervision measures such as publicly condemning and restricting investment in the insurance industry.465

462 463 464 465

Ibid., art.54. Ibid., art.55. Ibid., art.56. Ibid., art.57.

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If a related party violates the provisions of the Measures 2019 and causes losses to the insurance company, the insurance company may require it to bear the liability for compensation. If necessary, the CBIRC may urge the insurance company to take judicial measures to demand compensation.466 When service institutions such as accounting firms, professional assessment agencies, law firms, taxation firms, and so on violate the principles of good faith and due diligence, issue documents with false records, misleading statements or major omissions, the CBIRC may conduct industry notifications, and the opinions or reports issued by such service institutions in a certain period of time will not be recognized and will be handed over to the relevant regulatory authorities to give administrative penalties according to law.467 7.11.6 The significant features of the Measures 2019 In comparison with the previous regulations regarding related-party transactions, the Measures 2019 has a number of new features: First, the Measures 2019 better defines the criteria for related parties. Referring to domestic and international accounting standards and based on past experiences in supervising related-party transactions of insurance companies in China, the Measures 2019 sets out the criteria for identifying related parties.468 Second, the Measures 2019 sets relative regulatory standards. Based on the business development and management of insurance companies in recent years and in accordance with the principle of prioritizing the supervision of major transactions, the Measures 2019 clarifies the criteria for major related-party transactions and sets upper limits on insurance funds invested in related-party transactions so as to control the overall risks of these transactions.469 Third, the Measures 2019 strengthens the penetration supervision. Insurance companies are required to track and monitor the flow of insurance funds all the way to the underlying assets under the principle of substance over form. For natural persons, legal persons, or other organizations that may cause the tunnelling of benefits, penetration supervision shall be applied to identify related parties and related-party transactions.470 Fourth, the Measures 2019 improves the internal control and accountability mechanism. Insurance companies shall set up, under the board of directors, a related-party transaction control committee and a related-party transaction management office in charge of the overall and routine management of related-party transactions so as to improve the management process and the internal control mechanism. In respect of accountability, the Measures makes it clear that the relevant departments and independent directors of insurance companies may suggest an accountability

466 467 468 469 470

Ibid., art.58. Ibid., art.59. Ibid., articles 4 to 9. Ibid., articles 10 to 18. Ibid., articles 19 and 29.

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investigation into illegal related-party transactions and that the regulatory authority may order insurance companies to hold responsible persons accountable.471 Fifth, the Measures 2019 enhances information disclosure. The related-party transaction control committee under the board of directors shall conduct overall management of information disclosure to ensure the authenticity, accuracy, and integrity of information. The Measures also refers to international regulatory rules and sets a stricter standard for information disclosure, requiring insurance companies to disclose, in their annual reports, not only the related-party transactions in accordance with accounting principles but also the overall situation of that year’s related-party transactions according to regulatory requirements.472 Six, the Measures 2019 strengthens oversight responsibility. The Measures sets out in a specific chapter the management and oversight responsibilities of related-party transactions, requiring related parties such as shareholders, directors, supervisors, and senior executive members to truthfully disclose relevant information about related-parties relationships with no concealment or false statements. The board of directors of insurance companies shall bear the ultimate responsibility for the management of related-party transactions.The CBIRC will take regulatory measures against misconducts and relevant responsible persons and tighten supervision over the responsible parties.473 7.12 Risk management of insurance companies As part of the overall corporate governance framework and in furtherance of the safe and sound operation of the insurer and the protection of policyholders, the board of directors is ultimately responsible for ensuring that the insurer has in place effective systems of risk management and internal controls and functions to address the key risks it faces and for the key legal and regulatory obligations that apply to it. Senior management effectively implements these systems and provides the necessary resources and support for these functions. The nature of the systems that the insurer has is dependent on many factors. The systems typically include strategies setting out the approach of the insurer for dealing with specific areas of risk and legal and regulatory obligation; policies defining the procedures and other requirements that members of the board and employees need to follow; processes for the implementation of the insurer’s strategies and policies; and controls to ensure that such strategies, policies, and processes are in fact in place, are being observed, and are attaining their intended objectives.474 Insurance runs the business of risks. The word “risk” in underwriting can be defined as the uncertainty concerning a possible loss. The insured transfers his or her risk of possible loss to the insurer by paying premiums to the insurer; in return, the insurer will pay the insured when loss occurs. However, the term “risk” in the concept of risk management of an insurance company has a different meaning. It 471 472 473 474

Ibid., article 19 to 37. Ibid., articles 38 to 48. Ibid., article 49 to 59. The ICP 8.01 and 8.04.

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refers to the uncertain factors that may exert negative effects on the realization of insurance operation objectives. The term “risk management” refers to the basic flow, the relevant organic structure, systems and measures adopted by an insurance company to identify, evaluate, and control the risks involved in its insurance operation, with the focus being put on operation objectives.475 In order to strengthen the risk management of insurance companies, further regulate the insurance industry, and improve risk prevention capacity, the CIRC formulated the Notice of CIRC on Issuing the Guidelines for the Risk Management of Insurance Companies (for Trial Implementation) (hereinafter, the Guidelines 2007) on 6 April 2007, which came into force on 1 July 2007.476 These Guidelines were formulated in accordance with the Guiding Opinions on Regulating the Corporate Governance Structure of Insurance Companies (for Trial Implementation) 2006477 and other relevant laws and regulations.478 These Guidelines apply to the insurance companies and insurance asset management companies legally established within China. As for an insurance group (holdings) company which has already established a risk management system covering the whole group in accordance with these Guidelines, its subsidiary insurance companies are not required to be governed by these Guidelines, upon approval of CBIRC.479 An insurance company shall determine its risk management objectives, establish and improve a risk management system, standardize risk management flow, and adopt advanced methods and means of risk management to maximize the benefits gained under a proper risk level.480 7.12.1 The principles and general requirements for risk management An insurance company shall observe the following principles when conducting risk management:481 The first is the principle of unifying comprehensive management and key monitoring. An insurance company shall establish a comprehensive risk management system which covers all business flows and operation links and may conduct continual monitoring and regular evaluation over risks and give accurate warnings, and at the same time, conduct key monitoring over risks in light of the actual situation of

475 The Notice of CIRC on Issuing the Guidelines for the Risk Management of Insurance Companies (for Trial Implementation) 2007, articles 3 and 4. 476 Bao Jian Fa No.23 [2007] (see accessed on 14 October 2020). 477 Bao Jian Fa No. 2 [2006] (see accessed on 14 October 2020). 478 The Notice of CIRC on Issuing the Guidelines for the Risk Management of Insurance Companies (for Trial Implementation) 2007, art.1. 479 Ibid., art.2. 480 Ibid., art.5. 481 Ibid., art.6.

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the company so as to timely discover, prevent, and eliminate risks that may exert great influence on the company’s operation. The second is the principle of unifying independency, centralization, and cooperation based on division of function. An insurance company shall establish a mechanism for comprehensive assessment and centralized management of risks to ensure the independency and objectivity of risk management, and, at the same time, intensify business units’ duties as risk management subjects so as to, on the basis of ensuring the clear division of function and close cooperation between functional departments and business units, advance business development and risk management in a parallel way and realize process control over risks. The third is the principle of unifying sufficiency, efficiency, and cost control. An insurance company shall establish a risk management system suitable for its business objectives, business scale, capital, management capability and risk status, reasonably balance the relationship between the cost and efficiency of risk management, rationally allocate risk management resources, and realize efficient risk management with reasonable cost. An insurance company shall establish an information system which covers the basic flow of risk management and control links to improve the level of information digitalization of risk management.482 An insurance company shall make overall planning for risk management and business management information systems to realize the integration and sharing of risk information of different functional departments and business units so as to fully satisfy all the requirements on risk analysis, evaluation, monitoring, and control.483 An insurance company shall train its senior managers and employees in the aspects of risk management philosophy, knowledge, flow, method of control, and other contents on a regular basis. This training is designed to enhance their awareness of risk management. It shall combine risk management performance with the salary system, the personnel system, and the responsibility system to cultivate and create a good risk management culture.484 7.12.2 Risk management organization An insurance company shall establish a risk management organizational system which the board of directors shall be ultimately responsible for, which is directly led by the management level and which requires close cooperation of the relevant functionary departments and covers all business units.485 An insurance company may establish a risk management committee under the board of directors to be responsible for the risk management work.486 Members of risk management committee shall be familiar with the business and management flow of the insurance company and have adequate knowledge and

482 483 484 485 486

Ibid., art.7. Ibid. Ibid., art.8. Ibid., art.9. Ibid., art.10.

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experience in terms of the insurance business risks and the identification, evaluation, and control of these risks.487 Where no risk management committee is established, an auditing committee shall undertake the corresponding responsibilities.488 The risk management committee of an insurance company shall be fully aware of all the major risks the company is facing and the situation on risk control, supervise the operation efficiency of risk management system, deliberate the following issues, and put forward opinions and suggestions to the board of directors:489 (1) Overall objective, basic policy, and working system of risk management; (2) Establishment of risk management department and its duties; (3) Risk evaluation on significant decisions and plans for handling major risks; and (4) Annual risk assessment report. An insurance company may set up a comprehensive coordination department composed of the relevant senior managers or department principals which shall be under the charge of the general manager or a senior manager appointed by the general manager. Its major duties are as follows:490 (1) Upon research, formulating the risk management policies and systems matching the insurance company’s development strategy and overall riskbearing capability; (2) Upon research, preparing risk assessment report on a significant issue, decision, or important business flow and the plan for disposing of the major risks involved; (3) Submitting annual risk assessment report to the risk management committee of the board of directors and the management level; and (4) Guiding, coordinating, and supervising the risk management work conducted by all functional departments and business units. An insurance company shall set up a risk management department or appoint a department to be responsible for the relevant issues concerning risk management. The major duties of this department are as follows:491 (1) Making qualitative and quantitative assessment on risks, improving risk management methods, technologies, and models; (2) Rationally determining the limitation of each kind of risk, organizing and coordinating the daily work of risk management, assisting business units to conduct business within risk limitations, and supervising the abidance of risk limitations; (3) Assets liability management;

487 488 489 490 491

Ibid. Ibid. Ibid., art.11. Ibid., art.12. Ibid., art.13.

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(4) Organizing and promoting the establishment of risk management information system; and (5) Organizing and enhancing the building of risk culture. Where a risk management coordination institution is established as prescribed in art.12 of the Guidelines 2007, such institution shall be the working body of the risk management department. Each functional department or business unit of an insurance company shall be subject to the organization, coordination, and supervision of the risk management department, establish and improve a subsystem for the risk management of this department or unit, implement the basic flow of risk management, evaluate the risks of this department or unit on a regular basis, and bear the responsibility for the effectiveness of risk management of this department or unit.492 7.12.3 Risk assessment An insurance company shall identify and assess all kinds of major risks that may be encountered in the operation process, including insurance risks, market risks, credit risks and operating risks, and so on.493 (1) “Insurance risk” means the possibility of suffering losses from wrong pricing of products, insufficient drawing of reserves, improper arrangement of reinsurance, unexpected significant claim settlement, and any other circumstance caused by the wrong judgment on death rate, disease rate, loss ratio and insurance cancellation ratio, and so on; (2) “Market risk” means the possibility of suffering losses from any unfavourable change in such market prices as interest rate, exchange rate, stock price, and commodity price or the possibility that business income falls short of expenses because of a great crisis; (3) “Credit risk” means the possibility of suffering losses from the debtor’s or trading opponent’s failure to fulfil contractual obligations or any unfavourable change in the credit status of the debtor or trading opponent; (4) “Operating risk” means the possibility of suffering losses from imperfect operation flow, man-made fault, information system failure, or any other reason. An insurance company shall also pay attention to such risks as bringing harmful effects to the company because of wrong strategic planning or imperfect corporate governance structure, and so on. The risk management department of an insurance company shall establish an information sharing mechanism with all the functional departments and business units of the company and collect and sort out the internal and external information related to risk management from all aspects so as to provide corresponding information for risk assessment.494 492 Ibid., art.14. 493 Ibid., art.15. 494 Ibid., art.16.

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An insurance company shall, on the basis of collecting information from all aspects, conduct risk assessment on its business activities and operation flow. Risk assessment shall be conducted in three steps, namely, risk identification, risk analysis, and risk evaluation.495 Risk identification is to identify whether there exists any risk in business activities and operation flow and the category of the risk (if any).496 Risk analysis is to analyze a risk identified and estimate the possibility of and conditions for the occurrence of the risk.497 Risk evaluation is to evaluate the extent of the losses that may be caused by the risk and the degree of its influence on the insurance company’s realization of business objectives.498 Risk assessment shall be conducted by combining qualitative assessment with quantitative assessment. In the case of quantitative assessment, it is necessary to uniformly determine the measurement unit and measurement model of each risk so as to ensure the rationality and accuracy of hypothetic conditions, parameters, data source, and procedure of assessment.499 When conducting risk assessment, an insurance company shall analyze the correlativity among all kinds of risks to find out such associative effects as natural hedging between all kinds of risks and positive or negative correlation among risk incidents so as to conduct centralized risk management.500 Risk assessment shall be organized and conducted by the risk management department, which may invite an intermediary organ to assist when necessary.501 An insurance company shall practice dynamic management on risk information, identify new risks in a timely manner, and reassess the original risks in the case of any change.502 7.12.4 Risk control Risk control shall include clarifying the overall strategy of risk management, formulating risk solutions, organizing the implementation of such solutions, and so on.503 Formulating the overall strategy of risk management means that an insurance company shall, in light of its own development strategy and conditions, clarify risk management emphases, determine risk limitation, choose risk management instruments, allocate risk management resources, and make other overall arrangements.504

495 496 497 498 499 500 501 502 503 504

Ibid., art.17. Ibid. Ibid. Ibid. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23.

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An insurance company shall, according to the possibility of the occurrence of risks and their possible influence on business objectives, analyze and compare risks to determine the emphasis of risk management.505 Determining risk limitation means that an insurance company, in light of its own financial status, operation demands, and characteristics of various kinds of the insurance businesses, and on the basis of balancing risks and returns, determines which kinds of risks it is willing to undertake, determines the maximum risk level it can bear, and then determines the early warning line.506 An insurance company may choose such risk management instruments as risk aversion, risk reduction, risk transfer, or risk retaining for each different kind of risk to ensure that each risk is controlled within the risk limitation.507 An insurance company shall formulate risk solutions for each kind of major risk on the basis of its overall strategy of risk management. Risk solutions shall mainly include the specific objective to be reached by solving a risk, the management and business flow concerned in the process, the necessary conditions and resources, the specific measures and risk management instruments to be adopted, and so on.508 An insurance company shall, according to the division of duties among all functional departments and business units, seriously organize the implementation of risk solutions to ensure that all risks are under effective control.509 7.12.5 Supervision and improvement of risk management An insurance company shall inspect and evaluate the risk management flow and its efficiency and make improvement on the basis of evaluation results in a timely manner.510 Each functional department or business unit of an insurance company shall conduct self-inspection on its own risk management work and send a self-inspection report to the risk management department on a regular basis.511 The risk management department of an insurance company shall inspect and evaluate the risk management work of all functional departments and business units on a regular basis and put forward suggestions and measures for improvement.512 The risk management department of an insurance company shall submit a risk assessment report to the management level and the board of directors at least once every year.The risk assessment report shall mainly include the following contents:513 (1) Risk management organizational system and basic flow; (2) Overall strategy for risk management and its implementation; (3) Evaluation methods and results of various kinds of risks; 505 506 507 508 509 510 511 512 513

Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid., art.32.

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(4) Major risk incidents and forecast of future risk status; and (5) Suggestions on improving risk management. The board of directors or the risk management committee under it may invite an intermediary organ to evaluate the risk management work of the insurance company and issue an assessment report.514 7.12.6 Supervision over risk management An insurance company shall report the significant risk events suffered by this company to the CBIRC in a timely manner.515 An insurance company shall, in accordance with the Guidelines 2007 and the requirements of the rules on solvency compilation, submit an annual risk assessment report examined by the board of directors in the annual report.516 The CBIRC shall inspect the risk management work conducted by insurance companies and their branches on a regular basis. The contents to be inspected mainly include:517 (1) soundness of risk management organizations and their performance of duties; (2) completeness and operability of risk management flow and the actual situation on its operation; and (3) Timeliness and efficacy of the disposal of major risks. The CBIRC may, on the basis of inspection results, issue a risk warning letter to an insurance company which has grave defects in risk management. The insurance company shall submit a rectification plan as required by the risk warning letter in a timely manner, adopt measures to rectify, and submit a report on the situation of rectification.518 7.13 Comprehensive risk management of personal insurance companies To strengthen the comprehensive risk management of personal insurance companies, further implement the Guidelines for the Risk Management of Insurance Companies (for Trial Implementation) 2007,519 and enhance the level of comprehensive risk management of all companies, the CIRC issued to all life insurance companies, health insurance companies, and endowment insurance companies the Notice of CIRC on Issuing the Guidelines for the Implementation of Comprehensive Risk Management of Personal Insurance Companies (hereinafter, the Guidelines 2010) on 24 October 2010 which came into force on the same day.520 514 Ibid., art.33. 515 Ibid., art.34. 516 Ibid., art.35. 517 Ibid., art.36. 518 Ibid., art.37. 519 Bao Jian Fa No.23 [2007]. 520 Bao Jian Fa No. 89 [2010] (see accessed on 14 October 2020).

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These Guidelines 2010 were formulated in accordance with the Insurance Law, the Provisions on the Administration of Insurance Companies, and other relevant laws and administrative regulations and rules.521 The term “risks” as mentioned in the Guidelines 2010 refers to the uncertain factors which may have adverse effects on the realization of the business objectives of companies.522 The term “comprehensive risk management” refers to a continuous process wherein the board of directors, the management, and the staff of a company fully participate in identifying the potential risks and forecasting the effects of risks during the making of strategies and routine operation of the company. The board of directors, the management, and the staff of a company then effectively manage the risks in all aspects of the company within the range of the company’s risk appetite. While carrying out the comprehensive risk management, a company shall, in light of its business operations, focus on monitoring, preventing, and resolving the risks which have significant effects on its business operations.523 7.13.1 The basic principles for comprehensive risk management Comprehensive risk management of a company shall follow the following basic principles:524 (1) Principle of consistency. The company shall, when establishing a comprehensive risk management system, ensure the consistency between its risk management objectives and its strategic development objectives. (2) Principle of matching. The company shall, in the process of comprehensive risk management, ensure that its capital level matches the risks it bears and the risks it bears match the returns. (3) Principle of comprehensiveness. The comprehensive risk management of the company shall permeate through all business links of the company, and the company shall comprehensively recognize, analyze, and manage each type of risk. (4) Principle of full participation. The company shall establish a risk management culture featuring participation by all employees and the corresponding mechanisms, and its employees at all levels shall participate in the company’s risk management according to their respective work duties and assume the daily risk management responsibility. (5) Principle of combination of quantitative and qualitative methods. The company shall, according to the nature, scale, and complexity of its business, develop appropriate risk quantification techniques, promote the application of advanced and mature risk management experience, and achieve the organic combination of quantitative and qualitative methods.

521 The Notice of CIRC on Issuing the Guidelines for the Implementation of Comprehensive Risk Management of Personal Insurance Companies 2010, art.1. 522 Ibid., art.3. 523 Ibid., art.4. 524 Ibid., art.5.

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(6) Principle of continuous optimization.The company shall constantly inspect and evaluate the changes in the internal and external business management environments and pattern of competition as well as their material impacts on its comprehensive risk management and adjust and optimize in a timely manner the risk management policies, rules, and processes. A company shall, in accordance with the relevant requirements of the Guidelines 2010, establish a comprehensive risk management system commensurate with the nature, scale, and complexity of its business to effectively identify, assess, measure, deal with, and monitor risks. All the requirements of its comprehensive risk management shall be closely integrated into the management and business process of the company.525 The CBIRC shall oversee and administer the comprehensive risk management of companies and urge them to effectively identify, assess, measure, deal with, and monitor various types of risks.526 7.13.2 Risk management environment A company shall integrate a risk management culture into the whole process of development of its enterprise culture and build a risk management culture atmosphere at each level within the company, constantly revise and improve the risk management systems and processes, continuously reinforce the development of risk management organizations, and establish upon research a risk management system to ensure the realization of risk management objectives.527 A company shall raise all employees’ risk management awareness and transform the risk management awareness into the common understanding and voluntary actions of employees in order to promote the formation of systematic, standard, and highly efficient risk management mechanisms.528 A company shall make great efforts to strengthen the publicity and guidance of risk management among all employees and establish and improve the pre-job and on-the-job risk management training and education system of employees.529 A company shall establish a risk responsibility system in which the management of the company shall assume the leader responsibility, responsible persons shall be determined for major risks, and specific risk liabilities shall be assigned to various functional departments and business entities. Any organization or individual in violation of the related risk management policies shall be held liable and punished.530 A company shall combine the risk management effects with the performance assessment system and reinforce the risk awareness and responsibility of the managers at all levels, especially the management of the company, to ensure that the 525 526 527 528 529 530

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11.

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company is able to maintain better control and balance between returns and risks in the process of its business operations.531 A company shall make comprehensive risk management policies to define its risk appetite, its risk management strategies, and methods as well as the structure of risk management duties at different levels within the company.532 A company shall, according to the different classes of risks, establish the corresponding risk management systems respectively. These systems shall cover the measures for identification, assessment and measurement of different risks, qualitative and quantitative criteria for risk indicators, and corresponding responsible persons for the risks.533 A company shall apply information technologies to risk management, including the collection, storage, processing, analysis, testing, transmit, reporting, disclosure, and so on of information and establish a risk management information system covering the basic risk management processes and all phases of internal control.534 The risk management information system shall be able to realize the integration and sharing of information among all functional departments and business entities and fully meet the various requirements for the risk analysis and assessment, measurement, reporting management, monitoring and warning, and information disclosure as well as be able to meet not only the requirements for risk management of an individual business but also the integrated requirements for risk management at the company level or across functional departments and business entities.535 A company shall establish a risk information transmission and reporting mechanism to form a working process featuring vertical interactions and horizontal communication.536 A company shall establish a contingency mechanism for major events, major risks, and key business processes to ensure its normal business operation.537 7.13.3 Risk management organization A company shall establish a comprehensive risk management organizational system covering all business entities, in which the board of directors shall assume the ultimately responsibility, the management shall directly lead, and the relevant functional departments shall cooperate closely.538 The board of directors of a company shall be the highest decision-making body for the comprehensive risk management of the company and be responsible for the effectiveness of the comprehensive risk management. The main responsibilities of the board of directors shall include the examination and approval of the overall risk management objectives, risk appetite, risk management strategies, solutions to 531 532 533 534 535 536 537 538

Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19.

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major risk, establishment of a risk management body and the functions thereof, and so on of the company. The board of directors may delegate some risk management responsibilities to the risk management committee.539 A company shall establish a risk management committee under the board of directors to oversee the effectiveness of the operation of the comprehensive risk management system and perform the following responsibilities as authorized by the board of directors:540 (1) Deliberating the overall objectives, basic policies, and working rules for the risk management of the company; (2) Deliberating the risk appetite and risk tolerance of the company; (3) Deliberating the establishment and responsibilities of the risk management body of the company; (4) Deliberating the risk assessment of major decisions and solutions to major risks of the company; (5) Deliberating the annual comprehensive risk management report of the company; and (6) Other relevant responsibilities. The risk management committee shall consist of members who have abundant experience in financial risk management, are familiar with the personal insurance business, and possess the relevant professional capability. The management of a company shall, as authorized by the board of directors, perform the specific responsibilities for comprehensive risk management, and its main responsibilities shall be as follows:541 (1) Taking charge of the daily comprehensive risk management of the company to ensure that the risks facing the company stay within an acceptable range; (2) Implementing the risk management strategies approved by the board of directors; (3) Examining and approving the risk limits for the company; (4) Establishing an internal risk responsibility mechanism of the company; (5) Establishing an internal contingency mechanism for major risks of the company; and (6) Promoting the development of the risk management culture of the company. A company shall appoint a chief risk officer or designate a senior manager to be responsible for comprehensive risk management, and the chief risk officer or the senior manager responsible for comprehensive risk management shall not take charge of the sales or investment management at the same time, and his or her responsibilities shall mainly include formulating the risk management policies and systems, coordinating the comprehensive risk management at the company level, and so on. The chief risk officer shall have the right to know the major decisions, 539 Ibid., art.20. 540 Ibid., art.21. 541 Ibid., art.22.

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major risks, major events, important systems, and key business processes of the company and participate in the assessment of the relevant decisions.542 A company shall establish a risk management department to conduct the daily risk management under the leadership of the chief risk officer.The department shall be independent of the sales, financial, investment, actuarial, and other functional departments. The risk management department shall have the right to participate in the major decision-making of the strategies, business, investment, and other committees of the company. The main responsibilities of the risk management department shall be as follows:543 (1) Establishing and maintaining the comprehensive risk management system of the company, including the risk management rules, risk appetite system, and so on; (2) Assisting and directing all functional departments and business entities to make risk control measures and solutions; (3) Regularly conducting risk identifications and qualitative and quantitative risk assessments, issuing risk assessment reports, and offering suggestions on countermeasures; (4) Establishing and maintaining the risk management technologies and models and constantly improving the risk management methods; (5) Coordinating and organizing the management of assets and liabilities and offering suggestions for dealing with the relevant risks, including making relevant rules, determining technical methods, and effectively balancing the risks and returns of the asset side and liability side; (6) Promoting the establishment of a comprehensive risk management information system; and (7) Other relevant responsibilities. The risk management personnel of the company shall possess necessary vocational and professional capabilities for the aforesaid work. All functional departments and business entities of a company shall accept the organization, coordination, and supervision by the risk management department, establish and improve the relevant risk management processes, regularly assess their own risks, communicate the assessment results to the risk management department on a regular basis, and be responsible for the effectiveness of their risk management.544 A company shall, through a scientific structure of the aforesaid relevant functional bodies, establish a management framework consisting of three lines of defence or three levels around risk management:545 (1) The first line of defence shall comprise all functional departments and business entities, which shall identify, assess, deal with, monitor, and report risks at the front of business; 542 543 544 545

Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26.

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(2) The second line of defence shall comprise the risk management committee and the risk management department, which shall comprehensively coordinate and make various risk rules, standards, and limits and offer suggestions on countermeasures; and (3) The third line of defence shall comprise the audit committee and the internal audit department, which shall oversee the established risk management processes and the control procedures and activities of various risks. 7.13.4 Classification of risks In light of the business characteristics of a company, the risks facing a company in business operations shall mainly include the following seven types of risks:546 (1) Market risk, which refers to the risk of suffering unexpected losses by a company due to adverse changes in the interest rate, exchange rate, equity price, commodity price, and so on. (2) Credit risk, which refers to the risk caused by the failure of the debtor or counterparty to perform or perform on time its contractual obligations or caused by the adverse changes in the credit condition thereof; (3) Insurance risk, which refers to the risk of suffering losses due to the deviation of the actual experience in the actuarial assumptions about mortality, disease rate, loss ratio, surrender rate, and so on from the expectation; (4) Operational risk, which refers to the risk of suffering direct or indirect losses due to unsound internal operating procedures, personnel, system, or external events, including legal and compliance risks; (5) Strategic risk, which refers to the risk of mismatching between strategies and the market environment and the company’s ability due to the invalidity of procedures for making and implementing strategies or changes in the business environment; (6) Reputational risk, which refers to the risk of suffering losses by a company due to the occurrence of a negative event with respect to the company’s brand and reputation; and (7) Liquidity risk, which refers to the risk caused by the lack of sources of funds or an unavoidable high cost of financing upon the maturity of a debt or at the time of performance of a payment obligation. A company shall, on the basis of the classification of risks in the preceding paragraph and in light of its own business characteristics, establish and improve its own risk classification system and further detail various types of risks into subcategories and risk events.547

546 Ibid., art.27. 547 Ibid., art.28.

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7.13.5 Risk appetite system The risk appetite system shall consist of risk appetite, risk tolerance, and risk limits in descending order.548 Risk appetite refers to the risk level that a company is willing to bear in the process of achieving its business objectives. Risk appetite is the company’s basic attitude towards risks and provides guidance for the making of strategies, implementation of business plans, and allocation of resources.549 Risk tolerance refers to the degree of acceptable deviation which occurs to a given level of risk in the process of realizing the business objectives of a company. Risk tolerance, as an embodiment of risk appetite, shall be normally determined by combining the quantitative and qualitative methods, keeping consistent with risk appetite, and covering all types of risks.550 Risk limits are further quantification and details of risk tolerance. A company shall, within the range of risk tolerance, set risk limits according to different types of risks, business entities, product types and features, and so on.551 A company shall, with a prudent and responsible attitude, formulate its risk appetite system and submit it to the board of directors for examination and approval. The approved risk appetite system shall be decomposed level by level for the compliance and implementation by all functional departments and business entities.552 The risk management department shall monitor and report the implementation of the risk appetite system. If the risk appetite or risk tolerance is exceeded, the management shall report it to the board of directors in a timely manner, take countermeasures to reduce the risk level, and in the meantime, review the appropriateness of the given risk tolerance and risk limits.553 A company shall examine the effectiveness and rationality of its risk appetite system at least annually and constantly revise and improve it. In case of major changes in the market environment and business conditions, a company shall consider their impacts on the levels of various risks, adjust the risk tolerance and risk limits, and maintain the overall stability of risk appetite.554 7.13.6 Risk identification and assessment Risk identification refers to the process in which a company recognizes and discovers the risks facing it in its business activities. The company shall, describe the characteristics of risks through risk identification, and systematically analyze the causes of risks, drivers and conditions of risks, and so on.555 A company shall, in light of the characteristics of risks, identify the various types of risks facing it in its business operations at multiple levels and from multiple 548 549 550 551 552 553 554 555

Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36.

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perspectives. Internal and external factors shall be considered in risk identification. Internal factors shall include corporate governance factors, organizational factors, business management factors, technical factors, and so on; external factors shall include economic factors, natural factors, social factors, political factors, and so on.556 A company shall analyze and assess the identified risks and assess the impacts of the risks on the realization of its business objectives to form a basis for risk management.557 A company shall conduct assessment of risks from two dimensions: possibility of occurrence and degree of impact of risks. Possibility refers to the probability of occurrence of a risk within a specified period. Degree of impact refers to the degree of effects on the finance, reputation, supervision, operation, and so on of the company after a risk occurs.558 Risk assessment shall include inherent risk assessment and residual risk assessment. Inherent risks refer to the risks facing a company when no measures are taken; and residual risks refer to the risks facing a company after risk response and control measures are taken.559 A company shall gather and record the historical loss data of peers and itself, conduct analysis on the causes of losses and how to avoid losses, and establish a loss database.560 The risk management department of a company shall be responsible for organizing and directing the risk identification and assessment, providing risk classification standards and risk identification and assessment methods, and gathering and organizing the identification and assessment results from all functional departments and business entities in order to form a risk library and a comprehensive risk profile of the company. All functional departments and business entities shall be responsible for the specific risk identification and assessment.561 A company shall conduct comprehensive risk identification and assessment at least once a year. When any major risk occurs or is expected to occur in the company, it shall identify and assess the risk in a timely manner.562 7.13.7 Risk measurement A company shall, according to the nature, scale, and complexity of its business, measure its potential economic value losses to directly reflect its risk status. A company shall measure the risks it bears in the economic capital approach, constantly improve the measurement methods, actively explore advanced risk

556 557 558 559 560 561 562

Ibid., art.37. Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid., art.41. Ibid., art.42. Ibid., art.43.

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measurement practices, and continuously improve the scientificity and accuracy of risk measurement.563 The economic capital approach shall be the core risk measurement tool used within the company. So-called economic capital refers to the capital required by a company to make up the unexpected losses to it at a certain level of confidence within a certain period. When using the economic capital to measure risks, a company shall select appropriate assumptions and parameters in light of its risk environment and historical data, and by referring to the generally accepted international standards it shall properly choose the model technologies, such as variance-covariance, historical simulation method, and Monte Carlo method.564 A company may use such measurement methods as sensitivity analysis, scenario analysis, and stress testing as supplements for the economic capital measurement.565 A company shall integrate the use of models with daily risk management. The risk measurement models shall reflect the company’s business strategies and risk management practices and be applied to capital allocation, determination of risk appetite and tolerance, and so on.566 The risk management department of a company shall be responsible for the establishment and maintenance of the risk measurement models. When establishing a risk measurement model, it shall ensure the rationality and accuracy of the assumptions, parameters and sources of data, and the measurement procedures. A company shall regularly review the assumptions and parameters of a model and formulate internal processes for revising assumptions and parameters.567 7.13.8 Risk response and control A company shall prepare risk response plans in accordance with its development strategies, risk appetite, and risk tolerance in light of the risk assessment and measurement results. A risk response plan shall mainly include the specific objectives to be achieved in resolving the risks, management, and business processes involved, necessary conditions and resources, specific measures to be taken, risk response tools, and so on.568 According to the division of functions of all functional departments and business entities of a company, the risk management department shall put forward the risk response suggestions, the risk responsible person shall put forward a risk response plan, the relevant functional departments and business entities shall implement the plan, and the company shall ensure that the various measures are effectively carried out. Solutions to major risks shall be subject to the examination and approval of the risk management committee.569

563 564 565 566 567 568 569

Ibid., art.44. Ibid., art.45. Ibid., art.46. Ibid., art.47. Ibid., art.48. Ibid., art.49. Ibid., art.50.

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A company shall balance risks and returns and select such risk response tools as risk retention, avoidance, mitigation, and transfer for different types of risks.570 (1) “Risk retention” means that when inherent risks are within the risk appetite of a company, the company assumes the risks by itself rather than takes any measure against the possibility of occurrence or degree of impact of the risks. (2) “Risk avoidance” means that when inherent risks are beyond the risk appetite of the company, a company withdraws from the business activities where risks arise in order to avoid the impact of the risks. (3) “Risk mitigation” means the reduction of loss frequency or impact of risks by taking risk control measures. (4) Risk transfer means the transfer of all or part of risks to an independent third-party institution by using technologies or tools in order to avoid the risk of catastrophic losses. A company shall adopt the relevant control measures and establish the relevant control processes to ensure the effective implementation of the risk response plans. The risk control measures that may be adopted shall generally include:571 (1) establishing and improving the corresponding management policies and rules; (2) improving the corresponding business processes; (3) improving the corresponding internal control mechanisms; and (4) establishing a continuous risk monitoring system. A company shall ensure that the residual risks after risk response and control are controlled within the acceptable range, continuously monitor the implementation of the risk response and control plans, and regularly summarize and analyze the effectiveness and rationality of the existing risk response and control plans. A company shall continuously improve the risk control rules and processes according to the actual changes in its business operations to ensure the integrity and effectiveness of the contents thereof.572 7.13.9 Asset and liability management Asset and liability management is an important part of the comprehensive risk management of a company, and a company shall reduce its market risk, credit risk, liquidity risk, and other risks through the matching management of assets and liabilities.573 A company shall establish clear asset and liability management objectives, optimize the asset and liability allocation, seek best returns within its risk tolerance, and gradually strengthen its ability to respond to market changes.574

570 571 572 573 574

Ibid., art.51. Ibid., art.52. Ibid., art.53. Ibid., art.54. Ibid., art.55.

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A company shall establish an asset and liability management system to clarify the duties of all relevant departments in the asset and liability management and the main processes of asset and liability management.575 In the asset and liability management, a company shall ensure the matching between the maturity structure of assets and liabilities and the costs and benefits, in terms of product design and pricing and asset investment. The asset and liability management of a company shall mainly include:576 (1) matching between the amounts of assets and liabilities, i.e., the total amounts of investment assets and liabilities of each corresponding product category shall match; (2) maturity matching of assets and liabilities, i.e., the maturity structures of investment assets and sources of liabilities of each corresponding product category shall match; (3) matching between the asset returns and the expected returns on liabilities, i.e., the returns on investment assets of each corresponding product category are higher than the expected returns on liabilities thereof; and (4) management of matching gap, i.e., the gap in the asset and liability matching shall be regularly reviewed and assessed, and appropriate methods shall be studied to control the gap within the risk tolerance of the company. A company shall, according to the nature, scale, and complexity of its business, select asset and liability management tools, and in selecting tools, give full consideration to the product features, particularly the option implied in products, guaranteed benefits, conduct of insurance applicants, and other factors. The asset and liability management tools shall mainly include the gap analysis method, duration matching method, cash flow matching method, dynamic financial analysis method, and so on.577 7.13.10 Risk warning Risk warning refers to the process of measuring the degree of deviation of the risk status from the warning standards and issuing a warning signal on this basis. A company shall establish an effective risk warning system to identify and eliminate in a timely manner the risks in its business operations under a complex and volatile market environment and uncontrollable internal factors.578 A company shall, in light of its overall risk status, establish a key risk indicator system to monitor risk changes and conduct risk management. Risk indicators may include qualitative and quantitative indicators.579 A company shall, according to the risk limits and in light of its business condition, set appropriate warning standards, reveal the severity of risks under the

575 576 577 578 579

Ibid., art.56. Ibid., art.57. Ibid., art.58. Ibid., art.59. Ibid., art.60.

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warning standards of each key risk indicator, and dynamically maintain the warning standards.580 All functional departments and business entities of a company shall track the key risk indicators, determine and forecast the changes in various types of risk indicators, analyze the trends of risk development, and regularly report the risk monitoring information to the risk management department. Any excess of the risk limits shall be reported to the management of a company, which shall decide whether the warning standards may be exceeded and the countermeasures.581 7.13.11 Risk supervision Risk supervision refers to the supervisory inspection on the soundness, rationality, and effectiveness of the comprehensive risk management of a company. A company shall regularly analyze the design and implementation results of its comprehensive risk management system to ensure the implementation of the comprehensive risk management, and the effectiveness thereof, and identify the soft spots in its risk management through supervisory activities to constantly improve its comprehensive risk management system.582 The risk supervision of a company shall consist of three levels: self-check by all functional departments and business entities on their respective risk monitoring and risk management; supervisory inspections by the risk management department on the implementation of risk management by all functional departments and business entities to assess the risk management solutions at the company level; and independent supervision and evaluation by the internal audit department on the soundness, rationality, and effectiveness of the implementation of the comprehensive risk management system and processes of the company.583 The risk supervision of a company shall include continuous supervision and special supervision. Continuous supervision refers to the continuous, comprehensive, and systematic supervisory inspection on the construction and implementation of the comprehensive risk management system of a company. Special supervision refers to an irregular special supervisory inspection on a particular aspect or some aspects of the comprehensive risk management system of a company.584 A company shall continuously oversee the implementation of risk management decisions and constantly improve the quality of risk management. The defects in the comprehensive risk management system and the related suggestions and measures for improvement shall be reported to the management and fed back to the risk management department in a timely manner.585

580 581 582 583 584 585

Ibid., art.61. Ibid., art.62. Ibid., art.63. Ibid., art.64. Ibid., art.65. Ibid., art.66.

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7.13.12 Risk reporting and communication A company shall establish and improve its internal risk reporting and communication mechanisms, including the comprehensive risk management report submitted to the board of directors by the management, the comprehensive risk management report submitted by the risk management department to the management of the company, the risk communication reports circulated between the functional departments and business entities within the company, and so on.586 The comprehensive risk management report submitted by the management to the board of directors shall include at least:587 (1) Establishment of the comprehensive risk management organization of the company and the performance of duties thereof; (2) Development of the risk management rules and processes of the company; (3) Risk measurement results of the company; (4) Annual risk identification and assessment results of the company; (5) Implementation of solutions to major risks; and (6) Other relevant contents. The risk management department of a company shall regularly submit to the management of the company a comprehensive risk management report, which shall include:588 (1) risk identification and assessment results; (2) regular risk measurement results; and (3) implementation of risk response plans. For any major risk, the risk management department may provide the management with a specific risk analysis report. All functional departments and business entities of a company shall regularly submit to the risk management department the information on risk identification, analysis, response, control, supervision, and so on. For unexpected risk events, they shall make timely communication with the risk management department and submit a risk analysis report.589 The functional departments of internal audit, compliance and internal control, and the risk management department shall share information and data to ensure the timeliness of risk management at different levels.590 A company shall report to the CBIRC in a timely manner any major risk event that has occurred or is expected to occur soon in the company.591 A company shall, prior to 30 April each year, submit to the CBIRC an annual comprehensive risk management report of an incorporated institution that has been deliberated by the board of directors.592 586 587 588 589 590 591 592

Ibid., art.67. Ibid., art.68. Ibid., art.69. Ibid., art.70. Ibid., art.71. Ibid., art.72. Ibid., art.73.

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Endowment insurance companies legally established within China shall be governed analogically by these Guidelines 2010.593 7.14 Internal control of insurance companies The insurance regulatory authority requires the insurer to establish and operate within an effective system of internal controls, which is to ensure effective and efficient operations, adequate control of risks, prudent conduct of business, reliability of financial and non-financial information reported, and compliance with laws regulations and the insurer’s internal rules and decisions. To strengthen the construction of internal control of insurance companies, the CIRC promulgated the Notice of the CIRC on Issuing the Basic Rules for the Internal Control of Insurance Companies (hereinafter, the Basic Rules 2010) on 10 August 2010, which came into force on 1 January 2011.594 These Basic Rules apply to the insurance companies formed within the territory of China. The internal control of insurance group companies, reinsurance companies, and insurance asset management companies shall be governed analogically by these Basic Rules.595 The term “internal control” refers to the mechanisms and processes in which the institutions and personnel at all levels of an insurance company take appropriate measures according to their respective functions to reasonably prevent and effectively control various risks in the business operation and management and prevent the business operation of the company from deviating from its development strategy and business objectives.596 7.14.1 The objective, principles, and structure of internal control (a) The objectives The objectives of the internal control of an insurance company shall cover:597 (1) Regulatory compliance of conduct, i.e., to ensure the compliance of the business operation and management of the insurance company with laws, regulations, regulatory provisions, industrial norms, internal management rules of the company, and the doctrine of good faith; (2) Asset safety, i.e., to ensure the safety and reliability of the assets of the insurance company and prevent the company’s assets from any illegal use, disposition, or possession; (3) Authenticity of information, i.e., to ensure the authenticity, accuracy, and completeness of the financial reports, solvency reports, and other business, financial, and management information of the insurance company; 593 Ibid., art.75. 594 Bao Jian Fa No. 69 [2010] (see accessed on 14 October 2020). 595 The Notice of the CIRC on Issuing the Basic Rules for the Internal Control of Insurance Companies 2010, art.59. 596 Ibid., art.2. 597 Ibid., art.3.

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(4) Efficiency of business operation, i.e., to strengthen the insurance company’s capability of implementing decisions, raise the efficiency of management, and enhance business benefits; and (5) Strategic safeguards, i.e., to ensure the insurance company’s realization of its development strategies, promote its stable operation and sustainable development, and protect the legitimate rights and interests of the shareholders, the insured, and other parties of interest. (b) The principles To establish and implement internal control, an insurance company shall observe the following principles:598 (1) Integrating entirety with priorities. The insurance company shall establish a comprehensive, systematic, and standard internal control system which shall cover all business processes and operational links and run through the whole process of business operation and management. The insurance company shall, on the basis of overall management, implement key control over the major business issues and high-risk fields. (2) Integrating checks and balances with collaboration. The internal control of the insurance company shall form reasonable constraints and effective supervision in terms of organizational structure, setup of positions, assignment of authority and responsibilities, business processes, and so on, by way of through appropriate segregation of functions, authorization, multilevel examination, and approval and other mechanisms. On the basis of checks and balances, all functional departments and business units shall cooperate and coordinate closely with each other to raise efficiency and avoid buckpassing or omissions in work. (3) Integrating authority with adaptability. The internal control of the insurance company shall be linked with performance assessment and accountability, and no one shall have the authority to be under no internal control or change the internal control procedures without authorization.The company shall, on the basis of ensuring the authority of internal control, adjust in time and optimize regularly the internal control processes to make them continuously adapted to changes in the business environment and management requirements. (4) Integrating effective control with reasonable cost. The internal control of the insurance company shall match the actual risk status of the company to ensure that the internal control measures meet the management requirements and the risks are effectively prevented. The insurance company shall, under the premise of effective control, reasonably allocate resources and try its best to reduce the cost of internal control.

598 Ibid., art.4.

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(c) The structure The internal control system of an insurance company shall include the following three parts:599 (1) Internal control base, including corporate governance, organizational structure, human resources, information systems, corporate culture, and so on. (2) Internal control procedures, including risk identification and assessment, design and implementation of control measures, and so on. (3) Internal control assurance, including information communication, internal control management, internal audit emergency response mechanism, risk accountability, and so on. Internal control base: An insurance company shall strengthen the construction of its internal control base to create a good environment for the implementation of internal control.600 The insurance company shall have standard corporate governance and form scientific and effective decision-making, execution, and supervision mechanisms with clear authorization and standard operation. The board of directors, the board of supervisors, and the management of the company shall attach great importance to internal control, and take the lead in earnestly performing their respective internal control functions. The insurance company shall, in accordance with the insurance business processes and the needs for internal control, establish a reasonable organizational structure. It shall, under the principle of facilitating management, helping assessment, simplifying levels, and avoiding overlapping, scientifically set up internal institutions, branches, and positions; make a clear division of responsibilities; and specify reporting routes. The insurance company shall make human resource policies commensurate with the needs for internal control, and ensure that the personnel at key positions have professional competence and receive relevant training on a regular basis, and the human resource policies on assessment, remuneration, rewards and punishment, promotion, and so on. for the key positions of the company shall be linked with the effects of internal control. The insurance company shall establish safe and practical information systems covering all business links, and try its best to realize computerization, standard processes and automation of all its business activities, to reduce or eliminate human intervention and operational errors and provide technical guarantee and system support for internal control. The insurance company shall cultivate an internal control corporate culture wherein the leaders attach great importance to internal control, everyone is responsible for internal control, and whoever violates regulations shall be held liable. The company shall form a risk control-oriented management concept and business style,

599 Ibid., art.5. 600 Ibid., art.6.

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raise the awareness of risk prevention of all staff members, and realize voluntary compliance with the internal control system. Internal control procedures: An insurance company shall, based on the law of risk, reasonably design its internal control processes which are embedded in its business activities and strive to realize the process control over risks.601 The insurance company shall fully and systematically identify and analyze the risk factors likely facing the company in its overall business operation and management and specific business activities; find and identify risk points; make qualitative and quantitative assessment of the probability, triggers, and law of diffusion of the important risk points and the possible losses caused thereby; and determine the risk response strategies and focuses of control. The insurance company shall, according to the results of risk identification and assessment, scientifically design its internal control policies, procedures, and measures and strictly implement them and continuously improve its internal control processes based on the control effects to limit a risk to the predetermined target or extent of tolerance. Internal control assurance: An insurance company shall establish a multilevel and all-around monitoring system and realize effective monitoring before, during, and after the internal control activities to ensure the realization of the objectives of internal control.602 The insurance company shall establish an information communication mechanism to promote the wide sharing and the timely and sufficient communication of information of the company, increase the transparency of its business operation and management, and prevent fraudulent practices. The insurance company shall establish an internal control management and evaluation mechanism, urge all those responsible for internal control to conduct real-time monitoring, regularly check through the overall design and overall planning of internal control of the company, and adjust and improve the internal control processes of the company based thereon. The insurance company shall strengthen the audit inspection of internal control; conduct regular assessment of the soundness, rationality, and efficiency of internal control according to the inspection results; and submit timely feedback and reports to the audit objects, functional department of compliance management, and the superior leaders according to the prescribed reporting route. The insurance company shall establish an emergency management mechanism for internal control risks, formulate comprehensive and workable contingency plans, specify the response measures under various risks, and try its best to reduce the impact and losses caused by internal control risks. The insurance company shall strictly investigate the internal control liabilities, seriously deal with violations of the internal control requirements whether any loss is caused or not, and hold the parties concerned and the leaders liable for the violations.

601 Ibid., art.7. 602 Ibid., art.8.

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Levels of internal control activities: An insurance company shall, according to the characteristics of its business processes and the requirements for optimal allocation of resources and under the principles of controlling risks, improving service, reducing cost, and enhancing efficiency, scientifically create and reasonably demarcate the focuses and levels of internal control activities.603 The internal control activities of an insurance company shall be divided into three levels: front office control, back office control, and basic control. Front office control shall be a control over the marketing and trading activities directly facing the market and clients; back office control shall be a control over the business processing, backup support, and other operating activities; and basic control shall be a control over the management activities which provide decision-making support, resource guarantees, and so on for the business operation of the company. 7.14.2 Internal control activities (a) Sales control The contents and basic requirements of sales control: An insurance company shall organize and implement sales control activities by orientation to the market and customers and concentration on quality and benefits.604 The insurance company shall, according to the characteristics of sales activities in different channels and methods, formulate pertinent internal control systems to reinforce the control of the sales process and prevent sales risks. The sales control shall mainly include the control over the whole process of management of salespersons and institutions, management of the sales process, management of sales quality, management of commissions and handling fees, and so on. Control of salespersons and institutions: An insurance company shall establish and implement a scientific and uniform salespersons management system to regulate the selection, employment, organization, management, education, training, performance assessment, commissions and handling fees, dismissal, resignation, and so on of salespersons in various channels.605 The insurance company shall establish a management system for cooperation with insurance agencies to regulate the qualification examination, conclusion of contracts, transfer of premiums, settlement of commissions and handling fees, and so on during the course of cooperation with the agencies. Control of sales process and quality: An insurance company shall regulate its sales promotion activities and compile, print, and distribute various promotional and advertising materials in strict accordance with the regulatory provisions and internal authority to ensure the authenticity and legality of the advertisements and prevent misleading promotion and advertisements.606

603 604 605 606

Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12.

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The insurance company shall regulate its sales practice and establish a risk control mechanism for the sales process and sales quality by such means as risk warning to insurance applicants; return visit to clients; policy information inquiry; control of commissions and handling fees; recorded telephone calls; and improving service quality. Regulation of sales practice shall also consist of regular checks and anti-money laundering monitoring to effectively find and monitor such acts in sale process as misleading of clients, false business, encroachment on premiums, unfair competition, illegal fundraising, and money laundering. The insurance company shall stipulate the business scope and conditions of return visits to clients, proportion of return visits, and frequency of return visits, records of return visits, and other requirements of return visits as well as follow-up handling measures to strengthen the monitoring of sales risks. The insurance company shall regulate its cooperation with insurance agencies and other intermediary institutions, strictly implement the separate management of collection of premiums and payment of commissions, and regularly check accounts about premiums and important documents to ensure accounts are consistent with each other and consistent with the actual amounts and to prevent withholding of premiums and loss of documents. Control of commissions and handling fees: An insurance company shall strictly regulate the processes of computation and payment of commissions and handling fees to prevent the false listing, swindling, misappropriation, and illegal possession of commissions and handling fees.The insurance company shall eliminate any form of commercial bribery.607 (b) Operational control The contents and basic requirements of operational control: An insurance company shall organize and implement operational control by concentration on efficiency and risk control according to the requirements of centralization and specialization.608 The insurance company shall formulate management systems corresponding to the different links of operation to strengthen the control of operational processes, ensure the normal operation of business activities, and prevent operational risks. The operational control shall mainly include the control over the whole process of the product development management, underwriting management, claim settlement management, maintenance management, management of collection and payment, reinsurance management, management of business documents, management of call centres, accounting treatment, anti-money laundering, and other activities. Product control: An insurance company shall define the product development processes and regulate such control matters as the gathering, analysis, and demonstration of demands of clients and market information; determination of terms and conditions and premium rates; examination and approval filing; testing assignment and follow-up management to enhance the capability of product development

607 Ibid., art.13. 608 Ibid., art.14.

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and innovation of the insurance company; improving the product adaptability and preventing product pricing risks and legal risks of terms and conditions.609 The insurance company shall set up a functional department of product development and a leading decision-making institution; regulate the product development procedures, conditions, examination, and approval authority and duties; and define the duties and powers of the chief actuary (person liable for actuarial matters) and person liable for legal matters to ensure the standard and precise process of product development. The insurance company shall, according to the results of market demand surveys, conduct scientific demonstration and objective evaluation of new products from the market prospect, profitability, pricing, legal risk, and other aspects, conduct internal examination according to the evaluation results and prescribed authority, and perform the obligation of reporting for approval or filing according to the regulatory provisions. Underwriting control: An insurance company shall establish clear underwriting operational processes to regulate such control matters as acceptance of insurance applications, underwriting, and making and service of insurance policies.610 When accepting an insurance application, the insurance company shall conduct a preliminary examination of the insurance application materials and establish a review mechanism for the entered insurance application information to ensure that the insurance application materials are correctly and completely filled out and are accurately entered. The insurance company shall clarify the evaluation criteria, examination authority at different levels, operational requirements, qualifications of underwriting personnel, and so on of underwriting and specify the underwriting investigation conditions, procedures, and requirements. The insurance company shall, under the premise that the prescribed requirements are met, make insurance policies and take appropriate check-up and monitoring measures to ensure that the contents of the policies are accurate and the policies are actually served on clients in a timely manner. Control of claim settlement: An insurance company shall establish standard and clear operational processes of claim settlement and a highly effective claim settlement mechanism to regulate such control matters as acceptance of reports, on-site investigation, determination of responsibility, loss adjustment, review of indemnity, payment of indemnity, and closing and archiving of cases. It shall also ensure the quality and time limitation of claim settlement.611 The insurance company shall make timely case registration and entries after receiving a report and actively provide clients with a simple and clear claim settlement guide. The insurance company shall define the adjustment standards of claim settlement, disposal authority at different levels, operational requirements of claim settlement, qualifications of claim settlement personnel, and so on. It shall also specify the 609 Ibid., art.15. 610 Ibid., art.16. 611 Ibid., art.17.

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conditions, time limit, procedures, and requirements for on-site investigation and take such measures as separating investigative personnel from adjustment personnel, separating adjustment personnel from review personnel, and disqualifying the relevant parties of interest to prevent errors and falsehood in claim settlement. The insurance company shall establish a consultation, review, and investigation system for major and difficult cases to clarify the identification standards and handling requirements of such cases and prevent false settlement of claims or erroneous refusal to claims. Control of maintenance: An insurance company shall establish a standard and unified maintenance management system to regulate such control matters as renewal premiums of insurance contracts, modification of contents of contracts and client information, reinstatement of contracts, survival benefit, and surrender.612 The insurance company shall clarify the operational processes, contents and standards of examination, disposal authority, operational requirements, and so on of various maintenance management measures to prevent acts which infringe upon the rights and interests of the company and clients, such as encroaching on the premiums of clients, falsely claiming insurance money, conducting false business, and approving modification of insurance policies for refund of premiums in violation of legal provisions. Control of collection and payment: An insurance company shall establish a standard and unified collection and payment management system and specify the management processes, operating requirements, and position responsibility of collection and payment to prevent such acts as encroachment, misappropriation, and payment violations and to ensure security of funds.613 As a general rule, the insurance company shall separate the personnel and duties of the fee collection and payment positions from those of the business processing positions. If the company provides one-stop services, and so on, it shall take other measures to conduct effective monitoring. As a general rule, the insurance company shall adopt the non-cash manner of collection and payment and ensure that the relevant funds are transferred into the accounts of the payment owners as determined in the insurance contracts or the accounts authorized by them. If it is necessary to adopt the cash manner, the company shall take other measures to conduct effective monitoring. In the collection or payment, the insurance company shall, in strict accordance with the relevant provisions, check the identity of the insurance applicant, the insured or beneficiary, or the actual recipient of money and determine whether the aforementioned person is eligible as a party to the collection or payment. Reinsurance control: An insurance company shall establish a reinsurance management system to regulate such control matters as reinsurance plans, conclusion of contracts, execution of contracts, and follow-up credit management of reinsurers. It shall also improve its business risk dispersion and safeguard mechanisms.614

612 Ibid., art.18. 613 Ibid., art.19. 614 Ibid., art.20.

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The insurance company shall strengthen the follow-up analysis of its own business operation and management data and the reinsurance market to know accurate reinsurance demands, scientifically arrange reinsurance plans, reasonably conclude reinsurance contracts, ensure timely and adequate reinsurance, and provide reinsurers with timely and accurate reinsurance information. The insurance company shall continuously track the credit status of reinsurers and establish necessary response measures to prevent credit risks in reinsurance. Control of business documents: An insurance company shall establish a management system of business documents to regulate the design, printing, storage, application for use, distribution, use, write-off, invalidation, loss, and other control issues of insurance documents, including insurance application forms, insurance policies, insurance cards, approval slips, receipts, invoices, and so on.615 The insurance company shall conduct whole monitoring of the name, time, quantity, and serial number of the important blank negotiable documents to be used by branches, departments, and individuals upon application;, strictly control the quantity of the important blank negotiable documents to be used upon application and the holding period thereof; and regularly retract, write off, and inventory the said documents. Control of accounting treatment: An insurance company shall regulate its accounting processes; raise the level of automation in the gathering of accounting data and generation of accounts, reports, and statements; realize a seamless connection between its business system and financial system; reduce human intervention; and ensure the accuracy and efficiency of accounting treatment.616 The insurance company shall conduct accounting treatment based on true business matters and shall not adjust accounting information in violation of the authenticity of business. The insurance company shall strengthen the check-up of consistency between original vouchers and financial data to achieve consistency between accounts, consistency between accounts and actual amounts, and consistency between accounts and statements in order to ensure true, complete, and accurate accounting information. The insurance company shall strengthen the management of original accounting vouchers and gradually adopt such methods as image scanning to assist the archiving and keeping of them. Control of customer service call centres: An insurance company shall establish a management system of its customer call centre to regulate such control matters as telephone consultation and inquiries, acceptance of complaints, registration of reports, loss registration, return visits to clients, business transfer, and follow-up feedback on the business handled.617 The insurance company shall set up uniform customer service hotlines which are open for 24 hours, ensure the telephone connection rate, unify the service etiquette and standards, submit in a timely manner the customer needs to the relevant business departments for handling, and improve the quality of customer service. 615 Ibid., art.21. 616 Ibid., art.22. 617 Ibid., art.23.

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Anti-money laundering control: An insurance company shall, in accordance with the Anti-Money Laundering Law and the relevant regulatory provisions, establish a sound anti-money laundering control system to clarify the anti-money laundering functional institution, position responsibility, and reporting route.618 The insurance company shall establish internal operating rules against money laundering covering client identification, keeping of client information and transaction records, discovery and reporting of large and suspicious transactions, and so on, and by publicity, training, regular drills, and checking and other means, ensure that the staff members at the relevant positions strictly observe the operating rules and report suspicious information to the relevant institutions in a timely manner. (c) Control of basic management The contents and basic requirements of control of basic management: The control of basic management shall mainly include the control over the whole process of strategic planning, human resource management, planning and finance, information system management, administrative management, management of actuarial and legal matters, management of branches, risk management, and so on. Among them, risk management is not only an important part of the basic management of an insurance company but also an important link of the monitoring of internal control.619 The insurance company shall, according to the requirements of systematization and standardization, organize and implement the control of basic management. The insurance company shall formulate management systems corresponding to the various functions and activities of basic management and organize the implementation thereof to ensure the orderly operation of and harmonious cooperation in the basic management. It shall also provide support and services for the business development and normal operation of the company. Control of strategic planning: An insurance company shall strengthen the strategic planning function and regulate such control matters as information collection, formulation, demonstration, examination and approval of strategic decisions, and assessment and follow-up feedback on execution of decisions in the strategic planning in order to provide necessary support in human and financial resources for the research and development institutions. It shall also enhance the guiding role and practicability of strategic research and ensure rational business objectives and scientific decisions of the company.620 The insurance company shall strengthen the timely analysis and in-depth study of the macroeconomic and financial situation at home and abroad as well as its own business activities and business development in order to reasonably formulate and timely adjust its overall business operation and management processes and organizational structure, make scientific business development plans, and provide timely and effective decision-making support for the underwriting, investment, and other business activities of the company. 618 Ibid., art.24. 619 Ibid., art.25. 620 Ibid., art.26.

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The insurance company shall strengthen the real-time analysis of its business operations, regularly analyze and assess the business operation and management and financial status, reasonably set the business plans and performance indicators of its branches, and provide real-time guidance and supervision in order to ensure effective execution of the strategic objectives of the company. Control of human resources: An insurance company shall establish a human resource management system to regulate such control matters as setting of position responsibilities and position value, employment, remuneration, performance assessment, training, promotion, rewards and punishment, labour protection, dismissal, and resignation. It shall also provide human resource support for the business operation and management and sustainable development of the company.621 The insurance company shall, based on the needs of business operation and management, reasonably set positions and staffing, formulate clear position responsibilities and reporting routes, clarify competency conditions of different positions, and conduct job value assessment at appropriate time. The insurance company shall clarify the standards, procedures, and requirements for staff recruitment, remuneration management, post rotation, promotion, resignation, dismissal and other work; reasonably formulate the performance assessment indicators and weight of different positions and the assessment methods and procedures; and establish an incentive and constraint mechanism commensurate with the development of the company. The insurance company shall work out a systematic employee training plan which clearly sets out the time, contents, methods, safeguards, and so on of the training of employees at different professional positions to improve the professional quality and competence of employees. Control of planning and finance: An insurance company shall establish a rigorous financial management system to regulate the company’s budget, accounting, cost control, capital management, asset management, financial reports, and other control matters; reduce the operating costs of the company; and enhance its asset profitability.622 The insurance company shall establish a budget system to implement comprehensive budget management, clarify the operational processes of preparation, implementation, analysis, adjustment, assessment, and so on of budget and the operating requirements thereof; strictly control the examination and approval authority on the implementation and adjustment of budgets; control the deviation between expenditures and budget; and ensure the implementation of budgets. The insurance company shall establish a sound reserve actuarial system to make timely and full reserves according to the requirements of the relevant laws and regulations of the state and the principle of prudent operation. The insurance company shall strengthen the analysis of its solvency status and improve the efficiency of its solvency management. The insurance company shall specify the requirements as well as duties and powers of keeping cash, negotiable securities, blank vouchers, ciphers, specimen 621 Ibid., art.27. 622 Ibid., art.28.

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seals, fixed assets, and other capital and assets. It shall strictly separate income from expenditure, conduct unified management, and real-time monitoring of the funds of the company, including branches, and ensure the funds are centralized in a timely manner. The insurance company shall check cash and bank deposit accounts and make an inventory on a regular basis to ensure the safety and completeness of all kinds of assets. The insurance company shall establish an information statistical management system to clarify the statistical position responsibilities; regulate the gathering, aggregation, auditing, analysis, reporting, management, and so on of statistical data; and effectively meet the statistical needs of the company for internal and external information. Actuarial and legal control: An insurance company shall improve the actuarial and legal functions, have enough professional actuarial and legal personnel, and define the procedures, authority, and operating requirements for them in the relevant management and service so as to provide professional support for the business operation and daily management of the company.623 The insurance company shall make full use of the actuarial techniques in product development, provisioning, asset and liability matching management, and other aspects; make its business operation and management more professional and delicate; and prevent pricing failures, inadequate reserves, mismatch between assets and liabilities, and other risks. The insurance company shall let its legal functional department and professionals intervene earlier and fully participate in the formulation of regulations and rules, conclusion and management of contracts, decision-making on and disposal of major issues, disputes, lawsuits, and so on to prevent legal risks. Control of information systems: An insurance company shall establish an information system management system to regulate the overall planning, design and development, operation and maintenance, security management, confidentiality management, disaster recovery management, and other control matters of the information systems; raise the level of computerization in business and financial treatment as well as offices; and establish information systems meeting the business development and management needs.624 The insurance company shall make an overall plan on the development and construction of its information systems, integrate the information system resources of the company, and form an information platform widely shared by different business units, departments, and personnel. The insurance company shall apply authorization management to the use of information systems, update and improve in a timely manner the security control measures for its information systems, strengthen confidentiality management and disaster recovery management, and improve the operation stability and security of its information systems. Administrative management control: An insurance company shall formulate corresponding systems to regulate the purchase, bidding, brand publicity, management 623 Ibid., art.29. 624 Ibid., art.30.

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of documents and seals, logistics guarantee and other administrative management conduct; improve the efficiency of administrative management; and provide strong support for the highly efficient operation of the company.625 The insurance company shall define the procedures, conditions, and requirements for purchase and bidding to regulate its purchase activities and try its best to realize centralized and unified purchase, reduce purchase costs, and prevent risks of fraudulent practices. The insurance company shall make an overall plan on and reasonably allocate its brand publicity and business advertising resources to, unification of its brands and logos, workplace visual image, etiquette and service norms of staff, and so on, and it shall also consolidate and upgrade the company’s brand image. The insurance company shall establish a management system of documents and seals to ensure that documents are safely and smoothly transferred and kept in entirety; reasonably set the types of seals, regulate the design, engraving, taking, handover, keeping, use and destruction of seals and other control issues. It shall also strengthen the examination and approval, registration, and archival management of the use of seals. Control of branches: An insurance company shall, by a power of attorney, its internal management provisions and other means, uniformly formulate the organizational structure, duties and powers, and operating rules of branches according to the strategic plan and management capability of the parent company to establish a sound branch control system and realize the comprehensive, dynamic, and effective control of branches.626 The insurance company shall, in standard authorization methods, establish unified, standard, and clear management requirements for the business processes, financial and capital management, human resource management, administrative management, and internal control of its branches at different levels. The insurance company may, according to the capability of business operation and control of different branches and under the premise that there are rules to follow and regulation is possible, appropriately apply differential business policies or control powers to improve the business development capability of its branches. The insurance company shall, through information technology and explicit reporting requirements, be fully and accurately informed of the real-time information on the business operation and management of branches. It shall also regularly analyze and monitor the business, financial, and risk status of branches in order to realize the process control over the business operation and management of branches. The insurance company shall comprehensively and scientifically set the objectives of assessment of branches from business, compliance, risk, and other aspects, strengthen the audit and supervision of its branches and the senior managers thereof, and strictly implement the accountability system of the company in order to ensure that the branches conduct business in accordance with the laws and regulations.

625 Ibid., art.31. 626 Ibid., art.32.

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(d) Control of fund utilization The contents and basic requirements of fund utilization control: The utilization of insurance funds is a relatively independent part of the business operation of an insurance company and a key area of its internal control. The control of fund utilization shall include the control over the whole process of strategic allocation of assets, matching between assets and liabilities, investment decision-making management, investment transaction management, asset custody, and so on.627 The insurance company shall organize and implement the control of fund utilization by concentration on safety, profitability, and liquidity and according to the requirements of centralization, unification, specialization, and standardization. The insurance company shall formulate management systems corresponding to different links of fund utilization to regulate the decision-making and trading processes of utilization of insurance funds and prevent market risk, credit risk, liquidity risk, operational risk, and other risks in fund utilization. Where an insurance company authorizes an asset management company or any other institution to use the insurance funds, it shall ensure that the internal control measures of the authorized party meet the internal control requirements of the insurance company. Control of strategic allocation of assets: An insurance company shall, within the scope of investment varieties and ratios as required by laws and regulations, formulate mid- and long-term strategic asset allocation plans according to its business strategies and overall development plan and under the constraints of capital and solvency to clarify investment restrictions and performance benchmarks, strive to realize the long-term investment objectives, and effectively control risks in strategic asset allocation.628 Control of asset and liability matching: An insurance company shall strengthen the cost and benefit management, maturity management, and risk budget on the basis of solvency and liability feature of insurance products; determine the risk limits on the utilization of insurance funds; and scientifically assess the risk of asset mismatch. The fund utilization department of an insurance company shall strengthen communication with the product development, actuarial, financial, risk management, and other functional departments of the company to improve the efficiency of the asset and liability matching management.629 Control of investment decision-making: An insurance company shall formulate clear investment decision-making processes; clarify the distribution of authority; establish an investment decision-making authorization system which is characterized by relative centralization, multilevel management, and unification of authority and responsibilities; and specify the standards, methods, limitation, and procedures of authorization.630 The major investment decisions of an insurance company shall be made on a sufficient basis and be documented, and for such decisions, sufficient prior research 627 628 629 630

Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36.

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shall be conducted, and research reports shall be produced.The insurance company shall stipulate the processes of research, scope of collection of decision-making information and standard format of reports, and adopt advanced research methods and scientific evaluation methods to ensure the independency, objectivity, and accuracy of the research reports. Control of transactions: An insurance company shall establish an independent investment transaction executive department or position to conduct centralized trading. For transactions not on an exchange, the insurance company shall effectively monitor the price asking, negotiation, and other key acts during the course of trading by taking position separation and other monitoring measures to prevent operational risks.631 An insurance company shall establish a sound trading record system to completely and accurately record the trading process and results, regularly check the records, do a good job in archival management, and check, on a daily basis, transactions on an exchange. The insurance company shall, during the course of transaction management, strictly implement the fair trade rule to ensure that interests in funds of different natures and from different sources are treated fairly. Control of asset custody: An insurance company shall apply third-party custody and supervision of its investment assets.632 The insurance company shall establish a third-party custody system for its investment assets to regulate the selection of custodian, conclusion of contracts, information exchange, and other control matters. The insurance company shall conduct strict assessment and continuous tracking of the credit status of the custody institution and its capability and quality in such aspects as fund settlement, account management, and risk control to ensure that the qualification of the custody institution conforms to the regulatory requirements and the management needs of the company. 7.14.3 Organization, implementation, and monitoring of internal control Organizational structure of internal control: An insurance company shall establish an organizational system of internal control with clear division of work, clear routes, mutual cooperation, and highly efficient execution, in which the board of directors shall bear the final responsibility, the management shall directly lead, the internal control functional department shall be responsible for overall planning and coordination, the internal audit department shall be responsible for inspection and supervision, and the business unit shall take the primary responsibility.633 Duties of the board of directors: The board of directors of an insurance company shall regularly study and assess the soundness, rationality, and efficiency of the internal control of the company. The organizational structure of internal control,

631 Ibid., art.37. 632 Ibid., art.38. 633 Ibid., art.39.

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major internal control policies, and disposal of major risk events of the company shall be submitted to the board of directors for discussion and deliberation.634 The special committee taking the specific duties of internal control management under the board of directors shall have expert members who are familiar with the company’s business and management processes and have sufficient expertise and experience in internal control to provide professional opinions and suggestions for the decision making of the board of directors. Duties of the board of supervisors: The board of supervisors of an insurance company shall be responsible for supervising the performance of internal control duties by the board of directors and the management and inquiring into their negligence in performing the duties of internal control. It shall rectify the violations of the internal control requirements committed by the directors and the senior managers and investigate the accountability of them under the prescribed procedures.635 The board of supervisors shall have members who have necessary professional competence for performing their duties. Duties of the management: The management of an insurance company shall, according to the decisions of the board of directors, establish and improve the internal structure of the company, improve the internal control system, organize and lead the daily operation of the internal control system, and provide necessary human, financial, and material resources for internal control in order to ensure the effective implementation of the internal control measures.636 The insurance company shall specify the chief compliance officer or a member of the management designated by the board of directors to be specifically responsible for the overall planning and leading of internal control. Duties of the internal control functional department: The functional department of internal control management of an insurance company shall be responsible for the overall planning before and during internal control of the insurance company and the organization and promotion of real-time monitoring and regular inspection.637 The insurance company may designate the compliance management department or risk management department as the functional department of internal control management or integrate the existing management resources to establish a unified functional force of internal control, compliance management, and risk management. Duties of business units: The business units, departments, and personnel of an insurance company which are directly responsible for business operation and management or take the direct responsibility for internal control shall participate in the formulation of the internal control system, strictly implement it, and operate it according to the prescribed processes and methods; they shall also, meanwhile, report the defects in internal control and the risks in business operation and management according to the prescribed time and route until the problems are rectified.638

634 635 636 637 638

Ibid., art.40. Ibid., art.41. Ibid., art.42. Ibid., art.43. Ibid., art.44.

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Duties of internal audit: The internal audit department of an insurance company shall perform the duties of follow-up inspection and supervision of internal control. The internal audit department shall regularly conduct an audit of the soundness, rationality, and efficiency of the company’s internal control, covering all major risk points of the company. The audit results shall be reported according to the prescribed time and route and fed back to the functional department of internal control management at the same level to ensure the defects in internal control are timely and completely rectified.639 The internal audit department of an insurance company shall be separated from the functional department of internal control management. Internal control accountability: An insurance company shall establish an internal control accountability system to clearly classify the responsibilities and specify the specific handling measures and procedures according to the seriousness of internal control violations, size of losses, subjective and objective factors, and so on.640 For the internal control violations which occurred, the insurance company shall strictly implement the internal control accountability system to investigate the liability of the parties concerned. If a risk accident is caused by any design defect of the internal control procedures, the internal control functional department shall be also held liable. If the management personnel at a higher level connive at internal control violations, or similar internal control events occur frequently within their respective jurisdictions, they shall assume the managerial accountability. Transparency and anti-fraud mechanism: An insurance company shall strengthen the construction of transparency and anti-fraud mechanisms to prevent the expansion of losses or the failure to rectify in a timely manner defects in internal control as a result of concealment of violations by those responsible. It shall also prevent deliberate violations for the purpose of seeking illegal benefits by covert means.641 The insurance company shall strengthen the gathering and analysis of internal and external business operation and management information by taking special measures and realize wide information sharing through network platform, internal publications, regular communication, exchange on meetings, and so on. The information not involving business secrets, intellectual property rights, and personal privacy may be disclosed within the enterprise. The insurance company shall establish a reporting and complaint mechanism, set up channels facilitating reporting and complaint, specify the handling principles and procedures for reporting and complaint, make them known by all employees, and protect the legitimate rights and interests of informants and complainants. The insurance company shall, according to the requirements of the relevant laws and regulations, disclose its internal control information to the public and voluntarily accept supervision by the public. Control of the outsourcing business: Where an insurance company delegates or contracts out some business links or management functions to an external institution for execution or completion, it shall ensure that the outsourcing provider 639 Ibid., art.45. 640 Ibid., art.46. 641 Ibid., art.47.

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conforms to the internal control requirements of the insurance company and take responsibility for the internal control risks in the outsourcing business.642 The internal control management of the outsourcing business shall be subject to the supervision of the regulatory authority. 7.14.4 Evaluation and supervision of internal control Internal control evaluation system: An insurance company shall formulate an internal control evaluation system to conduct annual comprehensive assessment of the soundness, rationality, and efficiency of the internal control system and prepare an internal control assessment report.643 Contents of the internal control evaluation system: The internal control evaluation system of an insurance company shall include the implementers of the internal control evaluation, time, methods, procedures, scope, and frequency of internal control evaluation, reporting routes, disposal of problems revealed by the reports, feedback thereof, and so on.644 Implementers and processes of internal control evaluation: The internal control evaluation of an insurance company shall be completed by the internal control audit department, the functional department of internal control management, and the business unit of the company through division of work and cooperation with each other.645 The insurance company shall regard the internal control evaluation as a continuous and systematic task to review, check, rectify, and take improvement measures for the risk points in its business operation and management. Internal control assessment reports: An insurance company shall, after completing the internal control evaluation, work out an internal control assessment report. The insurance company may, in light of its actualities, designate the internal audit department or the functional department of internal control management to lead the preparation of the assessment report.646 Contents of an internal control assessment report: The internal control assessment report of an insurance company shall include at least:647 (1) The basic information on the company’s internal control evaluation work, including the procedures, standards, methods, and basis for the internal control evaluation; (2) The information on the company’s establishment of the internal control system, including the specific work done by the board of directors, the board of supervisors, and the management in the development of internal control; (3) The basic framework of and major policies on internal control of the company; 642 643 644 645 646 647

Ibid., art.48. Ibid., art.49. Ibid., art.50. Ibid., art.51. Ibid., art.52. Ibid., art.53.

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(4) The significant defects in the internal control of the company, the main risks, and the impact thereof; (5) The violations and risk events that occurred to the company in the previous fiscal year and the handling results thereof; (6) The improvement measures and the risk response plan to be adopted for the defects and major risks in the internal control; and (7) The evaluation results of the soundness, rationality, and efficiency of the company’s internal control, and the self-evaluation score and grade obtained according to the evaluation standards set out by the regulatory department. Categorization of evaluation results:The internal control evaluation results of insurance companies shall be divided into the following four categories:648 (1) Pass. The term “pass” means that the internal control of an insurance company is basically sound, reasonable, and efficient. (2) Common defects. The term “common defects” means that the internal control design of an insurance company is basically reasonable, that the design basically covers the key business links and high-risk areas but cannot ensure the effective implementation, and that there are defects in operation. (3) Significant defects. The term “significant defects” means that the internal control of an insurance company fails to fully cover the key business links and high-risk areas and cannot ensure the effective implementation and that there are defects in design and operation. (4) Material flaws. The term “material flaws” means that the serious defects in the design or operation of internal control of an insurance company give rise to the occurrence of major risk events or serious fraudulent practices in the company, causing financial or reputational losses to the company and seriously affecting the realization of its business objectives. Deliberation and filing of internal control reports: The internal control assessment report of an insurance company shall be submitted to the board of directors for deliberation. The internal control assessment report adopted after deliberation shall be submitted to the CBIRC in both written and electronic text prior to 30 April of each year.649 Enclosed with the internal control assessment report submitted to the CBIRC shall be a statement of the board of directors stating that: the board of directors has performed the duties of guidance and supervision for establishing and improving, as well as effectively implementing, the internal control. The board of directors and all members thereof shall be liable jointly and severally for the authenticity, accuracy and completeness of the contents of the report. Where an insurance company fails to submit, omits, makes concealment in submitting, or falsely provides any internal control assessment report, it shall

648 Ibid., art.54. 649 Ibid., art.55.

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be punished according to articles 171 to 173 of the Insurance Law650 and other relevant provisions. Authentication and disclosure of internal control assessment reports: The CBIRC may, according to the needs of supervision, require an insurance company to obtain an authentication conclusion from an external audit institution before submitting an internal control assessment report.651 The insurance company shall, according to the relevant provisions on information disclosure, disclose all or part of an internal control assessment report. Spot check (random check) and regulatory evaluation: The CBIRC may, according to the needs of supervision, inspect the internal control of an insurance company. The inspection methods shall include the spot check of some internal control links or business units and the comprehensive evaluation.652 The CBIRC may authorize an independent intermediary institution to conduct a comprehensive evaluation, and the insurance company shall cooperate and assume the corresponding expenses. The dispatched offices of the CBIRC shall be responsible for inspecting the internal control of the branches of insurance companies within their respective jurisdictions. Disposal of inspection results: For an insurance company which is found through inspection to have any significant defect or material flaw in its internal control, the CIRC shall issue a written regulatory opinion to require it to make rectifications within a prescribed time limit and give feedback.653

650 Article 171 of the Insurance Law: Where an insurance company, insurance asset management company, professional insurance agency or insurance broker violates this Law, the insurance supervision and regulation authority shall punish it according to the provisions of article 160 through article 170 respectively. For its directly responsible person in charge or any other directly liable person, the competent insurance supervision and regulation authority shall admonish him or her and impose a fine of ¥10,000 yuan up to ¥100,000 yuan upon him or her; and, if the circumstances are serious, cancel his or her post-holding qualification or practicing qualification.

Article 172 of the Insurance Law: “Where an individual insurance agent violates this Law, the insurance supervision and regulation authority shall admonish him or her and may impose a fine of not more than ¥20,000 yuan upon him or her; if the circumstances are serious, impose a fine of ¥20,000 yuan up to ¥100,000 yuan upon him or her.” Article 173 of the Insurance Law: “Where a foreign insurance institution forms a representative office within the territory of the People’s Republic of China without the approval of the insurance supervision and regulation authority of the State Council, the insurance supervision and regulation authority of the State Council shall ban the office and impose a fine of ¥50,000 yuan up to ¥300,000 yuan upon the foreign insurance institution. Where a foreign insurance institution’s representative office in the people’s republic of China carries out any insurance operating activity, the insurance supervision and regulation authority shall order it to make correction, confiscate the illegal gains and impose a fine of not less than the amount of but not more than five times the illegal gains upon it; if there are no illegal gains or the amount of illegal gains is less than ¥200,000 yuan, shall impose a fine of ¥200,000 yuan up to ¥1 million yuan upon it; may order it to replace its chief representative; and, if the circumstances are serious, shall cancel the representative office.” 651 The Notice of the CIRC on Issuing the Basic Rules for the Internal Control of Insurance Companies 2010, art.56. 652 Ibid., art.57. 653 Ibid., art.58.

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The parties who assume direct liability and/or management liability for the internal control violations and risk events shall be punished according to the regulatory provisions. Where the members of the board of directors, the board of supervisors and the management are liable for any serious problem existing in the internal control of a company, they shall be subject to the relevant liability. 7.15 Evaluation of insurance company corporate governance The first regulation for the evaluation of corporate governance of insurance companies was the Measures for the Corporate Governance Evaluation of Insurance Institutions with Legal Person Status (for Trial Implementation) issued by the CIRC on 6 December 2015.654 It rates insurers according to their corporate governance and linked the rating result to the remuneration supervision, branch establishment application, and business inspection of the company to make the evaluation more binding. A yellow or red card was given to those with poor corporate governance and no effective improvement. The aforesaid Measures 2015 has been replaced by the Notice of the CBIRC on Issuing the Measures for the Regulatory Assessment of Corporate Governance of Banking and Insurance Institutions (for Trial Implementation) on 25 November 2019 (hereinafter, the Measures 2019).655 Standardized and effective corporate governance is an important cornerstone for the long-term and stable development of financial institutions. In recent years, many risks exposed by the banking and insurance industries have been traced back to their roots because of incomplete corporate governance mechanisms or ineffective operations. Effective external supervision plays an important role in improving corporate governance of insurance institutions. On the basis of summarizing the experience of corporate governance assessment of banks and insurance institutions and the various types of corporate governance risks found in the rectification of market chaos in recent years, the CBIRC further combed the specific requirements for the integration of corporate governance regulatory systems of banks and insurance institutions and fully absorbed and learned from the OECD Principles of Corporate Governance, and the Insurance Core Principles formulated by the International Association of Insurance Supervisors and other international rules. It then established the evaluation indicators for corporate governance supervision of Chinese banks and insurance institutions . Formulating and promulgating the Measures 2019 is an important step for the CBIRC to resolutely prevent and resolve major financial risks. Regularly conducting regulatory assessments will help the regulatory authorities to grasp the situations of corporate governance of the institutions in a more timely and comprehensive manner, effectively prevent and resolve risks in a timely manner, and better protect the legitimate rights and interests of financial consumers. At the same time, the 654 Bao Jian Fa No. 112 [2015]. 655 Yin Bao Jian Fa No. 43 [2019] (see accessed on 14 October 2020).

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Measures 2019 help to further clarify the supervision direction and promote the insurance institutions to improve the level of corporate governance and achieve sustainable development. The Measures 2019 are developed in accordance with the Company Law, the Commercial Banks Law of China, the Banking Supervision and Administration Law of China, the Insurance Law, and other relevant laws, regulations, and regulatory provisions. Regulatory assessment of corporate governance means that the CBIRC and its local offices judge, evaluate, and classify the corporate governance level and risk status of banking and insurance institutions in accordance with the law, and legally conduct categorized regulation according to assessment results.656 The Measures 2019 apply to commercial banks and commercial insurance institutions legally formed within China, including large state-owned commercial banks, joint-stock commercial banks, urban commercial banks, private banks, rural commercial banks, foreign-funded banks, insurance group (holding) companies, insurance companies, mutual insurance associations, and captive insurance companies.657 The regulatory assessment of corporate governance of banking and insurance institutions shall follow the principles of compliance with laws and regulations, objectivity and fairness, uniform standards, and highlighting priorities, among others.658 7.15.1 Assessment content and methods The regulatory assessment of corporate governance of banking and insurance institutions mainly includes leadership of the Communist Party of China, governance of shareholders, governance of the board of directors, governance of the board of supervisors and senior management, internal control of risks, governance of related-party transactions, market constraints, governance of other stakeholders, and other aspects.659 The regulatory assessment of corporate governance includes three steps: compliance evaluation, effectiveness evaluation, and downgrading due to major events. Compliance evaluation: 100 points at maximum, mainly examining whether the corporate governance of a banking or insurance institution complies with laws, regulations, and regulatory provisions. The regulatory department shall give scores upon the evaluation of the relevant indicators item by item.660 Effectiveness evaluation: focusing on examining the actual effects of the corporate governance mechanism of a banking or insurance institution, and paying more attention to the existing prominent problems and risks. The regulatory authority shall deduct points in light of the effectiveness evaluation indicators on the basis of compliance evaluation and may add extra points in terms of the good practice 656 The Notice of the CBIRC on Issuing the Measures for the Regulatory Assessment of Corporate Governance of Banking and Insurance Institutions (for Trial Implementation) 2019, art.2. 657 Ibid., art.3. 658 Ibid., art.4. 659 Ibid., art.5. 660 Ibid., art.6.

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of a banking or insurance institution improving the effectiveness of corporate governance. Downgrading due to major events: if an institution has any major deficiencies or even failure in its corporate governance, the regulatory authority shall downgrade the preceding two comprehensive scores and their corresponding assessment grades and form the result of regulatory assessment of corporate governance. Where the problems existing in its compliance indicators or effectiveness indicators fail to be rectified for several consecutive years, more points may be deducted, as the case may be. If no rectification is made in the second year, points equivalent to two times the indicator score may be deducted; if no rectification is made in the third year, points equivalent to four times the indicator score may be deducted; if no rectification is made in the fourth year, points equivalent to eight times the indicator score may be deducted, and so on. The full score of regulatory assessment of corporate governance shall be 100 points, and the assessment level shall be divided into five grades: Grade A for above 90 points, Grade B for above 80 points but below 90 points, Grade C for above 70 points but below 80 points, Grade D for above 60 points but below 70 points, and Grade E for below 60 points.661 It can be directly rated as E in the following situations:662 (1) Refuse or hinder regulatory assessment of corporate governance; (2) Conceal important facts of corporate governance, major risks of asset quality, and so on, or provide false materials; (3) False capital contribution by shareholders, untrue capital contribution, circular capital injection, capital withdrawal, or capital withdrawal in disguise; (4) Shareholders circumvent the regulatory review by concealing actual controllers, concealing related-party relationships, invisible shareholders, shareholdings, voting rights entrustment, concerted action agreements, and other hidden actions, which have a substantial impact on the control or dominance of bank or insurance institutions; (5) The corporate governance mechanism has failed, and the shareholders’ (general assembly) meeting and the board of directors have been unable to normally convene or make decisions; (6) There is a payment crisis and the solvency is seriously insufficient; (7) Failure of other corporate governance mechanisms as identified by the regulatory authority. The CBIRC may revise and improve the content, evaluation indicators and scoring rules of regulatory assessment of corporate governance of banking and insurance institutions in accordance with the needs of corporate governance and supervision work, and promptly notify banking and insurance institutions.663

661 Ibid., art.7. 662 Ibid., art.8. 663 Ibid., art.9.

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7.15.2 Assessment procedures and division of work The regulatory assessment of corporate governance shall be carried out once a year, which mainly evaluates the corporate governance status of the previous year. In the process of regulatory assessment of corporate governance, the regulatory authority can, in accordance with the actual situation, carry out the assessment retrospectively or prospectively when it is appropriate.664 The office of regulatory assessment of corporate governance is located in the Corporate Governance Supervision Department of the CBIRC and coordinates and supervises the regulatory assessment of corporate governance of banking and insurance institutions. The supervision department at each institution and each bank and insurance supervision bureau shall carry out the work of the regulatory assessment of corporate governance.665 The corporate governance regulatory assessment process mainly includes institutional self-assessment, regulatory assessment, results feedback, and supervision and rectification.666 A bank or insurance institution shall conduct a self-assessment of corporate governance in accordance with regulations and form a self-assessment report on corporate governance of the institution. The self-assessment report and relevant certification materials shall be submitted to the supervisory authority before the end of January each year.667 The regulatory assessment of the banking and insurance institutions supervised directly by the CBIRC shall be organized and implemented by the relevant institutional supervision department. The regulatory assessment of the banking institutions supervised directly by the Banking and Insurance Regulatory Bureau shall be organized and implemented by the relevant regulatory bureau. The relevant institutional supervision department shall review the assessment results of the banking institutions directly supervised by the Banking and Insurance Regulatory Bureau in conjunction with daily supervisory information and institutional risk status.668 The regulatory assessment adopts a combination of off-site evaluation and onsite evaluation. In principle, the annual on-site assessment ratio shall not be less than 30% of the same type of institutions. The regulatory assessment shall focus on the information collected by the banking and insurance institution’s self-assessment report, the off-site supervision, onsite inspection, and so on and score each element of corporate governance of the relevant institutions, clarify the scoring basis, determine the major issues found, and form a regulatory assessment report. In principle, the institutional supervision department and the Banking and Insurance Regulatory Bureau shall complete the regulatory assessment by the end of April each year and report the relevant situations to the office of regulatory assessment of corporate governance. 664 665 666 667 668

Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14.

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The feedback of results is implemented by the institutional supervision department responsible for the regulatory assessment and the Banking and Insurance Regulatory Bureau. The feedback content includes the results of the regulatory assessment of corporate governance, the main problems of corporate governance, and the requirements for rectification.669 The institutional supervision department responsible for the regulatory assessment and the Banking and Insurance Regulatory Bureau shall urge the relevant institutions to earnestly implement the rectification requirements. After receiving the feedback from the regulatory authority, the relevant institution shall form a rectification report in accordance with the regulatory requirements and submit it to the relevant regulatory authority or the Banking and Insurance Regulatory Bureau.670 The institutional supervision department responsible for the regulatory assessment and the Banking and Insurance Regulatory Bureau shall take corresponding supervisory measures against the relevant institution based on the assessment results. If it is found that the banking or insurance institution has violated laws and regulations during the process of regulatory assessment of corporate governance and meets the circumstances of administrative punishment, it shall promptly initiate an investigation procedure for filing a case.671 The CBIRC shall establish an information system for the regulatory assessment of corporate governance of banking and insurance institutions and strengthen the information management of the entire assessment process.672 7.15.3 Assessment result and its application The results of regulatory assessment of corporate governance are important standards for measuring the level of corporate governance of banking and insurance institutions.673 The assessment Grade A (excellent) means that the relevant institutions have sound corporate governance, no obvious compliance and effectiveness issues have been found, and the corporate governance mechanism is operating effectively. The assessment Grade B (good) means that the relevant institutions have basically sound corporate governance, and there are some weaknesses. The relevant institutions can actively take measures to rectify and improve. The assessment Grade C (qualified) means that there are certain defects in the corporate governance of the relevant institutions, and the compliance or effectiveness of corporate governance needs to be improved. The assessment Grade D (weak) means that there are more outstanding problems in corporate governance of the relevant institutions, poor compliance, insufficient effectiveness, and weak corporate governance foundation.

669 670 671 672 673

Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19.

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The assessment Grade E (poor) means that there are serious problems in the corporate governance of the relevant institutions, poor compliance, severely insufficient effectiveness, and overall corporate governance failure. The CBIRC shall use the results of regulatory assessment of corporate governance as an important basis for the regulatory department to allocate supervision resources, take supervisory measures and actions, and strengthen the application of the assessment results in market access, on-site inspection and approval, regulatory rating, regulatory notification, and so on.674 According to the results of the regulatory assessment of corporate governance, the CBIRC shall adopt different supervisory measures for banking and insurance institutions according to law:675 (1) No special supervisory measures shall be adopted for Grade A institutions. (2) For Grade B institutions, the CBIRC shall pay attention to the changes in corporate governance risks and guide the institutions to gradually improve corporate governance through window guidance and regulatory talks. (3) For Grade C institutions, in addition to adopting regulatory measures for Grade B institutions, the CBIRC may also take the measures, such as risk warning letter, decisions of regulatory measures, and regulatory notifications according to the situation; order the institution to hold the responsible person accountable; and require the institution to rectify within a time limit and other measures. (4) For Grade D institutions, in addition to adopting the regulatory measures for Grade C institutions, the institution may be deemed to have failed to meet good standards for market access. At the same time, in accordance with the Banking Supervision and Administration Law of China, the Insurance Law, and other laws and regulations, the CBIRC can take orders to adjust the relevant responsible persons, orders to suspend some businesses, stop approving new businesses, stop approving the establishment of branches, and restrict distribution of dividends and other income, and other regulatory measures. (5) For Grade E institutions, in addition to adopting the regulatory measures for Grade D institutions, the CBIRC can also punish the institutions and responsible persons in accordance with laws and regulations such as the Banking Supervision and Administration Law of China and the Insurance Law. 7.16 Corporate governance of insurance group companies and of insurance groups The insurance regulatory authority has also formulated two pieces of regulations for the supervision and administration of insurance group companies: 674 Ibid., art.20. 675 Ibid., art.21.

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(1) Notice of CIRC on Issuing the Measures for the Administration of Insurance Group Companies (For Trial Implementation) on 12 March 2010676 (hereinafter, the Measures 2010). (2) Notice of the CIRC on Issuing the Guidelines on Consolidated Supervision of Insurance Groups on 4 December 2014677 (hereinafter, the Guidelines 2014). Rules on corporate governance of insurance group companies and on insurance groups are provided in these two pieces of regulation. In this section, we consider the relevant regulatory rules regarding corporate governance of insurance group companies and of insurance groups 7.16.1 Corporate governance of insurance group companies under the Measures 2010 Under the premise of maintaining the operational autonomy of the subsidiary as an independent legal person, an insurance group company shall bear ultimate responsibility for the overall strategic planning, resource allocation, and risk management of the group; conduct unified management on human resources, financial accounting, brand culture, and so on of the group; strengthen the internal business coordination and resource sharing; establish a risk management and internal audit system covering the whole group; and enhance the overall operational efficiency and risk prevention ability of the group.678 An insurance group company shall organize the formulation of an overall strategic planning for the group, conduct assessment on the implementation of the strategic planning on a regular basis, and adjust and improve the strategic planning according to the developments and the changes in the external environment.679 An insurance group company shall, in accordance with the overall strategic planning of the group, reasonably formulate a development strategy and business plan for its subsidiaries. An insurance group company shall establish or designate corresponding functional department to regularly monitor and assess the implementation of the development strategy and business plan by the subsidiaries and

676 Bao Jian Fa No.29 [2010] (see accessed on 14 October 2020).The term “insurance group companies” refers to those companies that are formed upon approval of the CBIRC and registered according to law with words such as “insurance group” or “insurance holding” in their names, and that exert control, joint control, or material impact on the member companies of the insurance group. The term “insurance group” refer to a collective of enterprises composed of an insurance group company and companies on which it exerts control, joint control, and material impact, and which has two or more insurance subsidiaries in addition to the insurance group company, and insurance business is its principal business. The term “member companies of an insurance group” refers to the insurance group company and companies on which it exerts control, joint control, and material impacts. 677 Bao Jian Fa No. 96 [2014] (see accessed on 14 October 2020). 678 The Notice of CIRC on Issuing the Measures for the Administration of Insurance Group Companies (For Trial Implementation) 2010, art.17. 679 Ibid., art.18.

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put forward management opinions so as to ensure the achievement of the overall objectives of the group and the responsibility objectives of subsidiaries.680 An insurance group company shall, according to the requirements of the Company Law and the regulatory provisions of the CBIRC, establish a standard governance structure.681 An insurance group company shall, according to its management needs, reasonably determine the size and membership of the board of directors. In particular, the independent directors shall not be less than one-third of all directors.682 The board of directors of an insurance group company shall establish an audit committee, a nomination and remuneration committee, a strategic management committee, and a risk management committee. It shall also establish other specialized committees according to the actualities.683 An insurance group company shall, according to the overall strategic planning of the group and the management needs of the subsidiaries, direct the subsidiaries to establish a governance structure under the principle of compliance, simplicity, and efficiency. If a subsidiary is a listed company, the corporate governance shall meet the listing rules and the regulatory requirements for listed companies.684 An insurance group company shall coordinate the overall operation of its and its subsidiaries’ shareholders’ meetings and the meetings of the, boards of directors and boards of supervisors, according to law, and strengthen the support in decision-making and organizational management of meetings of different levels and different types.685 An insurance group company shall establish or designate a corresponding functional department to provide decision-making service for the directors it accredits to its subsidiaries. The directors of the subsidiaries shall be liable for the decisions they make in the board of directors according to law.686 An insurance group company shall not abuse its holding position to damage the legitimate rights and interests of its subsidiaries and other shareholders during the course of performing the function of management of its subsidiaries.687 There shall not be more than three layers of equity control between an insurance group company and its subsidiaries, as is the general principle. The member companies of an insurance group company shall not hold shares of each other in principle.688 A senior managerial person of an insurance group company can only hold at most one concurrent senior manager’s position in one subsidiary, as is the general rule. The senior managerial personnel of the subsidiaries of an insurance group

680 681 682 683 684 685 686 687 688

Ibid. Ibid., art.19. Ibid. Ibid. Ibid., art.20. Ibid., art.21. Ibid. Ibid., art.22. Ibid., art.23.

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company shall not hold any concurrent position in each other, as is the general principle.689 An insurance group company shall establish a unified external guarantee system for the group, specifying the conditions, limits, and examination and approval procedures for external guarantee. The external guarantee of an insurance group company and its subsidiaries shall be deliberated and approved by the shareholders’ meeting of the company at the corresponding level. The balance of the external guarantee of an insurance group company or any of its subsidiaries shall not exceed 10% of its net assets.690 An insurance group company shall establish a management system for affiliated transactions and regulate the affiliated transactions within the group. The major affiliated transactions that occurred in the member companies of an insurance group shall be reported according to the provisions of the CBIRC.691 An insurance group company shall integrate the risk management resources of the group and establish a unified risk management system for the group so as to strengthen the assessment and prevention of various risks in and outside the group. An insurance group company shall establish functional departments of compliance and risk management so as to strengthen the planning and guidance for the compliance and risk management of the group.692 An insurance group company shall establish a unified internal audit system to inspect the overall business operations, financial information, and internal control of the group and direct and assess the internal audit of its subsidiaries. Where an insurance group company adopts centralized or vertical management on its internal audit department, its insurance subsidiaries may authorize such department to carry out an internal audit and report to the CBIRC.693 An insurance group company shall establish and improve a firewall system for personnel, funds, business, information, and so on of the group and prevent the risk transfer among the member companies of the insurance group.694 7.16.2 Corporate governance and risk management of insurance groups under the Guidelines 2014 The regulatory rules for corporate governance and risk management of insurance groups are set out in the Guidelines on Consolidated Supervision of Insurance Groups 2014.695 (a) Corporate governance of insurance groups An insurance group shall establish and promote a corporate governance framework that covers the entire group so as to deal with risks facing the group;, protect the 689 690 691 692 693 694 695

Ibid. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Bao Jian Fa No. 96 [2014].

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interests of policyholders, the insured, beneficiaries and other interested parties; and pay special attention to the long-term interests of the group as a whole and the member companies of the group. The focuses of the governance framework include, but are not limited to:696 (1) Its consistency with the structures of the group. (2) The suitability of the legal structure and management structure of the group. (3) The financial soundness of the major shareholders of the group. (4) The suitability of the directors, senior executives, and persons in charge of risk management and internal control of the insurance group company in the management of the group. The insurance group company shall establish a corporate governance mechanism in accordance with the requirements of the Company Law and the regulatory provisions of the CIRC and provide guidance for the member companies of the insurance group to establish and improve corporate governance mechanisms commensurate with the nature and size of their businesses.697 The board of directors of the insurance group company of an insurance group shall undertake ultimate responsibility for the consolidated management of the group. The specialized committees under the board of directors of the insurance group company shall have duties for the consolidated management of the group, which shall at least include:698 (1) developing the overall development strategies of the group, examining and approving the development strategies and business plans of the member companies of the insurance group, assessing the implementation of strategic plans, and adjusting and improving such plans in view of changes in the external environment and the risk profile of the group; (2) urging and guiding the management level in establishing effective and suitable internal control systems and risk isolation mechanisms; (3) assessing the internal control and compliance of the group, assessing the veracity, accuracy, integrity and timeliness of information in the consolidated financial reports of the group, and ensuring the independency of the internal audit functions of the insurance group; and (4) deliberating the incentive and restraint rules and policies of the group and overseeing their implementation. The board of supervisors of the insurance group company of an insurance company shall perform supervisory duties for the consolidated management of the group, which shall at least include:699

696 The Notice of the CIRC on Issuing the Guidelines on Consolidated Supervision of Insurance Groups 2014, art.13. 697 Ibid. 698 Ibid., art.14. 699 Ibid., art.15.

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(1) overseeing the development and implementation of the overall development strategies of the group; (2) overseeing the internal control system and risk isolation mechanism of the group as a whole; and (3) overseeing the management, examination, approval, and compliance of the internal transactions of the group. The senior management of the insurance group company of an insurance group shall execute the decisions made by the board of directors regarding the consolidated management of the group, which shall at least include:700 (1) executing the strategies and decisions made by the board of directors and the committees thereof regarding the consolidated management of the group; (2) developing the management rules of the group; and (3) ensuring the timely settlement of the regulatory, compliance, and audit problems of the group. The insurance group company of an insurance group shall, in view of changes in risks facing the group, changes in the structures of the group, and material changes in other aspects, adjust and update the corporate governance framework of the group in a timely manner and continuously improve the governance effect of the group.701 (b) Risk management of insurance groups An insurance group shall establish and promote a comprehensive risk management system to assess, prevent, and deal with major risks in routine operations. The comprehensive risk management system shall cover the entire group and match the nature, size, and complexity of the group. Elements of the comprehensive risk management system shall at least include:702 (1) (2) (3) (4) (5) (6) (7)

an overall risk governance structure; risk management objectives; The risk appetite and risk tolerance of the group; Risk management policies; Risk management processes; A risk management reporting system; and A risk management information system, among others.

The insurance group company of an insurance group shall determine the risk appetite and risk tolerance of the entire group, specify the scope and boundaries of risk tolerance, correctly handle the relation between risk and return of the group, continuously carry out risk assessment, and adjust its own risk appetite in a timely manner.703 700 701 702 703

Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19.

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The insurance group company of an insurance group shall, in the risk management system, establish effective measures for identifying, assessing, reporting, and managing risks facing the group, which shall at least cover insurance risk, credit risk, market risk, liquidity risk, operating risk, reputation risk, and strategic risk, among others.704 The insurance group company of an insurance group shall, in the risk management system, establish stress testing plans that match its risk profile. Stress testing shall use potential adverse scenarios as assumptions, which generally include credit risk, market risk, insurance risk, and liquidity risk, to analyze the risk profile of the insurance group and the ability to resist adverse impacts and absorb losses. Stress testing shall give consideration to the risk diversification effect and cumulative effect of different risks, a complex equity structure, and other factors. The insurance group company shall fully take into account the stress testing results in decision-making and risk management processes.705 The insurance group company of an insurance group shall gradually establish and improve a group-wide risk management information system. The risk management information system shall be able to cover the basic processes for risk management, including the gathering, storage, analysis, testing, reporting, and disclosure of information.706 The risk management information system shall be able to qualitatively and quantitatively analyze various risks, reflect the monitoring status of major risks and key business flows of the group, meet the requirements for the internal reporting and external disclosure of risk management information, and realize the integrity and sharing of information between functional departments and business entities.707 The risk management department of the insurance group company of an insurance group shall coordinate the risk management activities of the entire group and ensure that the risk management system is established and well-functioning within the group. The insurance group company shall adjust and update the risk management system of the group in a timely manner in view of changes in risks facing the group, changes in the structures of the group, and material changes in other aspects 7.17 Information disclosure by insurance companies “Information disclosure” means an insurance company’s disclosure of information on its operations and management to the general public. The practice of information disclosure is regulated by the Measures for the Administration of the Information Disclosure by Insurance Companies 2018 (hereinafter, the Measures 2018), which was first enacted by the CIRC on 12 May 2010 and amended by the CBIRC on 28 April 2018,708 The Measures 2018 became effective on 1 July 2018. 704 Ibid., art.20. 705 Ibid., art.21. 706 Ibid., art.22. 707 Ibid. 708 The CBIRC Order. No.2 [2018] (see accessed on 14 October 2020). The 2010 version of the

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Insurance companies must disclose information under the principles of authenticity, accuracy, completeness, timeliness, and effectiveness, and the information disclosed must not contain any false record, misleading statement, or major omission. Insurance companies shall disclose information in language as easy to understand as possible.709 Insurance companies shall disclose information in accordance with laws, administrative regulations, and the provisions issued by the CBIRC. Insurance companies may disclose more information on the basis of the information required by laws, administrative regulations, and the provisions issued by the CBIRC.710 If the information that an insurance company intends to disclose in accordance with the Measures 2018 belongs to state secrets, commercial secrets, and other circumstances that would lead to violations of the state’s laws and administrative regulations on confidentiality due to disclosure, the relevant content may be exempted from disclosure.711 7.17.1 Contents of information disclosure An insurance company shall disclose the following information:712 (1) Basic information; (2) Financial accounting information; (3) Insurance liability reserves information; (4) Risk management information; (5) Business information on insurance products; (6) Solvency information; (7) information on significant affiliated transaction; (8) information on significant events; (9) other information as required by the CBIRC. The basic information disclosed by an insurance company shall include a company overview, a summary of corporate governance, and basic information on insurance products.713 The company overview disclosed by an insurance company shall include the company’s714 (1) legal name and the abbreviation thereof; (2) registered capital; (3) place of registration; (4) time of formation; (5) business scope and operating territory; (6) legal representative; (7) customer service hotline and hotline for complaints; (8) each branch office’s business premises and contact information; and (9) catalogue and clauses of insurance products. The summary of corporate governance disclosed by an insurance company shall include715 (1) A brief description of the actual controller and its control of the company; (2) information on each shareholder which holds 5% or more of Administrative Measures on Information Disclosure of Insurance Companies (the CIRC Order No. 7 [2010]), and the Notice of the CIRC on Relevant Issues Regarding the Implementation of the Administrative Measures on Information Disclosure of Insurance Companies (Bao Jian Tong Xin No. 604 [2010]) were repealed by the 2018 version of the Measures. 709 The Measures for the Administration of the Information Disclosure by Insurance Companies 2018, art.3. 710 Ibid., art.4. 711 Ibid., art.5. 712 Ibid., art.7. 713 Ibid., art.8. 714 Ibid., art.9. 715 Ibid., art.10.

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the shares of the company and information on their shareholding; (3) the main resolutions of the shareholders’ meeting in the past three years, including at least the time, place, attendance, main topics, and voting status of the meeting, and so on; (4) resumes of directors and supervisors; (5) resumes and duties of senior executives and their performance of duties; and (6) information on the organization structure of the company. The basic product information disclosed by an insurance company shall include the following contents: (1) Insurance product catalogues and clauses which are approved or filed; (2) Descriptions of new personal insurance products; and (3) Basic information of other products as required by the CBIRC.716 The financial accounting information for the prior year disclosed by an insurance company shall be consistent with its audited annual financial accounting report, including:717 (1) Financial statements include the balance sheet, income statement, cash flow statement, and statement on ownership interest changes and note on financial statement. Notes to financial statements include the preparation basis for financial statements, explanation of major accounting policies and accounting estimates, explanation of changes in major accounting policies and accounting estimates, explanation of contingent matters, events after balance sheet date, and off-balance-sheet business, explanation of reinsurance arrangements that have a significant impact on the financial status of the company, explanation of business combination or division, and details of important items in financial statements. (2) Major audit opinions in the audit report and if there is any explanatory paragraph, qualified opinion, disclaimer of opinion, or adverse opinion in the audit opinions, the insurance company’s explanation thereof. The annual financial report of an insurance company whose actual operating period does not exceed three months may be exempt from audit. The insurance liability reserve information disclosed by an insurance company for the previous year includes qualitative and quantitative information on reserve assessment.The insurance company shall provide the following explanations according to the types of reserves: future cash flow assumptions, main actuarial assumption methods and their results, and so on. The insurance company shall list the reserve assessment results according to the types of reserves and the comparative analysis with the assessment results of the previous year. The insurance liability reserve information disclosed by the insurance company shall be consistent with the relevant information in the financial accounting report.718 The risk management information disclosed by an insurance company shall be consistent with the annual risk assessment report which has passed the deliberation by the board of directors, including (1) Risk assessment, which includes the identification and evaluation of major risks and brief descriptions of the risk, such as 716 Ibid., art.11. 717 Ibid., art.12. 718 Ibid., art.13.

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insurance risk, market risk, credit risk, and operational risk, and a brief description of the risks; and operational risk, strategic risk, reputation risk, liquidity risk, and so on; (2) Risk control, which includes a brief description to the risk management organization system, overall risk management strategy and its implementation.719 The business information on insurance products disclosed by a personal insurance company shall include the following contents:720 (1) The names, main sales channels, original insurance premium income, and surrender money of the top five insurance products in the original insurance premium income of the previous year; (2) The names of the top three insurance products, the main sales channels, the newly increased payment of the policyholder’s investment funds, and the policyholder’s investment funds surrendered this year; (3) The names of the top three investment-linked insurance products, the main sales channels, the new payment of the investment-linked independent account, and the surrender of the investment-linked independent account this year. The business information on products disclosed by a property insurance company refers to the business information on its top five commercial insurance product types in terms of premium income in the prior year, including the type of insurance products, the amount insured, the premium income, the amount of payment for claims, the reserves, and the underwriting profits.721 The solvency information disclosed by an insurance company in the previous year refers to the audited solvency information for the fourth quarter, which includes at least core solvency adequacy ratio, comprehensive solvency adequacy ratio, actual capital, minimum capital, and so on.722 The major related-party transaction information disclosed by an insurance company shall include the following:723 (1) An overview of the transaction and the basic information of the transaction subject; (2) Situation of counterparties; (3) The main content and pricing policy of the transaction; (4) Opinions of independent directors; (5) Other matters prescribed by the CBIRC. The identification and calculation of major related-party transactions shall comply with the relevant regulations of the CBIRC. Where any of the following significant issues arises in an insurance company, the company shall disclose the relevant information and provide a brief explanation:724 (1) Its controlling shareholder or actual controller changes. (2) The chairman of its board of directors or its general manager is replaced.

719 720 721 722 723 724

Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19.

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(3) The cumulative number of the members of the board of directors replaced in the current year exceeds one-third of the members of the board of directors. (4) The company’s name, registered capital, company location, or business premises changes. (5) There is any change of business scope. (6) The company undergoes any business combination or division, or is dissolved, or an application for bankruptcy is filed against the company. (7) A provincial branch of the company is abolished. (8) Significant equity investment that controls the invested enterprise. (9) A major investment loss in which the actual investment loss of a single investment exceeds 5% of the company’s total net assets at the end of the previous quarter. If the net assets are negative, it will be calculated at 5% of the company’s registered capital. (10) Major payment for claims in which a single claim or all claims involved in the same insurance incident exceed 5% of the company’s total net assets at the end of the previous quarter. If the net assets are negative, it will be calculated at 5% of the company’s registered capital. (11) A major lawsuit that has a major impact on the company’s net assets and actual operations or a judgment that the company’s compensation amount exceeds ¥50 million yuan. (12) A major arbitration decision that has a major impact on the company’s net assets and actual operations or a judgment that the company’s compensation amount exceeds ¥50 million yuan; (13) The insurance company or its chairman or general manager receives criminal punishment. (14) An insurance company or its provincial branch incurs administrative penalties by the CBIRC or its local office. (15) Change or dismissal the accounting firm in advance. (16) Other matters as specified by the CBIRC. 7.17.2 Manners and time of information disclosure An insurance company shall create a website to disclose the relevant information under the Measures 2018.725 An insurance company shall disclose its basic information on its website. Where any basic information on the insurance company changes, it shall update its basic information within ten working days after the change occurs.726 An insurance company shall prepare an annual information disclosure report, covering the information as set out in items (2) to (6) of article 7 of the Measures 2018. An insurance company shall, before 30 April each year, release its annual

725 Ibid., art.20. 726 Ibid., art.21.

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information disclosure report on the company’s website and in newspapers designated by the CBIRC.727 Where any matter as set out in items (7) and (8) of article 7 of the Measures 2018 occurs to an insurance company, the insurance company shall prepare a temporary information disclosure report within ten working days after the occurrence of the matter and release it on the company’s website. The temporary information disclosure report shall be numbered in the order in which the events occurred and the time of disclosure shall be marked. The report shall include the time when the event occurred, the cause of the event, the current state, and the possible impact.728 Where an insurance company is unable to disclose information on time, it shall report the relevant situation to the CBIRC before the expiry of the prescribed disclosure period and publish the reasons for the inability to disclose on time and the estimated time of disclosure on the company’s website.729 The website of an insurance company shall retain the company’s annual information disclosure report and temporary information disclosure report for the most recent five years.730 Where an insurance company discloses information elsewhere, not on its website and in media as specified by the CBIRC, the information disclosed shall not be in conflict with the information disclosed on its website and in the media as specified by the CBIRC, nor be disclosed at a time earlier than the time of disclosure on its website and in the media as specified by the CBIRC.731 7.17.3 Management of information disclosure An insurance company shall establish an information disclosure management system, and report it to the CBIRC. The information disclosure management system of an insurance company shall include732 (1) the contents and basic formats of information disclosure; (2) the information review and release processes;(3) information disclosure exemption and its review process; (4) the division of responsibilities for information disclosure affairs, the department handling information disclosure affairs, and an evaluation system for information disclosure affairs; and (5) an accountability system. After an insurance company revises its information disclosure management system, it shall report to the CBIRC within ten working days from the date of completion of the revision. If an insurance company intends to disclose information that is an exempted disclosure matter, it shall report to the CBIRC within ten working days after the exempted disclosure matter is reviewed by the company. If the reasons for the exemption from disclosure have been eliminated, the insurance company shall prepare a temporary information disclosure report within ten working days from 727 728 729 730 731 732

Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27.

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the date when the reasons are eliminated, and disclose relevant information, the reasons for the exemption from disclosure before, and the company’s review status.733 The secretary of the board of directors of an insurance company shall be responsible for managing the company’s information disclosure matters. An insurance company without a board of directors shall designate the company’s senior management personnel to be responsible for the management of information disclosure matters.734 An insurance company shall report to the CBIRC the contact information of the secretary of the board of directors or designated senior management personnel and the department undertaking information disclosure matters. In the event of a change in the aforesaid circumstances, the insurance company shall report to the CBIRC within ten working days from the date of the change.735 An insurance company shall set up an information disclosure column in a prominent position on the top of the company’s website homepage, titled “public information disclosure”. All publicly disclosed information of an insurance company shall be listed in sub-columns under this column. The names of the first-level subcolumns are “Basic Information”, “Annual Information”, “Major Events” and “Special Information”. Among them, the “special information” column has secondary sub-columns such as “related-party transactions”, “shareholder equity”, “solvency”, “Internet insurance”, “fund utilization”, “new products”, and “compulsory traffic insurance”. Listed insurance companies may disclose relevant information required by these Measures under the “Investor Relations” column.736 An insurance company shall enhance the construction of its website, maintain the security of its website, and provide the general public with convenient access to information.737 An insurance company shall disclose information in Chinese. Where a foreign language version is disclosed at the same time, the contents of the Chinese and foreign language versions shall be consistent; if there is any discrepancy between them, the Chinese version shall prevail.738 If an insurance company commits any of the following acts, the CBIRC shall impose penalties in accordance with laws and administrative regulations: (1) Failure to disclose information in accordance with the provisions of the Measures 2018; (2) Failing to submit or keep reports, statements, documents, and materials in accordance with the provisions of the Measures 2018, or failing to provide relevant information and materials in accordance with the provisions; (3) Compiling or providing false reports, statements, documents, and materials; and (4) Refusing or obstructing supervision and inspection according to law.739

733 734 735 736 737 738 739

Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34.

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Where any rules of the CBIRC provide otherwise for the disclosure of business information on insurance products and other information, such rules shall apply.740 The following insurance institutions shall also refer to the Measures 2018, except as otherwise provided by laws, administrative regulations, and the CBIRC: (1) Insurance group (holding) company; (2) Reinsurance company; (3) Insurance asset management company; (4) Mutual insurance organization; (5) Branches of foreign insurance companies; (6) Other insurance institutions specified by the China Banking and Insurance Regulatory Commission.741 7.18 Corporate governance action plan for three years, from 2020 to 2022 To further improve the regulation of corporate governance, the CBIRC has recently released the Notice of the CBIRC on Issuing the Three-year Action Plan (2020 to 2022) for Improving Corporate Governance in the Banking and Insurance Industry (hereinafter, the Action Plan 2020).742 The Action Plan was published and implemented on 18 August 2020. The Action Plan 2020 consists of ten parts: The first part highlights the guiding ideology, basic principles, and overall objectives of improving the corporate governance of the banking and insurance industry. The second part promotes the integration of Communist Party China leadership and corporate governance. The third part requires conduct of comprehensive evaluation of corporate governance. The fourth part requires standardizing shareholder behaviour. The fifth part sets out requirements for improving the quality and effectiveness of the performance of governance bodies such as the board of directors. The sixth part aims to improve incentive and restraint mechanisms. The seventh part requires strengthening the protection of stakeholders’ rights and interests. The eighth part is concerned with strengthening external market constraints. The ninth part clarifies the specific measures to improve the effectiveness of supervision. The tenth part requires the strengthening of organizational guarantees, the overall planning, and consolidating accountabilities. For the next three years, the CBIRC shall pay great attention on the strengthening of insurance corporate governance. 7.19 Conclusion Regulation of corporate governance of insurance companies is taken as the key task of the CIRC/CBIRC. Accordingly, a variety of regulations have been formulated and implemented that cover almost all aspects of corporate governance, with particular focuses on the structure and functions of the board of directors, internal control, risk management, and external control. These regulations operate well in the insurance industry. 740 Ibid., art.36. 741 Ibid., art.37. 742 Yin Bao Jian Fa No. 40 [2020] (see accessed on 14 October 2020).

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It can be concluded that the regulation of insurers’ corporate governance has been gradually strengthened year by year in China. On the other hand, there is still a long way to go for the improvement of corporate governance. At the Conference of Corporate Governance Training for Small and Medium-sized Banks and Insurance Companies held in April 2018, Mr Guo Shuqing, the Chairman of the CBIRC, pointed out that “China’s banking and insurance industry still has significant deficiencies in corporate governance”, so: Establishment and improvement of a modern corporate governance mechanism with Chinese characteristics is the key task of deepening the reform of the banking and insurance industries at this stage, and is the main guarantee for preventing and resolving various financial risks and achieving stable development of financial institutions.

To investigate the status and effectiveness of the supervision of corporate governance of insurance institutions, at the end of 2018, the CBIRC carried out an on-site assessment of corporate governance of 50 insurance institutions (as a sample), among which were one insurance group company, 28 property and reinsurance companies, 20 life insurance companies, and one insurance asset management company. As mentioned in section 7.15, the full score of regulatory assessment of corporate governance is 100 points, and the assessment level is divided into five grades: Grade A (excellent) for above 90 points, Grade B (good) for above 80 points but below 90 points, Grade C (qualified) for above 70 points but below 80 points, Grade D (weak) for above 60 points but below 70 points, and Grade E (poor) for below 60 points. The results of the on-site assessment show that four insurers scored Grade A (excellent), 42 insurers scored Grade B (good) or C (qualified), three scored Grade D (weak) and one scored Grade E (poor).743 In addition, the on-site evaluation found seven issues, including the non-compliance of shareholders’ equity behaviour, the non-standardized operation of the “three meetings and one level” (shareholders’ meeting, board of directors meeting, board of supervisors meeting, and the senior management level), inadequate management of related-party transactions, failure to meet standards for internal audit, imperfect salary management system, insufficient information disclosure, and lack of objectivity for self-evaluation. For example, the non-compliance of shareholders’ equity behaviour is mainly manifested in the following: complicated shareholders’ equity relationships; problems such as shareholding and invisible shareholders; shareholders’ struggle for control and improper exercise of shareholders’ rights; excessively high equity pledges and freezes; and irregular equity management. The lack of strict management of related-party transactions is mainly manifested in the following: the regulations for related-party transactions are not implemented; the related parties and related-party transactions are not accurately identified and updated in accordance with the principle of “substance is more important than form”; the related-party 743 Du Chuan, “Insurance company governance evaluation results released: 4 high-quality, 1 failed”, 23 January 2019 (see accessed on 14 October 2020).

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transaction structure is not complied, and as a result, the interests of insurance companies are impaired; the risk control of related-party transactions for funds is insufficient, and the underlying assets are not strictly reviewed in accordance with the principle of “layer-by-layer penetration”; the related-party transactions are not strictly reported and disclosed as required.744 The issues revealed by the on-site assessment of corporate governance for the 50 insurance companies may be taken as a snapshot of the industry as a whole. If this is the case, these issues must be addressed by further strengthening of the regulation and supervision on corporate governance in these areas.

744 Ibid.

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CHAPTER 8

Regulation on equities of insurance companies

8.1 Introduction Equities regulation is a key and special area of the regulatory system regarding corporate governance and thus deserves a separate treatment from the general regulatory framework for corporate governance. This chapter considers the regulatory rules in relation to equities of insurance companies. The primary legal sources in relation to regulation of equities of insurance companies are the Company Law and the Insurance Law. The detailed regulatory rules were first formulated by the former China Insurance Regulatory Commission (the CIRC) in the Measures for the Administration of Equities of Insurance Companies (hereinafter, the Equities Measures) in May 2010,1 and amended on 15 April 20142 and on 2 March 2018.3 The 2018 version of the Equities Measures came into force on 10 April 2018 and repealed all previous CIRC’s regulatory documents in respect of regulation of equities of insurance companies. The 2018 version of the Equities Measures has a number of key amendments: the first one was that CBIRC adhered to the problem-oriented approach and some of the problems in the industry were reflected and handled in the Measures 2018. The second one was that some adjustments to the equity ratio were made. The third one was that a system for penetrating supervision was designed. The fourth one was that the supervisory mechanism before, during, and after the occurrence of certain events to regulate the behaviour of shareholders was introduced.4 The 2010 version of the Measures consisted of 37 articles. The work for amending it started in 2016. The CIRC took two years to complete the task of amending the Measures and to add many new provisions. The 2018 version of the Measures consists of 94 articles in eight chapters: the general provisions, qualifications of shareholders, acquisition of equities, funds for making contributions, acts of shareholders, equities matters, submission of materials, and supplemental provisions.The Measures 2018 is a comprehensive and detailed set of regulatory rules currently

1 The CIRC Order No. 6 [2010], it was issued on 4 May 2010 and was repealed by the 2018 version of the Equities Measured. 2 The CIRC Order No. 4 [2014]. 3 The CIRC Order No. 5 [2018] (see accessed on 14 October 2020). 4 The CIRC Press Conference on the release of the 2018 version of the Equities Measures, 7 March 2018.

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applicable to the matters on equities of insurance companies in China. In the following sections, we consider these regulatory rules in detail. 8.2 Classification of equities of insurance companies The Equity Measures 2018 are developed in accordance with the Company Law, the Insurance Law, and other laws and administrative regulations for the purposes of strengthening the supervision and administration of equities of insurance companies; regulating the acts of shareholders of insurance companies; protecting the lawful rights and interests of insurance policyholders, insureds, and beneficiaries; and maintaining the order of the insurance market.5 The equities of insurance companies are regulated under the principles of good qualifications and clear relationships; reasonable structure and regulated conduct; and openness, transparency, and orderly transfer.6 The CBIRC is responsible for implementing penetrating supervision and categorized supervision and administration of the equities of insurance companies according to the law. The supervision and administration of equities shall be implemented through the following links: (1) investment in the formation of insurance companies; (2) change in the registered capital of insurance companies; (3) change in the equities of insurance companies; (4) listing of insurance companies; (5) merger and division of insurance companies; (6) governance of insurance companies; and (7) risk handling or bankruptcy liquidation of insurance companies.7 Article 4 of the Equity Measures classifies shareholders of insurance companies into four categories on the basis of the shareholding ratios, qualifications, and impact on the operation management of insurance companies: (1) Shareholders of Class-I finance: Shareholders holding not more than 5% of the equities of insurance companies; (2) Shareholders of Class-II finance: Shareholders holding not less than 5% nor more than 15% of equities of insurance companies; (3) Strategic shareholders: Shareholders holding not less than 15% nor more than one third of the equities of insurance companies, or shareholders with voting rights enjoyed on the basis of their amount of contribution or shares held sufficient to cause significant impact on the resolutions of the general meetings of stockholders of insurance companies; (4) Controlling shareholders: Shareholders holding not less than one-third of the equities of insurance companies, or shareholders with voting rights enjoyed on the basis of their amount of contribution or shares held sufficient to cause controlling impact on the resolutions of the general meetings of stockholders of insurance companies.8 The CBIRC shall encourage investors with expertise in risk management, scientific and technological innovation, health management, and pension services, among others, to invest in the insurance industry, to promote the transformation, upgrading, and optimization of services of insurance companies.9

5 6 7 8 9

The Measures for the Administration of Equities of Insurance Companies 2018, art.1. Ibid., art.2. Ibid., art.3. Ibid., art.4. Ibid., art.5.

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8.3 Qualifications of shareholders Article 6 of the Equity Measures permits the following four types of investors which can meet the conditions as prescribed in the Equity Measures to become shareholders of insurance companies: (1) domestic enterprise legal persons (entities); (2) domestic limited partnerships; (3) domestic public institutions and social organizations; and (4) overseas financial institutions. Public institutions and social organizations shall only become shareholders of Class-I finance of insurance companies unless as otherwise prescribed by the State Council. Natural persons shall become shareholders of Class-I finance of insurance companies through purchasing stocks of listed insurance companies unless as otherwise prescribed by the CBIRC.10 Asset management plans and trust products may invest in listed insurance companies through purchasing stocks publicly offered. The proportion of shares of a listed insurance company held by a single asset management plan or trust product shall not exceed 5% of the total capital stocks of the insurance company. Where an investor with affiliation relationship entrusts the same institution or affiliated institution to invest in an insurance company, the investment ratio shall be calculated on a consolidated basis.11 The Equity Measures set out different qualification standards for the different types of shareholders. The higher the percentage of shareholding, the higher the qualification standards of the shareholders. Articles 8 to 11 of the Equities Measures list the qualification standards for the four types of shareholders as classified in art.4 of the Equity Measures. These standards are shown for each type of shareholder, as follows: First (art.8), a shareholder of Class-I finance shall meet the following conditions: (1) It has sound business operation status and reasonable business income; (2) It has sound financial conditions and earns profits in the most recent accounting year; (3) It has sound tax payment records and has no record of tax evasion in the most recent three years; (4) It has sound credit records and has no record of major dishonest conduct in the most recent three years; (5) It has sound compliance status and has no record of major violation of laws and regulations in the most recent three years; (6) Other conditions as set out by laws, administrative regulations, and the CBIRC.12 Second (art.9), a shareholder of Class-II finance shall also meet the following four additional conditions on the top of those conditions as set out in art.8 of the Equity Measures previously mentioned: (1) It has good reputation, stable investment behaviours, and prominent core business; (2) It has capacity to continuously make capital contributions and has earned profits in the most recent two accounting years; (3) It has relatively strong capital strength and net assets not less than ¥200 million yuan; (4) Other conditions as set out by laws, administrative regulations, and the CBIRC.13

10 11 12 13

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9.

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Third (art.10), a strategic shareholder shall also meet the following four additional conditions on the top of those conditions as set out in articles 8 and 9 of the Equity Measures previously mentioned: (1) It has an ability to continuously make capital contributions and has made profits in the last three consecutive fiscal years; (2) It has net assets not less than ¥1 billion yuan; (3) Its amount of equity investment shall not exceed the net assets; (4) Other conditions as set out by laws, administrative regulations, and the CBIRC.14 Fourth (art.11), in addition to those as set out in articles 8, 9 and 10 of the Equity Measures previously mentioned, a controlling shareholder shall also meet the following conditions: (1) It has total assets of not less than ¥10 billion yuan; (2) It has net assets at the end of the most recent year of not less than 30% of total assets; (3) Other conditions as set out by laws, administrative regulations, and the CBIRC. Except as otherwise prescribed by the state, financial institutions are not required to be subject to the restriction as prescribed in (2) of article 11 of the Equity Measures.15 The Equity Measures also set forth different qualification standards for four different types of investors in articles 12 to 15: a domestic limited partnership (art.12), a domestic public institution or social organization (art.13), a domestic financial institution (art.14), and an overseas financial institution (art.15). The detailed rules are as follows: First, besides those as set out in articles 8 and 9 of the Equity Measures, an investor that is a domestic limited partnership shall also meet the following conditions: (1) Its general partners have sound credit records and have no record of major violation of laws and regulations in the most recent three years; (2) Where there is a duration, an investor shall undertake to transfer the equities of an insurance company held thereby before the expiry of the duration; (3) It has a simple hierarchy and clear structure. A domestic limited partnership shall not form any insurance company.16 Second, besides those as set out in art.8 of the Equity Measures, an investor that is a domestic public institution or a social organization shall also meet the following conditions: (1) Its main business or major matters are related to the insurance industry; (2) It does not undertake the administrative function; (3) It has been approved by a superior competent authority.17 Third, an investor that is a domestic financial institution shall also comply with the laws and administrative regulations and satisfy the regulatory requirements of the financial regulatory authorities in the industry.18 Fourth, an investor that is an overseas financial institution shall, besides the aforesaid requirements for the qualifications of shareholders, also meet the following conditions: (1) It has made profits in the most recent three consecutive accounting years; (2) Its total assets at the end of the most recent year are not less than

14 15 16 17 18

Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14.

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US$2 billion; (3) Its long-term credit rating given by an international rating agency in the most recent three years is grade A or above; (4) It satisfies the regulatory requirements of the local financial regulatory authorities.19 Article 16 of the Equity Measures provides many conditions that an insurance company must meet in order to form an insurance company or become a controlling shareholder of an insurance company: (1) It has been open for business for more than three years; (2) It has sound corporate governance and internal control; (3) It has earned profits in the most recent accounting year; (4) Its headquarters has no record of major violation of laws and regulations in the most recent year; (5) It has no record of major dishonest conduct in the most recent three years; (6) It has net assets not less than ¥3 billion yuan; (7) Its core solvency adequacy ratio in the most recent four quarters is not lower than 75%, comprehensive solvency adequacy ratio is not lower than 150%, and comprehensive risk rating is not lower than class B;20 (8) Other conditions as prescribed by the CBIRC.21 Where the total shares held by affiliated parties and persons acting in concert reach the standard for shareholders of Class-II finance, strategic shareholders, or controlling shareholders, the shareholder holding the most shares shall meet the qualifications for the corresponding shareholders under the Equity Measures and report to the CBIRC for approval. Parties that have affiliation relationships within 12 months before the date when the agreement on the investment is signed shall be deemed as affiliated parties.22 The Equity Measures provides a list of limiting circumstances in art.18, under any one of them an investor is prohibited from becoming a shareholder of an insurance company: (1) The investor is determined by a relevant entity of the state as an object subject to joint punishment for serious dishonesty and shall be subject to corresponding penalties in the insurance field; (2) The investor has an unclear equity structure or ownership dispute; (3) The investor once entrusted others or was entrusted by others to hold the equity of an insurance company; (4) The investor once invested in the insurance industry, provided any false material, or made any false statement; (5) The investor once invested in the insurance industry, and three years have not elapsed since the date when it assumes material liability for the business operation failure of an insurance company; (6) The investor once invested in the insurance industry and was materially liable for the major violation of laws and rations of an insurance company; (7) The investor once invested in the insurance industry and rejected to coordinate with the supervision and inspection of the CBIRC.23 An investor becoming a controlling shareholder of an insurance company shall have the capital strength for making investment in the insurance industry, risk control capability, and prudent investment philosophy. Article 16 of the Equity 19 Ibid., art.15. 20 Class B companies: companies with solvency adequacy ratios up to the standard and with low operational risks, strategic risks, reputation risks, and liquidity risks, see art.22(2) of the Insurance Company Solvency Supervision Rules No. 10: Comprehensive risk rating (classified supervision) 2015. 21 The Measures for the Administration of Equities of Insurance Companies 2018, art.16. 22 Ibid., art.17. 23 Ibid., art.18.

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Measures sets out additional circumstances under which an investor is prevented from becoming a controlling shareholder of any insurance company: (1) Fluctuation in cash flows is relatively greatly influenced by the economic climate; (2) Its business plan is not feasible; (3) Its financial capacity is insufficient to support the insurance company’s continuous business operation; (4) Its core business is not prominent, and its business scope involves too many industries; (5) Its corporate governance structure and mechanism have evident defects; (6) The investor has many affiliated enterprises, has complex and non-transparent equity relations, and conducts abnormal affiliated transactions frequently; (7) The investor has any record of bad investment on the open market; (8) The investor once had dishonest commercial behaviour which has caused adverse influence; (9) The investor has been confirmed by a relevant department to have inappropriate conduct; (10) Other circumstances that have a major adverse influence on the insurance companies. The actual controllers of insurance companies shall also be subject to the aforesaid circumstances.24 8.4 Acquisition of equities Article 20 of the Equity Measures stipulates ten ways in which an investor may acquire equities of an insurance company: (1) forming an insurance company; (2) subscribing unlisted equities issued by an insurance company; (3) accepting the equities of an insurance company held by another shareholder by means of agreement; (4) acquiring equities of an insurance company publicly transferred by another shareholder by means of bidding; (5) purchasing equities of a listed insurance company on the stock market; (6) purchasing convertible bonds of an insurance company and acquiring the equities of an insurance company under the conditions agreed in the contract; (7) obtaining equities of an insurance company as the pledgee of the equities of an insurance company under the condition of complying with the relevant provisions; (8) acquiring the equities by participating in the risk handling by the CBIRC for an insurance company; (9) acquiring the equities of an insurance company through administrative allocation; and (10) other ways recognized by the CBIRC.25 An investor of an insurance company shall fully understand the operation characteristics and business rules of the insurance industry and the responsibilities and obligations to be assumed as a shareholder of the insurance company. It shall also understand the business operation management situation, potential risks, and other information of the insurance company. An investor investing in an insurance company shall have true intention of making contribution and fulfil the necessary internal decision-making procedures.26 The Equity Measures provide further detailed requirements for each of the ten ways of acquiring equities of an insurance company in articles 21 to 31, which follow.

24 Ibid., art.19. 25 Ibid., art.20. 26 Ibid., art.21.

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Where the equities of an insurance company are acquired by formation of an insurance company (art.20(1)), the preparation for and opening of the insurance company shall be completed according to the conditions and procedures set out in the Insurance Law and the Provisions on the Administration of Insurance Companies 2015,27 among others.28 Subscription of the equities issued by an insurance company or acceptance of the equities of an insurance company transferred by another shareholder (art.20(2)) shall be reported to the CBIRC for approval or recordation according to the agreement of the by-laws of the insurance company, after the insurance company undergoes the corresponding internal examination and decision-making procedures. Where it is agreed in the by-laws of an insurance company that a shareholder has the preemptive right for the equities transferred by another shareholder, the shareholder transferring the equity shall actively require the insurance company to guarantee that other shareholders exercise the pre-emptive right according to the agreement of the by-laws.29 Where the equities of an insurance company are transferred by means of agreement or bidding (art.20(3)), the insurance company shall notify the investors of the relevant provisions of the Equity Measures in advance. Investors participating in the bidding (art.20(4)) shall comply with the provisions of the qualifications for shareholders of an insurance company as prescribed in these Measures. After the equities of an insurance company are acquired, investors shall report to the CBIRC for approval or recordation according to the provisions of the Equity Measures. Where approval is not granted, relevant investors shall transfer the equities within one year of the date when approval is not granted.30 An investor that purchases stocks of a listed insurance company on the stock market (art.20(5)) and holds equities exceeding the ratio as prescribed in art.55 of the Equity Measures shall report to the CBIRC for approval. Where approval is not granted, the equities shall be transferred within 50 trading days31 of the date of disapproval. In the event of suspension of trading, the equities shall be transferred within ten trading days of the date of resumption of trading.32 Article 55 of the Equity Measures provides that an investor that purchases stocks of a listed insurance company and whose equities held accounts for 5%, 15% or one-third of the total capital stock of the insurance company shall, within five working days of the date of the transaction, report to the insurance company in writing, and the insurance company shall, within ten working days of the receipt of the report, report to the CBIRC for approval.33

27 The CIRC Order No. 3 [2015], issued on 19 October. For more on the Provisions, see chapter 4 of this book. 28 The Measures for the Administration of Equities of Insurance Companies 2018, art.22. 29 Ibid., art.23. 30 Ibid., art.24. 31 In business, the trading day is the time span that a particular stock exchange is open. Trading days are usually Monday to Friday. When a trading day ends, all share trading ends and is frozen in time until the next trading day begins. 32 The Measures for the Administration of Equities of Insurance Companies 2018, art.25. 33 Ibid., art.55.

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An investor that purchases convertible bonds of an insurance company (art.20(6)) and converts them into equity under relevant contractual conditions or acquires the equities of an insurance company by exercising the right to pledge (art.20(7)) shall, under the provisions of the Equity Measures, report to the CBIRC for approval or recordation.34 The transfer of equity involving state-owned assets shall comply with the relevant provisions on the management of state-owned assets.Where the state-owned equities of an insurance company are managed on a consolidated basis by administrative allocation and other means, the provisions of the Equity Measures on shareholding ratio and conditions of investors shall be complied with unless otherwise prescribed by the state.35 Where the equities are acquired by participation in an employee stock ownership plan, the shareholding method and ratio shall be otherwise prescribed by the CBIRC.36 The shareholding ratio of shareholders of an insurance company shall satisfy the following additional requirements, besides the requirements as provided for in articles 4 and 6 of the Equity Measures: (1) The shareholding ratio of a single shareholder shall not exceed one-third of the registered capital of the insurance company; (2) The shareholding ratio of a single domestic limited partnership shall not exceed 5% of the registered capital of the insurance company, and the total shareholding ratio of multiple domestic limited partnerships shall not exceed 15% of the registered capital of the insurance company. Where an insurance company invests in the formation of or acquires an insurance company due to business innovation or specialized or group business operation needs, its contribution or shareholding ratio shall not be subject to any restriction of upper limit. The shareholding ratio of a shareholder and its affiliates and persons acting in concert shall be calculated on a consolidated basis.37 An investor and its affiliated party and person acting in concert may only become the controlling shareholder of an insurance company carrying out the same type of business. An investor that is an insurance company shall not invest in the formation of any insurance company carrying out the same type of business (art.30(1)). An investor and its affiliated party and person acting in concert shall not become controlling and strategic shareholders of more than two insurance companies (art.30(2)). An insurance company investing in the formation of an insurance company due to business innovation or specialized business operation shall not be subject to the restriction as provided in art.30(1) and art.30(2) of the Equity Measures and shall not transfer the controlling power of the insurance company formed thereby. An insurance company becoming controlling shareholders of more than 34 Ibid., art.26. 35 Ibid., art.27. 36 Ibid., art.28. 37 Ibid., art.29. The sentence that “shareholding ratio of a shareholder and its affiliates and persons acting in concert shall be calculated on a consolidated basis” means that the total shareholding ratio is the sum of the shareholding ratio of the shareholder plus the shareholding ratio of its affiliated companies (or persons acting in concert).

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two insurance companies shall not become a strategic shareholder of any other insurance company (art.30(4)). Investors holding equities of an insurance company upon authorization by the State Council and companies and institutions participating in the risk handling of insurance companies upon approval of the CBIRC shall not be subject to the restrictions as provided in art.30(1) and art.30(2).38 No investor shall entrust any other or accept any other’s entrustment to hold the equity of an insurance company.39 8.5 Funds for acquiring equities The Equities Measures 2018 stipulate requirements of funds which may be used for acquiring equities of an insurance company in articles 32 to 36. To acquire the equities of an insurance company, an investor shall use lawfully sourced self-owned funds, unless otherwise prescribed by the CBIRC. Here, selfowned funds are limited to the net assets. An investor shall not evade the provisions on the regulation of self-owned funds in a disguised manner through formation of a shareholding institution, transferring expected right to yields of equities, and other ways. The CBIRC may, under the principles of penetrating supervision and categorized supervision, retrospectively identify the source of self-owned funds.40 An investor shall make contributions in currency, other than non-currency property such as physical property, intellectual property rights, and right to use the land, among others, unless otherwise prescribed by the CBIRC for insurance group (holding) companies.41 An investor that is an insurance company shall not, by taking advantage of its registered capital, make repeated capital contributions to its subsidiaries level by level.42 An investor shall not directly or indirectly acquire the equities of any insurance company with any of the following capital: (1) borrowings relevant to the insurance company; (2) capital obtained with deposits or other assets of the insurance company as guarantee; (3) capital obtained by inappropriately utilizing the financial influence of the insurance company or inappropriate affiliation relationship with the insurance company; (4) capital obtained by other means prohibited by the CBIRC. It is prohibited to misappropriate insurance capital or use capital obtained through an investment trust plan, privately offered fund, or equity investment of the insurance company to make repeated capital contributions to the insurance company.43 An insurance company and a preparatory group of the insurance company shall open and use a capital verification account according to the relevant provisions issued by the state. Capital contributions made by an investor of an insurance

38 39 40 41 42 43

Ibid., art.30(4). Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35.

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company shall be verified by an accounting firm which shall issue a capital verification certificate.44 8.6 Behaviours of shareholders The equity structure of an insurance company shall be clear and reasonable, and the actual controller of the insurance company shall be explained to the CBIRC.45 Shareholders of an insurance company shall, according to the Company Law and the by-laws of the insurance company, lawfully exercise the rights of shareholders and fulfil the obligations of shareholders.46 An insurance company shall agree in its by-laws that a shareholder falling under one of the following circumstances shall not exercise the right to attend the general meeting of shareholders, the right to vote, or propose at the general meeting of shareholders, or any other shareholders’ rights, and shall undertake to accept the handling measures of the CBIRC: (1) The shareholder is changed without approval of or recordation with the CBIRC; (2) The shareholder’s actual controller is changed without recordation with the CBIRC; (3) The shareholder entrusts others or is entrusted by others to hold the equity of an insurance company; (4) The shareholder controls the equity in a disguised manner by accepting the entrustment for the voting right, transferring the right to yields, or any other method, (5) The shareholder utilizes insurance funds to directly or indirectly inject capital into its own company or makes false capital contributions; (6) Other acts of capital contribution or shareholding in violation of the regulatory provisions.47 A shareholder of an insurance company shall establish an effective risk isolation mechanism to prevent risk contagion and transfer among shareholders, insurance companies, and other affiliated institutions.48 It shall not conduct any unlawful affiliated transaction with the insurance company or obtain unlawful interests by virtue of its influence on the business operation and management of the insurance company.49 Where an insurance company needs to resolve its insufficient solvency by capital increase, the shareholders shall have the obligation of increasing capital. Shareholders that cannot increase capital contributions or do not increase capital contributions shall agree with other shareholders or investors to adopt reasonable programmes to increase capital contributions.50 Where an insurance company is subject to takeover and other risk-handling measures taken by the CBIRC due to a risk event or major violations of laws and regulations, its shareholders shall actively coordinate therewith.51 44 45 46 47 48 49 50 51

Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid., art.41. Ibid., art.42. Ibid., art.43.

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A controlling shareholder of an insurance company shall strictly exercise the right of control over the insurance company according to the law, and shall not abuse its controlling status to damage the lawful rights and interests of the insurance company and other stakeholders.52 A controlling shareholder of an insurance company shall exercise shareholders’ rights and fulfil shareholders’ obligations for the insurance company according to the provisions issued by the CBIRC on controlling shareholders. An insurance group (holding) company shall exercise shareholders’ rights and fulfil shareholders’ obligations for the insurance company controlled by it according to the provisions issued by the CBIRC on insurance group (holding) companies.53 A shareholder of an insurance company shall faithfully report the financial information, equity structure, sources of funds used for investing in the insurance company, controlling shareholder, actual controller, affiliated parties, and persons acting in concert, among others, to the insurance company (art.46(1)). Where a controlling shareholder or actual controller of the shareholder of an insurance company is changed, the shareholder shall notify the insurance company in writing of the changes, affiliated parties, and affiliation relationship after change and persons acting in concert (art.46(2)).54 The information disclosed by the shareholders of an insurance company according to the law shall be authentic, accurate, and complete and shall not contain any false record, misleading statement, or major omission.55 Article 48 of the Equity Measures imposes on a shareholder the duty of disclosure in writing to the insurance company within 15 working days of the date of occurrence of the following circumstances: (1) Preservation measures in litigation or compulsory enforcement taken against the equities of the insurance company held by the shareholder; (2) The equities held by the shareholder in the insurance company are pledged or the pledge is released; (3) The formalities of change are not undergone within three months after a permit of the CBIRC for change in equity is obtained; (4) Change in name; (5) Merger or division; (6) The shareholder is dissolved, bankrupt, closed, or taken over; (7) Other circumstances that may lead to change in the equity of the insurance company held by the shareholder.56 A shareholder of an insurance company pledging the equity of the insurance company held thereby shall not damage the interests of other shareholders or the insurance company. A shareholder of an insurance company shall not, by pledge of equity, hold any equity of the insurance company on a commission basis, conduct affiliated shareholding in violation of provisions or transfer equity in a disguised manner. When pledging the equities, a shareholder of an insurance company shall not agree with the pledgee that the pledged equities of the insurance company are owned by the creditor when the due debts are not paid, agree that the pledgee or its affiliated party exercises the right to vote and other stockholder’s rights, or

52 53 54 55 56

Ibid., art.44. Ibid., art.45. Ibid., art.46. Ibid., art.47. Ibid., art.48.

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transfer the controlling power of the equities of the insurance company by transfer of the right to yields of equities and other methods.57 An investor shall not transfer any equity held within five years of the date of becoming a controlling shareholder, transfer any equity held within three years of the date of becoming a strategic shareholder, transfer any equity held within two years of the date of becoming a shareholder of Class II finance, or transfer any equity held within one year of the date of becoming a shareholder of Class I finance. Where risk handling is conducted with the approval of the CBIRC, the CBIRC shall order transfer of equities according to the law, except under special circumstances under which equities are transferred between different entities under the control of a same controller.58 8.7 Management of equity matters The office of the board of directors of an insurance company shall be the working body handling the equity matters of the insurance company. The board chairman and board secretary of an insurance company are the persons directly responsible for handling the equity affairs of the insurance company.59 An insurance company shall be responsible for handling applications for an administrative license,60 matter reporting, submission of materials, and other equity matters. When necessary, with consent of the CBIRC, a shareholder may directly submit the relevant materials. To form an insurance company, all sponsors or authorized sponsors shall submit the relevant materials to the CBIRC.61 To change a shareholder holding not less than 5% of equities, an insurance company shall obtain the approval of the CBIRC. To change a shareholder holding less than 5% of equities, an insurance company, except a listed insurance company, shall report to the CBIRC for recordation, conduct public disclosure on the official website of the insurance company and the website designated by the CBIRC. Where the actual controller of a shareholder of an insurance company is changed and the value of the equities of the insurance company held by the shareholder of the insurance company accounts for not less than half of the total assets of the shareholder, the actual controller shall satisfy the relevant requirements of the Equity Measures for qualifications of shareholders and provide the relevant materials for the insurance company in a timely manner; and the insurance company shall report the relevant information to the CBIRC for recordation within 20 working days before the change.62 An insurance company shall, within three months from the date when shareholders enter into the equity transfer agreements, report to the CBIRC for approval or recordation.63 57 58 59 60 61 62 63

Ibid., art.49. Ibid., art.50. Ibid., art.51. The procedure for the application for administrative licensing can be seen at chapter 6 of this book. The Measures for the Administration of Equities of Insurance Companies 2018, art.52. Ibid., art.53. Ibid., art.54.

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Where a shareholder and its controlling shareholder or actual controller of an insurance company fall under the circumstances as prescribed in art.46(2) or art.48 of the Equity Measures, the insurance company shall, within ten working days of being aware of them, report to the CBIRC in writing.64 An insurance company shall, according to the relevant regulatory provisions, disclose its relevant equity information in a timely, authentic, accurate, and complete manner, including: (1) The equity structure and changes therein; (2) The shareholders holding not less than 5% of shares and their controlling shareholders and actual controllers; (3) The shareholders of Class-II finance, strategic shareholders, and controlling shareholders, and their controlling shareholders, actual controllers, affiliated parties, and persons acting in concert; (4) The pledge of the equities of the insurance company by relevant shareholders; (5) The directors and supervisors nominated by shareholders; (6) Other information as prescribed by the CBIRC.65 Where an investor becomes a controlling shareholder of an insurance company, the insurance company shall amend the by-laws and make reasonable arrangements for the rules on the nomination and election of directors and the protection of the interests of minority shareholders, insurance applicants, the insured, and beneficiaries.66 An insurance company shall strengthen the administration of equities of shareholders, verify the information on shareholders and their controlling shareholders, actual controllers, affiliated parties, and persons acting in concert and understand the changes therein, judge shareholders’ influence on the business operation decision-making of the insurance company, and report or disclose the relevant information in a timely, accurate, and complete manner according to the law.67 An insurance company shall, within three months of the date of approval by or recordation with the CBIRC, undergo the formalities of change in by-laws and industrial and commercial registration. Where the formalities of change are not undergone within the prescribed time limit, the insurance company shall report to the CBIRC in writing in a timely manner.68 An insurance company shall strengthen the management of equity pledge and release of pledge, record the relevant information on pledge in the registry of shareholders, and assist shareholders in handling pledge registration with the relevant institution in a timely manner.69 8.8 Submission of materials to the CBIRC The Equities Measures 2018 provides requirements of submission of materials to the CBIRC in articles 62 to 72. To apply for forming or investing in an insurance company, an insurance company or investor shall submit the application materials as required by the CBIRC, and 64 65 66 67 68 69

Ibid., art.56. Ibid., art.57. Ibid., art.58. Ibid., art.59. Ibid., art.60. Ibid., art.61.

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the application materials must be authentic, accurate, and complete. The application materials shall include the basic information (art.63), financial information (art.64), corporate governance information (art.65), additional information, and other relevant materials required by the CBIRC to be submitted (art.66).70 The basic information (art.63) shall include the following specific documents: (1) Photocopy of the business license; (2) Description of the business cope; (3) Organizational management structure chart; (4) Description of the overseas long-term equity investment; (5) Description of the investment of itself and affiliated institutions in other financial institutions and other information.71 The financial information (art.64) shall include the following specific documents: (1) The financial accounting reports of shareholders of Class-I finance for the most recent year audited by an accounting firm, financial accounting reports of shareholders of Class-II finance for the most recent two year audited by an accounting firm, and financial accounting reports of overseas financial institutions, strategic shareholders and controlling shareholders for the most recent three years audited by an accounting firm; (2) The description of the source of funds for making contributions; (3) The tax certificates for the most recent three years; (4) The credit records of investors issued by the credit rating agencies; (5) The long-term credit ratings of overseas financial institutions for the most recent three years granted by the international rating agencies; (6) The solvency reports for the most recent four quarters.72 The corporate governance information (art.65) shall include the following specific documents: (1) The description of the disclosure of the equity structure level by level to the ultimate equity holders; (2) The relevant certification materials on the public disclosure of the equity information; (3) The description of the controlling shareholders or actual controllers and the changes therein in the most recent year; (4) The equity subscription agreement jointly signed by investors or the equity transfer agreements jointly signed by and between the transferor and transferee; (5) The certification materials on the consent of the general meeting of shareholders or the board of directors for the investment; (6) The description of the affiliation relationship and acts in concert between investors and their actual controllers and other investors of the insurance company, and the description of the basic information on affiliated parties of newly formed insurance institutions shall also be provided; (7) The description of the career experience, business operation records, and previous investment, among others, of the actual controllers of an insurance company or actual controllers of the controlling shareholder; (8) The description of the corporate governance, business plan, subsequent fund arrangements, and other circumstances of controlling shareholders.73 The additional information (art.66) shall include the following specific documents: (1) The power of attorney issued by an investor for the submission of materials; (2) The certification materials on the consent of a competent institution on the 70 71 72 73

Ibid., art.62. Ibid., art.63. Ibid., art.64. Ibid., art.65.

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investment; (3) The report on the prudential regulation indicators of a financial institution; (4) The regulatory opinions issued by a financial regulatory authority; (5) The statement on no record of any gross violation of laws and regulations; (6) Other statements or letters of commitment to be provided as required by the CBIRC.74 The Equity Measures also provide specific requirements of submission of materials to the CBIRC in accordance with the types of investors or the change of circumstances in articles 67 to 72. To invest in an insurance company, a domestic limited partnership shall, besides submitting the relevant materials as required from articles 63 to 66 of the Equity Measures, also submit the following materials: (1) The explanatory materials on the source of funds and the designation or name, nationality, business scope or profession, amount of contribution and other background information on partners; (2) The commitment of the partner in charge of execution of business on the fact that the source of funds complies with the relevant provisions on anti-money laundering; (3) The description of the affiliation relationship between partners and other investors of the insurance company.75 To change the registered capital, an insurance company shall file a written application with the CBIRC and submit the following materials: (1) The resolution adopted at its shareholders’ meeting on increasing or decreasing the registered capital; (2) The proposal on increasing or decreasing the registered capital and feasibility study report; (3) The equity structure after the increase or decrease of the registered capital; (4) A capital verification report and a certification on the increase or decrease of capital contribution by shareholders; (5) The financial accounting report of the shareholders participating in capital increase audited by an accounting firm; (6) The name of and basic information on a withdrawing shareholder and the amount of decrease in capital contribution; (7) Other materials as prescribed by the CBIRC. An insurance company increasing shareholders shall submit the relevant materials as prescribed in articles 63 to 66 of the Equity Measures.76 Where a shareholder accepts the equities of an insurance company, the insurance company shall report to the CBIRC for approval or recordation and submit the equity transfer agreement and the financial accounting report of the transferee audited by a accounting firm. Where a transferee is a new shareholder, an insurance company shall submit the relevant materials as prescribed in articles 63 to 66 of the Equity Measures.77 When reporting to the CBIRC that equities are subject to conservatory measure in litigation or compulsory enforcement, an insurance company shall submit relevant judicial documents.78 When reporting to the CBIRC the pledge of equity or release of pledge, an insurance company shall submit the following materials: (1) the written report

74 75 76 77 78

Ibid., art.66. Ibid., art.67. Ibid., art.68. Ibid., art.69. Ibid., art.70.

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on the relevant information on the pledge and release of pledge; (2) the contract on pledge or release of pledge; (3) the contract on principal creditor’s rights and debts or a contract on transfer of the right to yields of equities; (4) the registration document issued by the relevant department; (5) the description of the relationship between the pledger and debtor; (6) the statement of a shareholder on the compliance of the pledge act with the by-laws and the regulatory requirements and the commitment of the shareholder on voluntary acceptance of the handling measures taken by the regulatory department against the equities held thereby if any false statement is provided; (7) all information on equity pledge as of the reporting day; and (8) other materials as set out by the CBIRC. A written report shall include the basic information on pledger, debtor and pledgee, type and amount of the creditors’ rights guaranteed, time limit for payment of debts by debtor, amount of equity pledged, scope of guarantee, purpose of the funds raised, solvency and relevant arrangements, potential risks, and corresponding handling measures, among others. A pledgee that is a non-financial enterprise shall also explain the source of the funds lent by the pledgee and the affiliation relationship between the pledgee and pledger.79 An insurance company shall, when reporting to the CBIRC the change in the name of a shareholder, submit the business license after the change in the name of a shareholder and the registration documents issued by the relevant department.80 8.9 Supervision and administration The CBIRC takes the approach of penetrating regulation81 and examination of shareholders of insurance companies and may substantially identify shareholders of insurance companies as well as their actual controllers, affiliated parties, and persons acting in concert. It takes the following measures to supervise and administer the equities of insurance companies: (1) reviewing the acquisition of or change in the equities according to the law; (2) requesting insurance companies to report matters on equities according to the relevant provisions or regulatory needs; (3) requesting insurance companies to disclose relevant equity information on designated media; (4) entrusting professional intermediary institutions to review the financial statements and other materials provided by insurance companies; (5) holding regulatory interviews with the directors, supervisors, senior executives and other parties of insurance companies and requesting them to explain the relevant circumstances; (6) conducting investigations or public inquiries on shareholders’ acts involving the equities of insurance companies; (7) requesting shareholders to submit audit reports, information on business operation management, equity information, and other materials; (8) consulting and copying the financial accounting statements and other documents and materials of shareholders and relevant entities and persons; (9) examining the insurance companies and imposing administrative punishments on the insurance companies and the relevant responsible persons according 79 Ibid., art.71. 80 Ibid., art.72. 81 Penetrating regulation is a manifestation of the strict regulation of insurance in China.

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to the law; and (10) other regulatory measures that may be taken by the CBIRC according to the law.82 To impose administrative licensing for the acquisition of or change in the equities of an insurance company, the CBIRC shall primarily review the following contents: (1) the completeness of the application materials; (2) the compliance of the decision-making procedures of the insurance company; (3) the qualifications of shareholders and the compliance of their investment acts; (4) the compliance of the source of funds; (5) the affiliation relationship between shareholders; and (6) other contents that the CBIRC deems necessary to be examined. An applicant shall truthfully submit the relevant materials and reflect the real situation and assume liability for the authenticity of the substantial contents of its application materials.83 To impose administrative licensing for the acquisition of or change in the equities of an insurance company, the CBIRC may conduct review by the following means: (1) reviewing the application materials; (2) requesting insurance companies or shareholders to submit certification materials, according to the needs of prudential supervision; (3) holding regulatory talks and conducting public inquiries of the insurance company or relevant shareholders; (4) requesting relevant shareholders of the insurance company to disclose the shareholders or actual controllers of their companies level by level; (5) requesting relevant shareholders to make statements on the affiliation relationships and source of funds upward level by level according to the needs of prudential supervision; (6) consulting relevant accounts or understanding the relevant information from the relevant institutions; (7) visiting shareholders or investing the business operation situations of shareholders; and (8) other means of review that the CBIRC deems necessary to be taken.84 Where an investor, insurance company, or shareholder falls under one of the following circumstances during the process of administrative licensing, the CBIRC may suspend the review: (1) There is dispute over the ownership of the relevant equities; (2) It needs to be subject to investigation due to an unsettled allegation; (3) It is under investigation by the relevant department for being suspected of any violation of laws and regulations or under criminal investigation by the judicial institution, and the case has not been closed yet; (4) It is prosecuted but judgment has not been rendered; (5) Other circumstances as recognized by the CBIRC.85 When implementing administrative licensing or performing other regulatory functions, the CBIRC may request an insurance company or its shareholders to make a statement on the authenticity of the relevant qualifications, affiliation relationships, or capital contributed, and other information provided, and to undertake to assume liability for the provision of false information or untrue statements.86 Where an insurance company or shareholder provides false materials or makes false statements, and falls under serious circumstances, the CBIRC shall revoke its administrative license according to the law. An investor whose administrative

82 83 84 85 86

The Measures for the Administration of Equities of Insurance Companies 2018, art.73. Ibid., art.74. Ibid., art.75. Ibid., art.76. Ibid., art.77.

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license is revoked shall withdraw at the purchase price or net asset value per share, whichever is lower, and an institution taking over the shares shall satisfy the relevant requirements of the CBIRC.87 Where an insurance company fails to conduct equity management in compliance with these Measures, the CBIRC may adjust the corporate governance evaluation results or classified regulatory evaluation types of the insurance company.88 The CBIRC shall keep adverse records of equity management of insurance companies, integrate them into the corporate credit information system of the insurance industry, and share the information with government organs through the national credit information sharing platform.89 Where an insurance company or its director or senior executive practices fraud or neglects duties in equity management and seriously damages the interests of the insurance company, the CBIRC shall impose administrative penalties thereupon according to the law or request the insurance company to replace the relevant party.90 Where a shareholder of an insurance company or a relevant party violate the provisions of the Equity Measures, the CBIRC may take the following regulatory measures: (1) circulating a notice of criticism and ordering it to take corrective action; (2) publicly condemning it and disclosing it to the public; (3) restricting its relevant rights in the insurance company; (4) ordering it to transfer or auction the equity held thereby according to the law. Before the equity is transferred, its shareholders’ rights shall be restricted. Where the equity is not transferred within a prescribed time limit, an investor satisfying the relevant requirements of the CBIRC shall accept the equity at the assessment price; (5) restricting its investment activities in the insurance industry and notifying other financial regulatory authorities; (6) restricting the allocation of dividends, offering of bonds, listing, and other acts of the insurance company, and (7) other measures that may be taken by the CBIRC according to the law.91 The CBIRC shall develop a negative list for market access of investors of insurance companies, record investors’ violations of laws and regulations, and formally notify the insurance companies and investors in writing. The CBIRC may, according to investors’ violations of laws and regulations, restrict them from investing in the insurance industry again for more than five years or for one’s lifetime. A violator that is suspected of any crime shall be transferred to the judicial organ according to the law.92 The CBIRC shall create credit archives of accounting firms and other third-party intermediary institutions in order to record the practicing quality of accounting firms, law firms, and their practitioners.Where a third-party intermediary institution issues an assessment report without any creditability or commits other dishonest acts, the CBIRC shall not recognize any report issued by it within five years of the date of the occurrence of the misconduct and conduct disclosure to the public.93 87 88 89 90 91 92 93

Ibid., art.78. Ibid., art.79. Ibid., art.80. Ibid., art.81. Ibid., art.82. Ibid., art.83. Ibid., art.84.

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The Equity Measures shall apply to the Chinese-funded insurance companies registered within the territory of China in accordance with the law. Insurance companies whose foreign-funded shareholders hold shares accounting for not less than 25% of their registered capital shall be governed, mutatis mutandis, to the relevant provisions of the Equity Measures.94 The administration of the equities of insurance group (holding) companies and insurance asset management companies shall be governed, mutatis mutandis, to the Equity Measures, except as otherwise prescribed in laws and administrative regulations or by the CBIRC.95 Where the financial regulatory authority has developed separate rules on the investment of non-financial enterprises in financial institutions, such separate rules shall apply.96 A shareholder that is approved by the CBIRC to participate in the risk handling of an insurance company or has its equities taken over by a designated institution shall not be subject to the restrictions of the Equity Measures on qualifications of shareholders, shareholding ratio, or funds for making contributions.97 An investor that becomes a shareholder of Class-I finance of an insurance company through purchasing stocks of a listed insurance company shall not be subject to the restrictions of articles 8, 12, 13, 15, 50, 62, 67, and 69 and paragraph 3 of art.53 of the Equity Measures.98 Insurance companies listed on the National Equities Exchange and Quotations shall be governed, mutatis mutandis, to the provisions of the Equity Measures on listed insurance companies.99 For the purposes of these Equity Measures, “more than” and “not less than” shall include the figure itself, and “less than” and “exceed” shall exclude the figure itself.100 For the purpose of the Equity Measures, “acting in concert” means the act or fact that an investor works together with other investors through an agreement or any other arrangement to jointly increase the quantity of voting shares under control thereof in a company. Investors acting in concert in relevant equity change activities of an insurance company shall be considered as persons acting in concert with each other. If there is no contrary evidence, an investor falling under any of the following circumstances shall be a person acting in concert: (1) a director or supervisor of an investor, or a major member of its senior executives serves as director, supervisor, or senior executive of another investor concurrently; (2) an investor acquires relevant equities through the financing arrangements provided by other investors other than banks; (3) there is partnership, cooperation, joint operation, and other economic benefit relationships between investors; and (4) other circumstances as set out by the CBIRC. An investor believing that it and others 94 95 96 97 98 99 100

Ibid., art.85. Ibid., art.86. Ibid., art.87. Ibid., art.88. Ibid., art.89. Ibid., art.90. Ibid., art.91.

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shall not be regarded as persons acting in concert may submit the contrary evidence to the CBIRC.101 8.10 Equity information disclosure by insurance companies For the purposes of implementing the relevant requirements of the Measures for the Administration of Information Disclosure by Insurance Companies102 and the Measures for the Administration of Equities of Insurance Companies; further strengthening social supervision and improving the transparency of the review work; regulating the acts of insurance companies in the preparation for formation and the equity change; and ensuring the authenticity, legitimacy, and validity of the capital sources; the CIRC issued the Notice on Matters concerning Further Strengthening the Equity Information Disclosure by Insurance Companies on 15 July 2016.103 An insurance company shall, within ten working days of the deliberation and adoption of a plan for changing registered capital at the shareholders’ meeting (assembly), issue an announcement on information disclosure at its official website and the website of the Insurance Association of China, to disclose the following information:104 (1) The decision-making procedures, including the resolutions of the shareholders’ meeting (assembly), the motion summary, and the voting information, among others; (2) the plan for changing registered capital, including the scale of capital increase (decrease), the amount of capital increase (decrease) by each shareholder, and the comparison table of equity structure before and after capital increase (decrease) (a listed insurance company shall disclose shareholders holding more than 5% of shares), among others; (3) the statement on the source of capital increase funds; (4) the description of the affiliation relationship among shareholders; and (5) other information required to be disclosed by the CBIRC under the principle of prudential regulation. An insurance company shall, within ten working days of receipt of the relevant application materials on the change of shareholders holding more than 5% of shares, issue an announcement on information disclosure at its official website and the website of the Insurance Association of China, to disclose the following information:105 (1) the decision-making procedures; (2) the relevant information on the change of shareholders, including the transferor, the transferee, the number of shares (amount of contribution), and the equity ratio, among others; (3) the statement on the source of funds; (4) the description of the affiliation relationship among shareholders; and (5) other information required to be disclosed by the CBIRC under the principle of prudential regulation. 101 Ibid., art.92. 102 Yin Bao Jian Fa No.2 [2018] (see accessed on 14 October 2020). 103 Bao Jian Fa No. 62 [2016] (see accessed on 14 October 2020). 104 The Notice of the CIRC on Matters concerning Further Strengthening the Equity Information Disclosure by Insurance Companies 2016, s.1. 105 Ibid., s.2.

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Relevant information on the application for the preparation for the formation of a new insurance company shall be disclosed by the CBIRC at the official website or on a designated unified information platform.106 The information disclosed by investors and insurance companies under the provisions of this Notice shall be true, accurate, complete, and standardized, and shall not contain any false records, misleading statements, or material omissions. Whoever is verified to have committed relevant acts in violation of the disclosure requirements of the Equity Measures shall be punished by the CBIRC under relevant provisions of the Insurance Law.107 An insurance company shall submit relevant proof for its fulfilment of information disclosure when submitting relevant application materials to the CBIRC.108 Insurance group (holding) companies and insurance asset management companies shall be subject to management by reference to insurance companies.109 8.11 Conclusion The 2018 version of the Equities Measures includes three main aspects of the regulatory rules. The first aspect relates to the rules before investing in insurance companies, including specific requirements for shareholder qualifications, ways to acquire equities, and funds of equities investment. The second aspect is in respect of the rules after becoming a shareholder of an insurance company, including the rules of conduct of shareholders and the management rules of equity affairs of insurance companies. The third is the equity supervision and management rules, including the focus, measures, and accountability mechanisms for violations of equity supervision. The Equity Measures regulate the activities of investment and shareholding and, prevent the transmission of improper benefits and various risks. The Equity Measures put forward stricter requirements in terms of financial status and investment ability. Especially for the controlling shareholders, the strict requirements are formulated to strengthen the appropriateness check and to strictly inspect and evaluate their industry background and performance experience so as to ensure that they have the ability in risk management in investing in the insurance industry and prudent investment philosophy. The Equity Measures clearly set out a negative list for market access. Investors are not allowed to make investment in insurance companies under certain negative circumstances. For example, the shareholding structure is unclear or has disputes and the investor provides false information or false statements or is responsible for the failure of insurance companies and major violations. The Equity Measures strengthen the supervision of the shareholding structure. According to the shareholding ratio of shareholders and the impact on the operation and management of insurance companies, the shareholders of insurance companies 106 107 108 109

Ibid., s.3. Ibid., s.4. Ibid., s.5. Ibid., s.6.

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are classified into four types: financial class I, financial class II, strategic shareholders, and controlling shareholders. The upper limit of the single shareholder’s shareholding ratio is reduced from 51% to one-third. The Equity Measures set out clear requirements for shareholders in respect of risk isolation, affiliated transactions, information disclosure, and so on, to effectively prevent the abuse of rights by large shareholders and improper transfer of benefits. However, equity management is a very complex issue, and supervision faces many challenges and practical problems. The first aspect is the identification of the affiliation relationship. There are detailed rules regarding affiliation relationship in the corporate accounting standards or the Company Law, but some investors seek to exploit policy shortfalls to find a way to bypass the limitations on affiliation relationship of the investors. The insurance regulatory authority had noticed this kind of problem and introduced rules to handle the problem in the Equity Measures,110 but even so, there may still be new problems arising in the future. The second aspect is concerned with the authenticity of the equity investment funds. The cash flow of commercial entities is continuously in and out of the entities. It is often difficult to determine at what point it can be truly determined as its own funds, especially when there are a large number of exit channels; this adds a lot of room for flexibility, which is also the problem to be faced. The third aspect is the limited methods of supervision. According to the Administrative Licensing Law of China, administrative agencies review the completeness of materials, and applicants are responsible for authenticity. However, if authenticity issues arise, administrative agencies often face questions from the public. Administrative agencies also have a time limit of 20 working days for administrative examination and approval.111 Financial institution equity review often involves large amounts of hundreds of millions or billions of funds. It is difficult to verify the authenticity within 20 working days. The law does not place this responsibility on the administrative agencies. It is the CBIRC’s responsibility to check the truthfulness of the equities and sources of funds. This is a very big challenge for the insurance regulatory authority. With the rapid development of China’s insurance market, new situations keep occurring, the CBIRC must respond to the situations in a timely manner so as to put right to the improper market behaviours and formulate new rules for the new challenges.

110 Ibid., art.7, art.29, art.46, etc. 111 The Administrative Licensing Law of China, art.42.

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CHAPTER 9

Regulation of the insurance business

9.1 Introduction The operation of the insurance business is regulated by the Insurance Law and the regulatory rules enacted by the Insurance Supervision and Regulation Authority of the State Council (i.e. the former China Insurance Regulatory Commission [the CIRC] and the current China Banking and Insurance Regulatory Commission [CBIRC]). This chapter considers how insurance business is regulated in China, focusing on the following aspects: the scope of the insurance business, the statutory and regulatory requirements for insurance clauses and premium rates, development and supervision of insurance products, information disclosure of insurance products, premium rate adjustment of long-term medical insurance products, regulation of actuaries, and regulation of reinsurance business. 9.2 An overview of law and regulations for the insurance business The Insurance Law provides statutory rules in respect of the insurance business operations (articles 95 to 116). The relevant provisions of the Insurance Law will be discussed in the relevant parts of this chapter. The general regulatory rules are set out in the Provisions on the Administration of Insurance Companies 20151 (articles 41 to 48). These regulatory rules will be considered in relevant parts of this chapter. The insurance supervision and regulation authority have also formulated specific regulations for specific aspects of the insurance business. These specific regulations are considered under the following topics of the insurance business regulation and supervision: (1) the regulation on scope of the insurance business; (2) statutory and regulatory requirements for insurance clauses and premium rates,; (3) regulation of insurance clauses and premium rates of property insurance; (4) regulation of insurance clauses and premium rates of commercial motor vehicle insurance; (5) regulation of insurance clauses and premium rates of personal insurance; (6) development of insurance products by property insurance companies; (7) improving the product supervision of property insurance companies; (8) strengthening the supervision of personal insurance products; (8) regulation of product development and design of 1 The CIRC Order No. 3 [2015] (see accessed on 8 September 2020).

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personal insurance companies; (9) regulation of information disclosure of insurance products; (10) premium rate adjustment and information disclosure of long-term medical insurance products; (11) regulation of actuaries; and (12) regulation of reinsurance business. 9.3 The regulation on scope of the insurance business 9.3.1 The business scope According to art.95 of the Insurance Law, the scope of business of an insurance company is confined to (1) personal insurance business, including life insurance, health insurance, and accident insurance, and so on; (2) property insurance, including property loss or damage insurance, liability insurance, credit insurance and surety bond, and so on; and (3) other insurance-related business approved by the CBIRC. An insurer is not permitted to concurrently engage in property insurance and personal insurance. However, a property insurance company may conduct a shortterm health insurance and accident insurance business with the approval of the CBIRC. An insurance company shall engage in insurance business activities within the scope of the business approved by the CBIRC.2 As to the reinsurance business, the insurance law provides that an insurance company, with the approval of the CBIRC, may conduct ceding reinsurance and/ or assuming the reinsurance business.3 Where the liability assumed by an insurer for a single insured event exceeds 10% of the total sum of its paid-up capital and its surplus reserve, reinsurance shall be arranged for the portion in excess of this limit.4 The reinsurance business shall be divided into life reinsurance and non-life reinsurance. An insurer shall maintain separate accounts and conduct separate accounting for life reinsurance and non-life reinsurance.5 9.3.2 The geological scope of business operation An insurance company may establish branches, but the geological scope of the business operation is limited according to article 41 of the Provisions on the Administration of Insurance Companies 2015,6 which provides that a branch office of an insurance company may not conduct insurance business across provinces, autonomous regions, and municipalities directly under the Central Government, except under the circumstances as set out in article 42 of the Provisions or except as otherwise specified by the CBIRC. Article 42 of the Provisions sets out the circumstances by providing that an insurance institution which participates in 2 The Insurance Law, art.95. 3 Ibid., art.96. 4 Ibid., art.103. 5 The Provisions on the Administration of Reinsurance Business (2015 amendment) (the CIRC Order No. 3 [2015]), art.9 (see accessed on 13 October 2020). 6 The CIRC Order No. 3 [2015].

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coinsurance, conducts large commercial insurance or master policy business, or underwrites insurance across provinces, autonomous regions, and municipalities directly under the Central Government on the Internet, over telephone, or in any other manner shall comply with the relevant provisions issued by the CBIRC. 9.3.3 Hierarchical management of business scope of insurance companies To regulate the management of business scope of insurance companies, establish and improve the insurance market entry and exit mechanisms, promote the professional and differentiated development of the insurance industry, and guide the intensive and refined operation of insurance companies, in accordance with the Insurance Law, the Regulation on the Administration of Foreign-funded Insurance Companies, the Provisions on the Administration of Insurance Companies, and other relevant laws, administrative regulations, and rules, the CIRC formulated and implemented the Notice of the CIRC on Issuing the Measures for the Hierarchical Management of Business Scope of Insurance Companies on 2 May 2013.7 The term “business scope” refers to the original insurance businesses of insurance companies, excluding reinsurance business, the business of utilization of insurance funds, and agency sale of products of other insurance companies.8 (a) Classification The business scope of insurance companies shall be divided into two levels in accordance with the insurance business attributes and risk features, namely, basic businesses and extended businesses.9 The basic businesses of property insurance companies shall include the following five items:10 (1) motor vehicle insurance, including compulsory traffic accident liability insurance for motor vehicles and commercial insurance for motor vehicles; (2) enterprise/family property insurance and engineering insurance (excluding special risk insurance); (3) liability insurance; (4) ship/cargo transportation insurance; and (5) short-term health/accident insurance. The extended businesses of property insurance companies shall include the following four items:11 (1) agriculture insurance; (2) special risk insurance, including aviation and space insurance, ocean exploitation insurance, petroleum and natural gas insurance, and nuclear insurance; (3) credit guarantee insurance; and (4) investmenttype insurance. The basic businesses of personal insurance companies shall include the following five items:12 (1) common type insurance, including life insurance and annuities 7 Bao Jian Fa No. 41 [2013] (see accessed on 12 October 2020). 8 The Notice of the CIRC on Issuing the Measures for the Hierarchical Management of Business Scope of Insurance Companies 2013, art.3. 9 Ibid., art.4. 10 Ibid., art.5. 11 Ibid., art.6. 12 Ibid., art.7.

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insurance; (2) health insurance; (3) accident insurance; (4) participating insurance;13 and (5) universal insurance.14 The extended businesses of personal insurance companies shall include the following two items:15 (1) investment-linked (or unit-linked) life insurance;16 and (2) variable annuity insurance. (b) Access A newly established insurance company can only apply for basic businesses,17 upon meeting the following conditions:18 (1) If it is established with a minimum registered capital of ¥200 million yuan, it can only apply for one item of basic business; (2) For each added item of basic business, the registered capital shall be increased by not less than ¥200 million yuan; and (3) Other conditions as prescribed by laws, administrative regulations, and the CBIRC. A newly established personal insurance company applying for any basic business shall meet the following conditions:19 (1) If it is established with a minimum registered capital of ¥200 million yuan, it can only apply for one of the businesses listed in items (1) to (3) of art.7 of these Measures;

13 A participating policy pays dividends to the policyholder. Dividends are generated from the profits of the insurance company that sold the policy and are typically paid out on an annual basis over the life of the policy. Most policies also include a final or terminal payment that is paid out when the contract matures. Some participating policies may include a guaranteed dividend amount, which is determined at the onset of the policy. A participating policy is also referred to as a with-profits policy. 14 Universal insurance is a hybrid life insurance policy which combines elements of term life insurance with an investment savings option. Universal life combines the ability to build savings at the same time as providing a life insurance policy. This allows flexibility in what you can do with the savings or investment portion of the premium. Universal life insurance also contains an element of long-term investment strategy because it required you build the values in the investment portion through part of the amount you pay monthly. 15 The Notice of the CIRC on Issuing the Measures for the Hierarchical Management of Business Scope of Insurance Companies 2013, art.8. 16 An investment-linked (or unit-linked) insurance policy is a life insurance product that unlike a pure insurance policy, gives investors both insurance and investment under a single integrated policy. A unitlinked insurance policy is essentially a combination of insurance and an investment vehicle. A portion of the premium paid by the policyholder is utilized to provide insurance coverage to the policyholder and the remaining portion is invested in equity and debt instruments. The aggregate premiums collected by the insurance company is pooled and invested in varying proportions of debt and equity securities in a similar manner to mutual funds. Each policyholder has the option to select a personalized investment mix based on his/her investment needs and risk appetite. Like mutual funds, each policyholder’s unitlinked insurance policy holds a certain number of fund units, each of which has a net asset value (NAV) that is declared on a daily basis. The NAV is the value upon which net rates of return are determined. The NAV varies from one unit-linked insurance policy to another based on market conditions and fund performance. 17 The Notice of the CIRC on Issuing the Measures for the Hierarchical Management of Business Scope of Insurance Companies 2013, art.9. 18 Ibid., art.10. 19 Ibid., art.11.

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(2) For each added item of businesses of the first three items, the registered capital shall be increased by not less than ¥200 million yuan; (3) If it applies for businesses of the first three items and the business of item (4) or (5) of art.7 of these Measures, its registered capital shall be not less than ¥1 billion yuan; (4) If it applies for all basic businesses, its registered capital shall be not less than ¥1.5 billion yuan; (5) If it applies for the business of item (4) or (5) of art.7 of these Measures, it must apply for the businesses of the first three items at the same time; (6) If it applies for the business of item (2), (4) or (5) of art.7 of these Measures, it shall have special internal control rules, professionals, service capability, information systems, and reinsurance plans; and (7) Other conditions as prescribed by laws, administrative regulations, and the CBIRC. (c) Modification The modification of business scope of an insurance company shall be subject to the approval of the CBIRC.20 An insurance company cannot apply for a new extended business unless it has obtained the qualifications for operating the basic businesses of the first three items and may only apply for one extended business each time, and the intervals between its two applications shall be no fewer than six months.21 A property insurance company applying for agriculture insurance business shall meet the following conditions:22 (1) It has been operating for three full consecutive fiscal years or more; (2) Its year-end average net assets in the latest three years are not less than ¥1 billion yuan; (3) Its solvency adequacy ratio at the end of the previous year and in the latest four quarters is not less than 150%; (4) It has no records of major violations of laws and regulations in the latest three years; and (5) Other conditions as prescribed by laws, administrative regulations, and the CBIRC. An insurance company applying for operating agricultural insurance business must complete the modification of its business scope before filing the application for operating an agricultural insurance business with the CBIRC in accordance with law. A property insurance company applying for special risk insurance business shall meet the following conditions:23 20 21 22 23

Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15.

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(1) It has been operating for three full consecutive fiscal years or more; (2) Its year-end average net assets in the latest three years are not less than ¥1 billion yuan; (3) Its solvency adequacy ratio at the end of the previous year and in the latest four quarters is not less than 150%; (4) It has a sound corporate governance structure and effective internal management, and all its risk control indicators meet the requirements, and its categorized regulatory evaluation result for the previous quarter is Grade A or B; (5) It has special internal control rules, professionals, service capability, information systems, and reinsurance plans; (6) It has no records of major violations of laws and regulations in the latest three years; and (7) Other conditions as prescribed by laws, administrative regulations, and the CBIRC. A property insurance company applying for credit guarantee insurance business shall meet the following conditions:24 (1) It has been operating for three full consecutive fiscal years or more; (2) Its year-end average net assets in the latest three years are not less than ¥2 billion yuan; (3) Its solvency adequacy ratio at the end of the previous year and in the latest four quarters is not less than 150%; (4) It has a sound corporate governance structure and effective internal management, and all its risk control indicators meet the requirements, and its categorized regulatory evaluation result for the previous quarter is Grade A or B; (5) It has special internal control rules, professionals, service capability, information systems, and reinsurance plans; (6) It has no records of major violations of laws and regulations in the latest three years; and (7) Other conditions as prescribed by laws, administrative regulations, and the CBIRC. A property insurance company applying for investment-type insurance business shall meet the following conditions:25 (1) It has been operating for three full consecutive fiscal years or more; (2) Its year-end average net assets in the latest three years are not less than ¥3 billion yuan, and it has got net profits as a whole in the latest three fiscal years; (3) Its solvency adequacy ratio at the end of the previous year and in the latest four quarters is not less than 150%;

24 Ibid., art.16. 25 Ibid., art.17.

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(4) It has a sound corporate governance structure and effective internal management, all its risk control indicators meet the requirements, and its categorized regulatory evaluation result for the previous quarter is Grade A or B; (5) It has special internal control rules, professionals, service capability, information systems, and reinsurance plans; (6) It has an independent fund utilization management department and has established sound fund utilization management rules and risk control management rules; (7) It has no records of major violations of laws and regulations in the latest three years; and (8) Other conditions as prescribed by laws, administrative regulations, and the CBIRC. A personal insurance company applying for investment-linked insurance business shall meet the following conditions:26 (1) It has been operating for three full consecutive fiscal years or more; (2) Its year-end average net assets in the latest three years are not less than ¥2 billion yuan; (3) Its solvency adequacy ratio at the end of the previous year and in the latest four quarters is not less than 150%; (4) It has a sound corporate governance structure and effective internal management, all its risk control indicators meet the requirements, and its categorized regulatory evaluation result for the previous quarter is Grade A or B; (5) It has special internal control rules, professionals, service capability, information systems, and reinsurance plans; (6) It has no records of major violations of laws and regulations in the latest three years; and (7) Other conditions as prescribed by laws, administrative regulations, and the CBIRC. A personal insurance company applying for variable annuity business shall meet the following conditions:27 (1) It has been operating for six full consecutive fiscal years or more; (2) It has been approved for operating the investment-linked insurance business for three years or more; (3) Its year-end average net assets in the latest three years are not less than ¥3 billion yuan; (4) Its solvency adequacy ratio at the end of the previous year and in the latest four quarters is not less than 150%; (5) It has a sound corporate governance structure and effective internal management, all its risk control indicators meet the requirements, and its 26 Ibid., art.18. 27 Ibid., art.19.

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(6) (7) (8) (9)

categorized regulatory evaluation result for the previous quarter is Grade A or B; It has special internal control rules, professionals, service capability, information systems, and reinsurance plans; It has a stable investment management team and experience of stable investment performance; It has no records of major violations of laws and regulations in the latest three years; and Other conditions as prescribed by laws, administrative regulations, and the CBIRC.

Where an insurance company has inadequate solvency or has committed any major violation of law or regulation, the CBIRC may order it to stop accepting new business or limit its business scope in accordance with law.28 Where the CBIRC orders an insurance company to stop accepting new business or limits its business scope, or the insurance company takes the initiative to apply for reducing its business scope, the insurance company shall properly handle the business already undertaken, continue to fulfil the liabilities underwritten, or transfer the business to a qualified insurance company in accordance with the Interim Measures for the Administration of Transfer of Insurance Business by Insurance Companies.29 (d) Materials to be submitted The application materials submitted by applicants must be true, accurate, and complete.30 Where a newly established insurance company applies for health insurance business, participating insurance business, or universal insurance business, it shall provide certification materials regarding special internal control rules, professionals, service capacity, information systems, and reinsurance plans.31 Where an insurance company intends to modify its business scope, it shall file a written application with the CBIRC, and submit the following materials:32 (1) The resolution of the general assembly of shareholders or the shareholders’ meeting; (2) A report on the feasibility of the modification of business scope; (3) Certification materials regarding the special internal control system, professionals, service capability, information systems, and reinsurance plans; (4) Certification materials regarding the independent fund utilization management department, fund utilization management rules, and risk control management rules, if a property insurance company applies for investmenttype insurance business;

28 29 30 31 32

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24.

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(5) Certification materials regarding the investment management team and past investment performance if a personal insurance company applies for investment-linked insurance business or variable annuity business; and (6) Other materials as required by the CBIRC. The insurance group (holding) companies, insurance asset management companies, captive property insurance companies, mutual insurance companies, insurance cooperatives and professional insurance companies shall not be governed by these Measures unless otherwise prescribed by the CBIRC.33 These Measures shall apply to the professional insurance companies operating the business other than their main business.34 Insurance companies violating these Measures and conducting illegal business operations shall be subject to punishments by the CBIRC in accordance with law.35 9.4 Statutory and regulatory requirements for insurance clauses and premium rates The key components of an insurance contract are the clauses of the contract and the premium rate. Therefore, an important aspect of regulating the insurance business is to regulate the insurance clauses and premium rates. In China, both the statutory law and regulations provide rules regarding the regulation of insurance clauses and premium rates. 9.4.1 Statutory requirements The Insurance Law requires an insurance company to fairly and reasonably formulate insurance clauses and determine premium rates in accordance with the relevant provisions of the insurance supervision and regulation authority of the State Council, and not to prejudice the lawful rights and interests of the policyholders and the beneficiaries.36 The insurance clauses and premium rates of the insurance products that concern social and public interest, the compulsory insurance products and the newly developed life insurance products shall be submitted to the insurance supervision and regulation authority of the State Council for approval. The authority of insurance supervision and regulation follows the principles of protecting social and public interest and preventing unfair completion in the examination and approval. The insurance clauses and premium rates of other insurance products shall be filed with the insurance supervision and regulation authority. The specific rules for examination and approval and filling of insurance clauses and premium rates shall be formulated by the authority of insurance supervision and regulation in accordance with article 135 of the Insurance Law.37 33 34 35 36 37

Ibid., art.25. Ibid., art.26. Ibid., art.27. The Insurance Law, art.114. Ibid., art.135.

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Article 136 of the Insurance Law sets forth the consequences for not complying with the requirements relating to the insurance clauses and premium rates. Where the insurance clauses and premium rates used by an insurance company violate laws, administrative regulations, or the relevant provisions of the insurance supervision and regulation authority, the authority shall order the insurance company to stop using them and to make corrections within a prescribed period; where the circumstances are severe, submission of new insurance clauses and premium rates may be forbidden within a certain period. 9.4.2 Regulatory requirements In accordance with the Insurance Law, the regulatory authority provides one general requirement and two major pieces of regulations for regulating the insurance clauses and premium rates for property and personal insurance business. The general requirement is article 43 of the Provisions on the Administration of Insurance Companies 2015,38 which provides that insurance institutions shall draft insurance clauses and premium rates in a fairly and reasonable manner, without detriment to the lawful rights and interests of the insurance applicants, insured, and beneficiaries. The two pieces of major regulations for regulating the insurance clauses and premium rates for property and personal insurance business, respectively, include: (1) The Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies which was issued on 5 February and came into force on 1 April 2010;39 and (2) The Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies which was promulgated and implemented on 19 October 2015.40 The CIRC also formulated another two pieces of regulations for the matters regarding the implementation of the aforesaid two major pieces of regulations: (1) The Notice of the CIRC on the Relevant Issues concerning the Implementation of the Measures for the Administration of Insurance Clauses and Insurance Rates of Property Insurance Companies which was issued on 11 May 2010;41 and (2) The Notice of the CIRC on Several Issues concerning the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies which was issued on 4 January 2012.42 38 The CIRC Order No. 3 [2015]. 39 The CIRC Order No. 3 [2010] (see accessed 13 October 2020). 40 The CIRC Order No. 3 [2015] (see accessed on 13 October 2020). 41 Bao Jian Fa No. 43 [2010] (see accessed on 13 October 2020). 42 Bao Jian Fa No.2 [2012] (see accessed on 13 October 2020).

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The CIRC/CBIRC has also formulated six separate pieces of regulations for the commercial motor vehicle insurance clauses and premium rates. The following sections consider these regulations in turn. 9.5 Regulation of insurance clauses and premium rates of property insurance The Measures for the Administration of the Insurance Clauses and Premium Rates of Property Insurance Companies 2010 was developed in order to improve and strengthen the regulation of the insurance clauses and premium rates of property insurance companies; protect the lawful rights and interests of the proposers, insureds, and beneficiaries; maintain the competitive order of the insurance market; and encourage innovation by property insurance companies. “Insurance institutions” means property insurance companies and the branch offices thereof.43 An insurance company shall develop insurance clauses and premium rates in accordance with laws, administrative regulations, and the relevant provisions issued by the CBIRC and assume corresponding responsibilities for the insurance clauses and premium rates. An insurance company shall, according to the provisions of the Measures, submit insurance clauses and premium rates to the CBIRC for approval or recordation.44 Insurance companies shall submit the insurance clauses and premium rates for insurance types involving the public interest and types of insurance which is compulsory according to the law to the CBIRC for approval under these Measures. Insurance companies shall submit the insurance clauses and premium rates for other insurance types to the CBIRC for recordation under the Measures.45 In regulating insurance clauses and premium rates, the CBIRC shall adhere to the principles of protecting the public interest, preventing unfair competition, and coordinating and cooperating with the regulation of solvency, corporate governance structure, and market behaviour.46 9.5.1 Approval An insurance company shall submit the insurance clauses and premium rates for the following insurance types to the CBIRC for approval:47 (1) Types of insurance which is compulsory according to laws and administrative regulations. (2) Other insurance types involving the public interest as determined by the CBIRC. 43 The Measures for the Administration of the Insurance Clauses and Premium Rates of Property Insurance Companies 2010, art.2. 44 Ibid., art.4. 45 Ibid., art.5. 46 Ibid., art.6. 47 Ibid., art.7.

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To apply for approval of insurance clauses and premium rates, an insurance company shall submit:48 (1) (2) (3) (4) (5) (6) (7) (8) (9)

The application document; An approval form in duplicate; The texts of insurance clauses and premium rates; An explanation of the insurance clauses and insurance rates, including an analysis of the main features, the market risks, and operating risks of the insurance clauses and insurance rates; An actuarial report on insurance rates signed by the appointed actuary, including the actuarial hypothesis, methods, formulas, and process of measurement; A statement from the appointed actuary; A statement from the appointed legal counsel; The electronic versions of the submissions in required forms; and Other materials as set out by the CBIRC.

To amend the approved insurance clauses or insurance rates, an insurance company shall submit the amended insurance clauses or insurance rates for approval under these Measures. An insurance company which submits amended insurance clauses or insurance rates for approval shall, in addition to the materials prescribed in article 8 of the Measures, submit an explanation of the reasons for the amendment and a comparison of insurance clauses or insurance rates before and after amendment.49 A provincial branch of an insurance company may, within the scope prescribed by the CBIRC, adjust the approved insurance rates submitted by the insurance company, provided that the adjustment is subject to the consent of the insurance company and is reported to the local office of the CBIRC within ten working days after the official consent reply from the insurance company is received.50 Where a provincial branch of an insurance company adjusts the approved insurance rates submitted by the insurance company beyond the scope prescribed by the CBIRC, the insurance company shall report the adjustment to the CBIRC for approval. Where a provincial branch of an insurance company submits the insurance rates prescribed in paragraph 1 of article 10 of these Measures to the local office of the CBIRC for approval, it shall submit the approval document issued by the CBIRC to the insurance company, the materials prescribed in article 8 of these Measures, and an official consent reply bearing the official seal of the insurance company.51 Before insurance clauses and premium rates subject to approval are approved by the CBIRC, no insurance company may use them in operations.52

48 49 50 51 52

Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12.

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9.5.2 Recordation An insurance company which develops insurance clauses and premium rates for insurance types other than those in article 7 of the Measures shall submit them to the CBIRC for recordation within ten working days after using them in operations. An insurance company which amends or adjusts the coverage in the recorded insurance clauses or the recorded insurance rates shall submit the insurance clauses or insurance rates to the CBIRC for recordation again.53 To submit insurance clauses and premium rates to the CBIRC for recordation, an insurance company shall submit:54 (1) (2) (3) (4) (5) (6)

A recordation form in duplicate; The texts of insurance clauses and premium rates; A statement from the appointed legal counsel; A statement from the appointed actuary; The electronic versions of the materials submitted in required forms; and Other materials as set out by the CBIRC.

The CBIRC shall, within 20 working days after receiving the recordation materials, proceed as follows:55 (1) If the recordation materials are incomplete, the CBIRC shall notify the insurance company of providing supplements and corrections within ten working days. (2) If the recordation materials are complete or the insurance company has provided supplements and corrections as required, the CBIRC shall assign a number to the recordation form, affix its seal to it, place one copy on file, and return the other copy to the insurance company. 9.5.3 Management of combined insurance clauses and premium rates and those of coinsurance An insurance institution may combine the approved or recorded insurance clauses and insurance rates for use in operations.56 Where an insurance institution uses combined insurance clauses and premium rates in operations, without any amendment to the approved or recorded insurance clauses and premium rates, it need not submit them for approval or recordation again. Where an insurance institution uses combined insurance clauses and premium rates in operations, with any amendment to the approved or recorded insurance clauses and premium rates, it shall submit them for approval or recordation again under the Measures. An insurance company which submits combined insurance clauses and premium rates for approval or recordation shall submit the name of the combined insurance clauses and premium rates and a specimen of the insurance policy, in addition to the materials prescribed in the Measures. 53 54 55 56

Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16.

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Where an insurance institution uses combined insurance clauses and premium rates in operations, it shall specify the insurance premiums and the amounts insured under the insurance clauses, respectively.57 In co-insurance, the other insurance companies may directly use the leading underwriter’s insurance clauses and premium rates approved by or recorded with the CBIRC, and need not submit them for approval or recordation additionally.58 9.5.4 Appointed legal counsel and appointed actuary An insurance company shall appoint a legal counsel and an actuary to be respectively responsible for the legal affairs and actuarial affairs concerning insurance clauses and premium rates.59 The company shall provide the appointed legal counsel and the appointed actuary with information necessary for them to perform their duties and fully respect their professional opinions. The company shall enhance management of the appointed legal counsel and the appointed actuary and establish and improve the internal control and accountability systems of the appointed legal counsel and the appointed actuary. The internal management rules of the company for the appointed legal counsel and the appointed actuary shall be reported to the CBIRC. The appointed legal counsel and the appointed actuary of an insurance company shall be subject to confirmation by the CBIRC. Where the appointed legal counsel and the appointed actuary are not confirmed by the CBIRC, the CBIRC and the local offices thereof shall not recognize the statement from the appointed legal counsel or the appointed actuary or any other relevant report signed by either one of them.60 The appointed legal counsel of an insurance company shall meet the following conditions:61 (1) Having a domicile within the territory of China; (2) Being a regular employee of the company in charge of a department of the company or holding a higher position in the company; (3) Having passed the bar qualification examination or the uniform national judicial examination or having other experiences to prove that he or she has good legal professional capability; (4) Having experience in practicing insurance or law for three consecutive years or more in China; (5) Not having received any administrative penalty for illegal practice in the past two years; (6) Not having received any criminal penalty; (7) Other conditions as set out by the CBIRC.

57 58 59 60 61

Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21.

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An insurance company which applies for confirmation of the appointed legal counsel shall submit to the CBIRC:62 (1) An application form for qualification review; (2) Photocopies of the identification and certificate of domicile of the candidate; (3) Photocopies of the educational credentials and certificate of professional qualification of the candidate; (4) The candidate’s experiences in the insurance or legal sector of China; (5) An explanation on the candidate’s position in the company; and (6) Other materials as set out by the CBIRC. The conditions for the appointed actuary of an insurance company and the materials that an insurance company shall submit to the CBIRC for confirmation of the appointed actuary shall be specified additionally by the CBIRC.63 An insurance company shall, according to the provisions of the Measures, submit a statement from the appointed legal counsel. The appointed legal counsel shall take the following responsibilities for insurance clauses:64 (1) The insurance clauses comply with the Insurance Law, other laws and administrative regulations, and the relevant provisions issued by the CBIRC; (2) The insurance clauses do not damage the public interest or do not infringe upon the lawful rights and interests of insurance applicants, insureds, and beneficiaries; (3) An insurance contract has all essential elements and is accurate in wording, easy to understand, and precise in expression; (4) Other responsibilities as set out by the CBIRC. An insurance company shall, according to the provisions of the Measures, submit an actuarial report signed by the appointed actuary and a statement from the appointed actuary. The appointed actuary shall take the following responsibilities:65 (1) The actuarial report is complete in content; (2) The actuarial hypothesis and the actuarial method used comply with the general actuarial principles and the relevant provisions issued by the CBIRC; (3) The benefit estimation method for products with benefit demonstration complies with the general actuarial principles and the relevant provisions issued by the CBIRC; (4) The insurance rates are rationally set, and the results satisfy the principles of adequacy, suitability, and fairness; (5) Other responsibilities as set out by the CBIRC.

62 63 64 65

Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25.

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9.5.5 Supervision and administration The insurance clauses and premium rates of an insurance company shall satisfy the following requirements:66 (1) They are clear in structure, accurate in wording, precise in expression, and easy to understand; (2) They have all the essential elements and are fair and without damage to the lawful rights and interests of insurance applicants, insured, beneficiaries, and the public interest; (3) The premium rates are scientifically and rationally set under the risk and loss principle, without damage to the insurance company’s solvency or impediment to fair competition in the market; (4) The conditions for adjusting insurance rates shall be specified if the insurance rates are floating; (5) Other conditions as prescribed in the Insurance Law, other laws and administrative regulations, and the provisions issued by the CBIRC. All insurance institutions shall strictly implement the insurance clauses and premium rates approved by or recorded with the CIBRC and may not modify them in violation of the provisions of the Measures.67 An insurance company which needs to amend any approved or recorded insurance clauses or premium rates shall submit the amended insurance clauses or premium rates for approval or recordation under the Measures again. After the amended insurance clauses or premium rates are approved by or recorded with the CBIRC, the insurance company may not use the original insurance clauses or premium rates in an insurance contract newly concluded.68 Where an insurance institution underwrites insurance by an insurance agreement, it shall submit the agreement for approval or recordation according to the relevant provisions of the Measures if the agreement amends any approved or recorded insurance clauses or premium rates.69 Where it is discovered that any insurance clauses or premium rates used by an insurance institution violate any law or administrative regulation or article 26 of the Measures, the CBIRC or the local office thereof shall order it to stop the use and make amendment during a specified period; if the circumstances are serious, the CBIRC or the local office thereof may prohibit it from submitting new insurance clauses and premium rates during a specified period.70 Where an insurance company terminates its employment of or entrustment with the appointed legal counsel or the appointed actuary, it shall, within ten working days of the termination, report to the CBIRC in writing.71 Upon the termination the qualification of the appointed legal counsel or the appointed actuary shall be 66 67 68 69 70 71

Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31.

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automatically invalidated from the day when the employment or entrustment is terminated. Where the appointed legal counsel violates article 24 of the Measures or the appointed actuary violates article 25 of the Measures, the CBIRC shall order him or her to take corrective action and may require him or her to submit a written self-inspection statement; if he or she violates the aforesaid provision twice in two years, the CBIRC may, in addition to cancelling his or her qualification as appointed legal counsel or appointed actuary under article 40 of the Measures, reject the confirmation of his or her qualification as appointed legal counsel or appointed actuary within two years from the day when the second violation is discovered.72 The Insurance Association of China (IAC) shall effectively perform its selfregulatory functions regarding insurance clauses and premium rates and establish the self-regulatory mechanisms and risk prevention mechanisms of the insurance sector.73 The IAC shall actively promote the plain language and standardization of insurance clauses and premium rates and establish a basic data platform and a standard product database for the insurance sector. 9.5.6 Legal liability Where an insurance company fails to apply for approval of insurance clauses or premium rates as required, the CBIRC shall order it to take corrective action and impose a fine of not less than ¥50,000 yuan nor more than ¥300,000 yuan on it; if the circumstances are serious, the CBIRC may restrict its business scope, order it to stop accepting new business, or revoke its business permit.74 Where an insurance company commits any of the following conduct, the CBIRC shall order it to take corrective action during a specified period; if it fails to do so, the CBIRC may impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan on it:75 (1) Failing to submit insurance clauses or premium rates for recordation as required; (2) Failing to submit or preserve reports, statements, documents, or materials related to insurance clauses or premium rates as required or failing to provide the relevant information or material as required. Where an insurance company commits any of the following conduct, the CBIRC shall order it to take corrective action and impose a fine of not less than ¥100,000 yuan nor more than ¥500,000 yuan on it; if the circumstances are serious, the CBIRC may restrict its business scope, order it to stop accepting new business, or revoke its business permit:76

72 73 74 75 76

Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36.

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(1) Preparing or providing any false report, statement, document, or material when submitting insurance clauses and premium rates for approval or recordation; (2) Preparing or providing any false report, statement, document, or material when submitting materials for confirmation of the appointed legal counsel or the appointed actuary. Where, in violation of the Measures, an insurance company employs any unqualified person to serve as the appointed legal counsel or the appointed actuary, the CBIRC shall order it to take corrective action, and impose a fine of not less than ¥20,000 yuan nor more than ¥100,000 yuan on it.77 Where an insurance institution violates article 27 of the Measures, the CBIRC or the local office thereof shall order it to take corrective action and impose a fine of not less than ¥100,000 yuan nor more than ¥500,000 yuan on it; if the circumstances are serious, the CBIRC may restrict its business scope, order it to stop accepting new business, or revoke its business permit.78 Where, after the CBIRC or the local office thereof orders an insurance institution to stop using or amend during a specified period any insurance clauses and premium rates under article 30 of the Measures, the insurance institution fails to do so, the CBIRC or the local office thereof shall impose a fine of not less than ¥50,000 yuan nor more than ¥300,000 yuan on it; if the circumstances are serious, the CBIRC may restrict its business scope, order it to stop accepting new business, or revoke its business permit.79 Where an insurance institution violates the provisions of these Measures, the CBIRC or the local office thereof shall, in addition to punishing it in accordance with laws, administrative regulations, and these Measures, issue a warning to and impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan on the directly liable executive in charge, the directly liable appointed legal counsel or appointed actuary, or any other directly liable person in consideration of the circumstances according to the law; if the circumstances are serious, the CBIRC shall revoke his or her office qualification or practicing qualification and may prohibit him or her from entering the insurance sector for a certain period or even one’s lifetime.80 The procedures for approval of insurance clauses and premium rates and the procedures for confirmation of the appointed legal counsel or appointed actuary of an insurance company shall be governed by the Administrative Licensing Law of China and the Measures of the CBIRC for the Implementation of Administrative Licensing.81 The qualification as an appointed legal counsel or an appointed actuary confirmed by the CBIRC before these Measures come into force shall continue to be effective. Within one year after the Measures come into force, an insurance 77 78 79 80 81

Ibid., art.37. Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid., art.41.

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company shall replace its appointed legal counsel or appointed actuary who fails to meet the conditions prescribed in the Measures.82 The administration of the property insurance clauses and premium rates of liability insurance companies and agriculture insurance companies shall be governed by the Measures.83 The administration of the insurance clauses and premium rates of the branches of foreign property insurance companies shall be governed by the provisions on property insurance companies in the Measures. The branches of property insurance companies formed within China by insurance companies from Hong Kong, Macao, and Taiwan regions shall be administered as branches of foreign property insurance companies.84 9.5.7 Relevant issues concerning the implementation of the Measures for the Administration of Insurance Clauses and Premium Rates of Property Insurance To clarify the relevant issues concerning the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies 2010 (hereinafter, the Measures 2010)85 and strengthen the standard administration of insurance clauses and premium rates of property insurance companies, the CIRC issued the Notice of the CIRC on the Relevant Issues concerning the Implementation of the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies 2010.86 (a) Scope of insurance products subject to examination and approval87 The insurance clauses and premium rates of the following insurance products as legally determined by the CBIRC shall be reported to the CBIRC for examination and approval: (1) (2) (3) (4)

Motor vehicle insurance; Investment-type non-life insurance; Guarantee insurance and credit insurance, with a term over one year; and Other insurance products concerning public interests as determined by the CBIRC and compulsory insurance products as prescribed by laws and administrative regulations.

The insurance clauses and premium rates of other insurance products shall be filed with the CBIRC. 82 Ibid., art.42. 83 Ibid., art.43. 84 Ibid., art.44. 85 The CIRC Order No. 3 [2010]. 86 Bao Jian Fa No. 43 [2010].This Notice came into force on 1 May 2010 and replaced the Notice on the Relevant Issues concerning the Implementation of the Measures for the Administration of Insurance Clauses and Insurance Rates of Property Insurance Companies issued by the CIRC on 25 November 2005 (Bao Jian Fa No. 109 [2005]). 87 The Notice of the CIRC on the Relevant Issues concerning the Implementation of the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies 2010, s.1.

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From 1 March 2020, the insurance products of commercial motor vehicle insurance using the model insurance clauses as formulated by the IAC, guarantee insurance, and credit insurance with a term over one year are not required to be approved by the CBIRC but simply to be registered (or filed) with the CBIRC. This new change is provided in the Notice of the CBIRC on Issues Concerning Further Strengthening and Improving the Supervision of Insurance Products of Property Insurance Companies which was released on 19 February 2020.88 (b) Amendments to insurance clauses and premium rates89 Where a property insurance company amends any insurance liability in the insurance clauses filed with the CBIRC or adjusts any premium rate beyond the extent of rate filed with the CBIRC, it shall file the insurance clauses or premium rate anew with the CBIRC. In particular, amending any insurance liability means the increase or decrease of the liabilities of the insurer, the exemption of the insurer from any liability, the increase or decrease of the liabilities of the proposer or the insured or the rights of the beneficiary, the exemption of the proposer or the insured from any liability, or the waiver of any right of the beneficiary, including but not limited to amending any insurance liability, liability exemption through insurance clauses, or insurance documentation. With respect to the insurance clauses on the assumption of insurance liability, in principle, the corresponding premium rate shall not be zero. (c) Submissions of materials for amending insurance clauses and premium rates90 Where a property insurance company amends any insurance liability in its insurance clauses already filed, it shall submit a comparison table of the insurance clauses of the property insurance company before and after the amendment, in addition to the materials as set out in article 14 of the Measures 2010. Where a property insurance company amends any premium rate already filed, it shall submit a statement on adjusting the premium rate, including the reasons for adjustment, the range of adjustment to the original rate, and an actuarial explanation on the rate in addition to the materials as set out in article 14 of the Measures 2010. (d) Summary analysis report on product business operations91 A property insurance company shall, prior to the end of January each year, fill out a summary business statement on the insurance clauses and premium rates of the property insurance company, including the insurance clauses and premium rates used in all its business operations in the previous year and the insurance clauses 88 Yin Bao Jian Ban Fa No,17 [2020] (see accessed on 9 September 2020). 89 The Notice of the CIRC on the Relevant Issues concerning the Implementation of the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies 2010, s.2. 90 Ibid., s.3. 91 Ibid., s.5.

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and premium rates repealed in the previous year, and submit it to the CBIRC along with a summary analysis report on the development of insurance clauses and premium rates and business operations. (e) Strengthening the management of the product development process, the person responsible for legal affairs, and the person responsible for actuarial affairs92 A property insurance company shall strengthen the management and control system of the product development process and establish the internal management and control system of product developers, the person responsible for legal affairs, and the person responsible for actuarial affairs. A property insurance company shall, according to the provisions of the Measures 2010, strengthen the management of the person responsible for legal affairs and the person responsible for actuarial affairs, and make a adjustment in a timely manner of the person responsible for legal affairs or the person responsible for actuarial affairs if he or she does not meet the prescribed conditions any more. Where a property insurance company applies for verification and approval of the person responsible for legal affairs, it shall submit the materials as set out in article 22 of the Measures 2010 in both paper and electronic forms. (f) Promoting the plain language and standardization of insurance clauses and premium rates and establishing a basic data platform and a standard product database of the insurance sector93 The Insurance Association of China shall, according to the requirements of the Measures 2010, actively promote the use of plain language and standardization of insurance clauses and premium rates and the establishment of a basic data platform and a standard product database of the insurance sector that puts forward specific work targets and arrangements. (g) Submission formats and requirements94 A property insurance company shall fill out and submit forms according to the Measures 2010 and the forms, including (1) the comparison table of the insurance clauses of a property insurance company before and after amendment; (2) Summary business statement on the insurance clauses and rates of the property insurance company; (3) Form for the examination and approval of insurance clauses and premium rate of the property insurance company; (4) Filing form for the insurance clauses and premium rate of the property insurance company; (5) Application form for the examination of qualification of the person responsible for legal affairs of the property insurance company; (6) Table of abbreviated names of the property insurance company, abbreviated names of insurance products by category, and abbreviated names of regions, text formats, and instructions as set out in the

92 Ibid., s.6. 93 Ibid., s.7. 94 Ibid., s.8.

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Notice 2010. For any matter requiring a special explanation, such an explanation may be given on additional pages. The contact person and contact methods shall be indicated on the materials submitted. The electronic version of materials may be submitted in the manner of mailing of a magnetic disk or compact disc or e-mail. Where the electronic version is directly sent in the manner of e-mail, an indication shall be given on the materials submitted. The administration of clauses and rates of compulsory traffic accident liability insurance for motor vehicles are governed by the Notice 2010, except as otherwise provided for by a law or administrative regulation or the CBIRC. 9.6 Regulation of insurance clauses and premium rates of commercial motor vehicle insurance Motor vehicle insurance accounts for a large portion of the property insurance in terms of premium income in China. In 2019, the total number of motor vehicles insured reached 260 million vehicles, and premium income was US$818.9 billion, accounting for 63% of property insurance premiums.95 The administration of insurance clauses and premium rates of compulsory traffic accident liability insurance for motor vehicles is governed by the Notice of the CIRC on the Relevant Issues concerning the Implementation of the Measures for the Administration of Insurance Clauses and Premium Rates of Property Insurance Companies 2010,96 while for commercial (non-compulsory) motor vehicle insurance, the CIRC/CBIRC has formulated seven pieces of regulations: (1) The Notice of the CIRC on Strengthening the Administration of the Clauses and Premium Rates for Commercial Motor Vehicle Insurance which was issued and implemented on 23 February 2012.97 (2) Opinions of the CIRC on Deepening the Reform of the Administrative System of Commercial Motor Vehicle Insurance Clauses and Premium Rates which was issued and implemented on 3 February 2015.98 (3) Notice of the CIRC on Issuing the Work Plan for Deepening the Pilot System Reform of the Administration of the Commercial Motor Vehicle Insurance Clauses and Premium Rates which was issued and implemented on 20 March 2015.99 (4) Notice of the CIRC on Issues concerning Promoting Nationwide the Pilot Reform of the Administration System for Commercial Motor Vehicle 95 See the website of the CBIRC accessed on 13 October 2020. 96 Bao Jian Fa No. 43 [2010]. 97 Bao Jian Fa No. 16 [2012] (see accessed on 13 October 2020). 98 Bao Jian Fa No. 18 [2015] (see accessed on 8 July 2020). 99 Bao Jian Chan Xian No. 24 [2015] (see accessed on 13 October 2020).

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Insurance Clauses and Premium Rates which was issued and implemented on 27 June 2016.100 (5) Notice of the CIRC on Issues concerning Adjusting and Managing Premium Rates for Commercial Motor Vehicle Insurance which was issued and implemented on 8 June 2017.101 (6) Notice of the General Office of the CBIRC on Regulatory Requirements for Commercial Motor Vehicle Insurance Rates which was issued and implemented on 29 June 2018.102 (7) The Notice of the CBIRC on Issuing the Guiding Opinions on the Implementation of Comprehensive Reform of Motor Vehicle Insurance on 2 September 2020.103 9.6.1 Strengthening the administration of the clauses and premium rates for commercial motor vehicle insurance In order to further regulate the market order of commercial motor vehicle insurance, improve the regulatory system for commercial vehicle insurance, and follow the principle of protecting public interests and preventing unfair competition, and in accordance with the Insurance Law, the Measures for the Administration of Insurance Clauses and Premium Rates of Property Insurance Companies 2010 and other relevant laws, regulations and provisions, the CIRC formulated the Notice of the CIRC on Strengthening the Administration of the Clauses and Premium Rates for Commercial Motor Vehicle Insurance 2012.104 (a) Principles for determining commercial vehicle insurance clauses and premium rates105 (1) Insurance companies shall determine the commercial vehicle insurance clauses and premium rates according to laws, administrative regulations and the provisions of the CBIRC. Insurance companies shall assume corresponding legal responsibility for the commercial vehicle insurance clauses and premium rates they set. Insurance companies shall submit the commercial vehicle insurance clauses and premium rates they set to the CBIRC for approval. Insurance companies shall strictly implement the commercial vehicle insurance clauses and premium rates approved by the CBIRC. 100 Bao Jian Chan Xian No. 113 [2016] (see accessed on 13 October 2020. 101 Bao Jian Chan Xian No. 145 [2017] (see accessed on 13 October 2020. 102 Yin Bao Jian Ban Fa No. 57 [2018] (see accessed on 13 October 2020. 103 It came into force on 19 September 2020 (see accessed on 13 October 2020. 104 Bao Jian Fa No. 16 [2012]. 105 The Notice of the CIRC on Strengthening the Administration of the Clauses and Premium Rates for Commercial Motor Vehicle Insurance 2012, s.1.

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(2) When determining commercial vehicle insurance clauses and premium rates, insurance companies shall follow the principles of compliance, impartiality, reasonability, honesty, credibility and pellucidity. When determining commercial vehicle insurance clauses and premium rates, insurance companies shall follow the principle of sufficiency and the principle of fairness, and ensure that insurance clauses and premium rates are commensurate with the insurance liability and are able to cover the risk transfer cost, and may not endanger the financial soundness and solvency of insurance companies or damage the legal rights and interests of policyholders and the insured. (3) The Insurance Association of China (IAC) shall organize professionals to research and develop the Model Clauses of Commercial Motor Vehicle Insurance of the Insurance Association of China (hereinafter, Model Clauses), the referential depreciation factors database, and the vehicle models database for reference and use by the insurance companies. The IAC shall gather, collect statistics of and analyze data on the sector-wide commercial vehicle insurance business, and calculate the referential net loss ratio for the commercial vehicle insurance business sector at least once every two years for reference and use by the insurance companies. The IAC shall report the Model Clauses and the referential net loss ratio for the insurance sector to the CBIRC. (4) Insurance companies shall refer to or use the Model Clauses to determine their own commercial vehicle insurance clauses, and use the referential net loss ratio for the insurance sector to determine their own commercial vehicle insurance premium rates. Insurance companies, whose composite cost rate is lower than average in the insurance sector and lower than 100% for two consecutive accounting years, may duly increase the insurance liability for commercial vehicle insurance clauses on the basis of the Model Clauses when determining their commercial vehicle insurance clauses and premium rates according to the referential net loss ratio for the insurance sector. When using the Model Clauses and the referential net loss ratio for the insurance sector, insurance companies shall, during the course of implementation, report problems they encounter to the IAC. The IAC shall organize member entities to assess the problems, make demonstration and modifications, and report the relevant information to the CBIRC. (5) Insurance companies, which satisfy the following conditions, may determine their commercial vehicle insurance clauses and premium rates on the basis of their own data: (i) their governance structure is sound, their internal control system is healthy and has been effectively implemented, their data is sufficient and authentic, and they have been operating the commercial vehicle insurance business for three full fiscal years or more; (ii) their audited composite cost rate is lower than 100% in the last two consecutive fiscal years; (iii) their audited solvency adequacy ratio is higher than 150% in the last two consecutive fiscal years; (iv) they have commercial insurance underwriting data for 300,000 or more motor vehicles; (v) they have a 375

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special team to develop commercial vehicle insurance products, have management personnel who are familiar with laws and vehicle insurance pricing practices, and have established sound operation flows and information systems; and (vi) other conditions as set forth by the CBIRC. (6) Insurance companies, which determine their commercial vehicle insurance clauses on the basis of their own data, shall extensively and publicly solicit opinions and organize experts to conduct appraisal on the clauses in light of the actual needs. (b) Requirements on the determination and implementation of commercial vehicle insurance clauses106 (1) Parties to the commercial vehicle insurance contracts shall enjoy equal legal status. Neither party is allowed to impose its will on the other party. Commercial vehicle insurance contracts shall be concluded on the basis of free will and consensus, and determine the rights and obligations of all parties according to the principle of equality. (2) Commercial vehicle insurance clauses shall be integrated in content, clear in format, and easy to read. When concluding commercial vehicle insurance contracts, the insurance companies shall provide, to their policyholders, insurance policies with the insurance clauses attached. (3) Insurance companies shall, on the most conspicuous part of the first page of the insurance policy, include the note “Special Reminder on Liability Exemption” in red and in font size 4 or above in order to remind policyholders to pay attention to the clauses that exempt the liability of insurance companies. The content of such clauses shall be clearly explained to the policyholders in writing or orally by using straightforward words. Insurance companies shall remind its policyholders to write under the “Special Reminder on Liability Exemption” that “Upon explanation by the insurer, I understand the content of the liability exemption clauses,” and affix their signature. (4) Insurance companies shall note at a conspicuous place on the insurance policy that “In order to protect the legal rights and interests of policyholders, policyholders shall carefully read the insurance contract, particularly the liability exemption clauses, before signing it and prudentially select the insurance products. If there are any violations of the law or regulations in this insurance contract, this company will assume liability.” (5) Commercial vehicle insurance clauses shall cover: (i) insurance liability; (ii) liability exemption; (iii) method for determining the insured amount; and (iv) measures for the payment of insurance money. (6) Commercial vehicle insurance clauses shall satisfy the different insurance needs of its policyholders and the insured as much as possible according to the principle of risk control, clearly specifying responsibilities, and providing reasonable assurance. 106 Ibid., s.2.

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(7) Commercial vehicle insurance clauses shall list all clauses exempting the liability of insurance companies under the liability exemption section, and bring such clauses to policyholders’ attention by ways such as highlighting the clauses in bold. Commercial vehicle insurance clauses may not include clauses exempting obligations that the insurer should undertake, or increasing the liability of the policyholder or the insured, or excluding the rights that the policyholder or the insured is entitled to according to law. (8) Insurance companies and policyholders shall, according to the fair market value, determine the actual value of the insured motor vehicles upon negotiation. The insured amount shall also be determined by the insurance companies and policyholders upon negotiation. (9) Commercial vehicle insurance clauses shall, for purposes of preventing moral risks, saving social resources and stimulating the insured to prevent disasters and reduce losses, set appropriate deductibles and franchises according to the principles of clearly defining such clauses, fairly and reasonably determining the risk sharing proportion and not damaging the legal rights and interests of the insured. (10) Commercial vehicle insurance clauses may not require the insured to provide certificates and materials irrelevant to the determination of the nature, cause and degree of damage of insurance accidents. (11) For insurance accidents caused by damages to the insured motor vehicles due to third party, insurance companies may, from the date on which they compensate the insured, exercise the right of subrogation against such a third party for compensation within the scope of compensation. Insurance companies may not refuse to fulfil their insurance liability by waiving the right of subrogation. The IAC shall, in accordance with the principle of convenient settling of claims for the insured, develop guidelines for the claim settlement practices of insurance companies in light of the insurance liability prescribed by the commercial vehicle insurance clauses of insurance companies, and offer support in the relevant aspects. (12) Insurance companies shall strictly implement the commercial vehicle insurance clauses and premium rates approved by the CBIRC, and may not make any substantial modification to such clauses and premium rates by endorsement or special agreement. (c) Requirements on the determination and implementation of commercial vehicle insurance premium rates107 (1) When insurance companies determine the commercial vehicle insurance premium rates, generally, the pre-set surcharge rates may not exceed 25%.108

107 Ibid., s.3. 108 It was 35% until 18 September 2020. This cap is now 25% as stipulated in the Notice of the CBIRC on Issuing the Guiding Opinions on the Implementation of Comprehensive Reform of Motor Vehicle Insurance 2020.

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Insurance companies may set different surcharge rates for different marketing channels such as the telephone, the Internet and outlets. (2) Floating factors of commercial vehicle insurance premium rates shall be reasonably set, clarified and standardized in light of the risk status of motor vehicles and drivers. (3) Insurance companies shall assess and verify the reasonability of commercial vehicle insurance premium rates every year according to historical and empirical data, operating situations, preparation of reserves and other actual situations. If there is any significant difference between the average composite loss ratio and the pre-set loss ratio of the commercial vehicle insurance business in the last two consecutive fiscal years, insurance companies shall submit reports to the CBIRC to explain the reasons. (d) Supervision and administration of commercial vehicle insurance clauses and premium rates109 (1) In order to file commercial vehicle insurance clauses and premium rates with the CBIRC, insurance companies shall submit the following materials in addition to those prescribed in the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies: (i) the difference between the insurance companies’ commercial vehicle insurance clauses and the IAC’s Model Clauses, and detailed reasons for such difference; (ii) commercial vehicle insurance premium rates, including expected compensation expenses (including direct compensation expenses, direct claim settlement expenses and indirect claim settlement expenses), business tax and the surcharges thereof, commission, service charges, operation and management cost, profit, and risk surcharge; and (iii) other materials as set forth by the CBIRC. (2) In order to file commercial vehicle insurance clauses and premium rates determined on the basis of their own data, insurance companies shall submit the following materials in addition to those prescribed in the preceding paragraph: (i) the difference between the net loss ratio for commercial vehicle insurance as determined on the basis of their own data and the referential net loss ratio for the insurance sector; (ii) the operation information of the commercial vehicle insurance business in the last three fiscal years, including the premium income, compensation, expenses, underwriting profits, receivable premiums and reinsurance arrangements; (iii) a feasibility study report on the commercial vehicle insurance business made on the basis of their own data, including market analysis, product positioning, business strategy, development planning, and market forecasting; (iv) materials proving that such companies satisfy the conditions for determining 109 The Notice of the CIRC on Strengthening the Administration of the Clauses and Premium Rates for Commercial Motor Vehicle Insurance 2012, s.4.

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insurance clauses and premium rates on the basis of their own data; and (v) other materials as set forth by the CBIRC. (3) If necessary, the CBIRC may check on the authenticity of the data involved in the determination of commercial vehicle insurance clauses and premium rates by insurance companies on the basis of their own data. (4) If the commercial vehicle insurance clauses and premium rates used by an insurance company violate any laws or administrative regulations or the following provisions, the CBIRC shall order the company to stop using them and to modify them within a certain time limit; if the circumstances are serious, the CBIRC may forbid the company to apply for approval of the new insurance clauses and premium rates within a certain time limit: (i) commercial vehicle insurance clauses and premium rates shall be wellstructured, accurate in wording, precise in expression and easy to understand; (ii) commercial vehicle insurance clauses and premium rates shall have all the elements, be impartial, and may not infringe upon the legal rights and interests of policyholders, the insured and beneficiaries, or public interests; (iii) insurance premium rates shall be scientifically and reasonably determined by the risk loss principle, and may not endanger the solvency of the insurance company or impede fair market competition; (iv) if the insurance premium rates are floating, the conditions for adjusting insurance premium rates shall be specified; and (v) other requirements as set forth by the Insurance Law, any other laws or administrative regulations, or by the CBIRC. In addition to the provisions of the preceding paragraph, if an insurance company which determines commercial vehicle insurance clauses and premium rates on the basis of its own data falls under any of the following circumstances, the CBIRC shall order it to stop using such clauses and premium rates and modify them within a certain time limit: (i) the audited solvency adequacy ratio of the company is lower than 150% in the last year; or (ii) the composite cost rate of the company is higher than 100% in two consecutive fiscal years. (5) If insurance companies fail to strictly implement the commercial vehicle insurance clauses or premium rates approved by the CBIRC, the CBIRC will pursue the liability of such companies and the relevant personnel. (6) Insurance companies shall file an annual commercial vehicle insurance report with the CBIRC before 30 June each year. Such a report shall include the use and implementation of commercial vehicle insurance clauses and premium rates, and the assessment and verification of whether the commercial vehicle insurance clauses and premium rates are reasonable. (7) Insurance companies shall strengthen their internal control over commercial vehicle insurance clauses and premium rates, establish internal control rules covering links such as the research and development of clauses and premium rates, examination, approval and filing, marketing and publicity, underwriting and claim settlement, IT system, and verification and modification, improve the internal control and supervision mechanisms so as to ensure the effective implementation of all systems, ensure the strict 379

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implementation of commercial vehicle insurance clauses and premium rates, and ensure the authenticity and integrity of premium rates data. 9.6.2 Deepening the reform of the administrative system of commercial motor vehicle insurance clauses and premium rates To further protect the lawful rights and interests of the proposers and the insureds, maintain the normal order of the property insurance market, and promote the sustainable and healthy development of the property insurance market, the CIRC issued the Opinions of the CIRC on Deepening the Reform of the Administrative System of Commercial Motor vehicle insurance Clauses and Premium Rates 2015.110 (a) Basic principles111 (1) Adhering to market orientation: A unified and open commercial motor vehicle insurance market system featuring orderly competition and effective supervision shall be built, a market-oriented mechanism for the formation of commercial motor vehicle insurance clauses and rates shall be established and improved, property insurance companies’ vigour and momentum for development and innovation shall be unleashed, property insurance companies shall be directed to conduct comprehensive, multilevel, and differentiated market competition in terms of, among others, brand, management, channels, price, and services of commercial motor vehicle insurance, and the property insurance sector’s capacity of accurately assessing the risks of subject matter, effectively managing and controlling operating cost and continuously improving service quality shall be enhanced. (2) Protecting the lawful rights and interests of insurance consumers: Insurance supervision shall be intensified, property insurance companies shall be overseen in fulfilling all obligations to consumers, conduct that infringes upon insurance consumers’ right to information, right to make their own choices, fair trading right, and other lawful rights and interests shall be seriously investigated and punished, and property insurance companies shall be directed to provide insurance consumers with more high quality commercial motor vehicle insurance products and services at fair prices. Insurance awareness education shall be enhanced, basic motor vehicle insurance knowledge shall be widely disseminated, insurance information disclosure shall be well regulated, the insurer’s explanation obligation shall be reinforced, and insurance consumers shall be assisted in selecting commercial motor vehicle insurance products and services in a scientific and rational manner. (3) Promoting reform in a positive and solid manner: Under the work guideline of making a comprehensive plan, implementing it by steps, conducting 110 Bao Jian Fa No. 18 [2015]. 111 Ibid., s.1(2).

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pilot programs, and extensively advancing reform, the timing, strength, and focus of all kinds of policies and measures shall be appropriate, and the relationship among reform, development, and stability shall be effectively handled so as to steadily promote reform measures and produce policy effects in an orderly manner. (b) Major objectives112 A scientific and rational administrative system of commercial motor vehicle insurance clauses and premium rates in line with Chinese situation shall be established and improved. Based on model industry clauses as the main body, which are supplemented by innovative clauses, a system of co-existence of standard and personalized commercial motor vehicle insurance clauses shall be established. Property insurance companies’ autonomy in the rating of commercial motor vehicle insurance shall be gradually enlarged, based on the law of large numbers and in a market-oriented manner. The supervision of commercial motor vehicle insurance clauses and rates shall be strengthened and improved by emphasizing dynamic supervision and centring on solvency supervision. (c) Establishing and improving the mechanism for the formation of commercial motor vehicle insurance clauses113 (1) Establishing the system of model industry clauses. The IAC shall be charged with developing and continuously enriching the model commercial motor vehicle insurance clause system. The coverage of model commercial auto insurance clauses shall be able to satisfy the public’s reasonable expectation, and the language of clauses shall be precise, standard, clear, and easy to understand. The IAC shall, according to the changes of policies and laws and the development of the insurance market, dynamically revise and improve model commercial motor vehicle insurance clauses in a timely manner, vigorously accelerate the standardization and popularization of insurance clauses, and continually enhance the adaptability of model commercial motor vehicle insurance clauses. (2) Establishing the mechanism for the formation of innovative clauses. Property insurance companies are encouraged to vigorously develop innovative commercial motor vehicle insurance clauses. Property insurance companies shall be directed to provide insurance consumers with diversified, personalized and differentiated commercial motor vehicle insurance coverage and services so as to satisfy the public’s insurance demand at different levels. The IAC is supported in setting up an expert assessment committee for innovative commercial motor vehicle insurance clauses and establishing a scientific, impartial, and objective innovative clause assessment mechanism. The establishment of an insurance product innovation protection mechanism shall be explored. 112 Ibid., s.1(3). 113 Ibid., s.2.

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(d) Establishing and improving the mechanism for the formation of commercial motor vehicle insurance rates114 (1) Establishing the mechanism for the formation and adjustment of the industry’s benchmark pure risk insurance premiums. The IAC shall, according to the requirements of the law of large numbers, establish the mechanism of the collection, measurement and adjustment of commercial motor vehicle insurance loss data in the property insurance sector, dynamically release the table of benchmark pure risk insurance premiums for commercial auto insurance to provide a reference for the scientific rating of commercial motor vehicle insurance by property insurance companies, prevent large deviations and risks in the rating of commercial motor vehicle insurance by property insurance companies, and improve the operations of commercial motor vehicle insurance in the property insurance sector in a more scientific, stable and standard manner. The IAC shall continuously promote the industry data accumulation and actuarial work, and gradually make the table of benchmark pure risk insurance premiums for commercial auto insurance more precise and adaptable. (2) Gradually expanding property insurance companies’ autonomy in rating. Property insurance companies shall be granted a certain degree of autonomy in the rating of commercial motor vehicle insurance, so that the market players scientifically calculate the benchmark additional insurance premiums based on their actual circumstances and reasonably determine the autonomous rating adjustment coefficient and adjustment standards. Property insurance companies shall be impelled to gradually enhance their business management efficiency and improve their risk pricing capacity, and be supported in reasonably translating their business management advantages into price and service advantages to promote better matching between commercial motor vehicle insurance rates and the operating cost and the risks of subject matters of property insurance companies and make the rating of commercial motor vehicle insurance rates in the property insurance sector more scientific, refined and specialized. Based on the development of the insurance market and the extent of maturity of the insurance market, property insurance companies’ autonomy in the rating of commercial motor vehicle insurance shall be gradually enlarged so as to finally form a highly market-oriented mechanism for the formation of commercial motor vehicle insurance rates. (e) Enhancing and improving the supervision of commercial motor vehicle insurance clauses and premium rates115 (1) Establishing a dynamic mechanism for the supervision of clauses and rates. The daily monitoring of the drafting and use of commercial motor vehicle 114 Ibid., s.3. 115 Ibid., s.4.

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insurance clauses and rates of property insurance companies shall be enhanced. Property insurance companies which are found in violation of laws and regulations shall be ordered to cease the use of relevant insurance clauses and rates and make revision within a prescribed time limit. If the circumstances are serious, they may be prohibited from declaring new commercial motor vehicle insurance clauses and rates during a certain period. On the basis of improving the separate accounting management system of commercial motor vehicle insurance, a retrospective analysis mechanism for the rating of commercial motor vehicle insurance and use of rates of property insurance companies shall be established. The rationality of actuarial assumptions, the compliance of liability provisioning and the authenticity of financial business data in the rating of commercial motor vehicle insurance and use of rates shall be verified in a timely manner, and thorough investigation shall be conducted on hidden risks caused by unscientific, unfair and unreasonable rating of commercial motor vehicle insurance so as to effectively prevent the damage to public interest by excessively high commercial motor vehicle insurance rates or the unfair competition and disturbance of the normal business order of the commercial auto insurance market caused by excessively low insurance rates. (2) Improving solvency supervision rules. The building of solvency supervision rules shall continue to be enhanced, the solvency supervision system shall be improved, property insurance companies shall be impelled to establish and improve a comprehensive risk management system, and property insurance companies shall be directed to enhance solvency through regulating the operations of commercial auto insurance and improving the underwriting benefits of commercial motor vehicle insurance.The execution of solvency regulatory rules shall be enhanced, the rigid restraint of solvency shall be reinforced, and the bottom line of non-occurrence of systemic and regional risks shall be strictly guarded. (f) Effectively organizing and implementing reform116 (1) Strengthening leadership. Deepening the reform of the administrative system of commercial motor vehicle insurance clauses and rates is very import and extensive, and attracts wide public attention. Time is of the essence, and the tasks are arduous. Insurance regulators, insurance industry associations, and property insurance companies shall, in a timely manner, form the leading groups and work teams for the reform of the administrative system of commercial motor vehicle insurance clauses and premium rates headed by the primary persons in charge and attended by all relevant departments, make implementation plans, and carry out various measures to ensure the smooth progress of the reform.

116 Ibid., s.5.

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(2) Preparing contingency plans to ensure steady transition. Property insurance companies shall, according to their own capacities, prudently make their development plans for commercial motor vehicle insurance, appropriately handle the transition between old and new commercial motor vehicle insurance products, vigorously improve underwriting and claim settlement services, and effectively prevent pricing risks and solvency risks. Insurance regulators, insurance industry associations, and property insurance companies shall make good preparations before the initiation of the reform of the administrative system of commercial motor vehicle insurance clauses and premium rates, pay attention to the problems and hidden risks in the implementation of the reform, and make emergency response plans so as to promote the steady development of the property insurance sector. (3) Enhancing publicity and raising awareness. Insurance regulators, insurance industry associations, and property insurance companies shall organize the publicity of policies for the reform of the administrative system of commercial motor vehicle insurance clauses and premium rates, focus on the interpretation and explanation of commercial motor vehicle insurance clauses and rates, widely disseminate insurance knowledge, and raise insurance awareness so as to create a sound environment for the reform of the administrative system of commercial motor vehicle insurance clauses and rates. 9.6.3 The plan for pilot reform on commercial motor vehicle insurance clauses and premium rate In accordance with the requirements of the Opinions of the CIRC on Deepening the System Reform of the Administration of the Commercial Motor Vehicle Insurance Clauses and Premium Rates 2015, the CIRC released the Work Plan for Deepening the Pilot System Reform of the Administration of the Commercial Motor Vehicle Insurance Clauses and Premium Rates 2015 (hereinafter, the Work Plan),117 so as to ensure the steady promotion of the reform on the commercial motor vehicle insurance clauses and premium rates. (a) The objectives of the Work Plan118 The main objectives of the Work Plan is to implement the Opinions of the CIRC on Deepening the System Reform of the Administration of the Commercial Motor Vehicle Insurance Clauses and Premium Rates, to clarify the division of tasks, to specify the working responsibilities, and to determine the pilot areas and reform steps so as to ensure smooth progress of the commercial motor vehicle insurance clauses and premium rates administration system reform.

117 Bao Jian Chan Xian No. 24 [2015]. 118 The Work Plan for Deepening the Pilot System Reform of the Administration of the Commercial Motor Vehicle Insurance Clauses and Premium Rates 2015, s.1.

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(b) Work tasks119 The Plan set out tasks for the Insurance Association of China and for the property insurance companies, respectively. (1) THE TASKS OF INSURANCE ASSOCIATION OF CHINA (IAC) The first task of IAC is to formulate the industry model clauses for commercial motor vehicle insurance. (i) Modifying the model clauses for commercial motor vehicle insurance. According to the changes in the social and economic environment and the needs of the public, the Model Clauses of the version of 2012 shall be further revised and improved; the model clauses structure shall be straightened out; the language which easily triggers disputes shall be modified; the scope of insurance coverage shall be expanded; and the standardization and popularization level of the industry model clauses shall be improved. (ii) Improving the model clauses system of commercial motor vehicle insurance. The security level of commercial motor vehicle insurance shall be enriched and the model clauses of commercial motor vehicle insurance with different scope of insurance coverage shall be further increased on the basis of comprehensive model clauses so as to meet the diversified insurance needs of the public. (iii) Improving the supporting documents requirements for commercial motor vehicle insurance.The reference samples of the supporting insurance application forms, specifications on exception from liability, insurance policies, insurance cards, and other documents of model clauses for commercial motor vehicle insurance shall be drawn up so as to improve the degree of standardization and normalization of insurance underwriting. (iv) Establishing a library of typical commercial motor vehicle insurance cases. According to the problems revealed by consumers in a concentrated manner in lawsuits and complaints of commercial motor vehicle insurance, the model clauses shall be revised and improved in a dynamic manner. The second task is to draw up the trade standards of insurance premiums for commercial motor vehicle insurance. According to the non-life insurance actuarial principles, and the principle of insurance premium rate matching with the risks and operating costs of subject matter, the standard formula for the determination of insurance premium rates for commercial motor vehicle insurance is: Insurance premium = standard insurance premium × rate adjustment coefficient. Standard insurance premium = standard pure risk insurance premium / (1- additional expense ratio). The IAC shall organize forces of the insurance sector, promote the construction of a database of vehicle model standards and other infrastructures, establish a measurement, issuance and adjustment mechanism for standard pure risk insurance premiums of commercial motor vehicle insurance, main rates adjustment

119 Ibid., s.2.

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coefficients, and other reference insurance premium standards of the insurance sector, and provide support in improving the scientific, rational and accurate determination of rates in the sector. (i) The calculation of standard pure risk insurance premiums of commercial motor vehicle insurance shall accurately reflect the level of average indemnity payment to insured motor vehicles from region, vehicle model, service life, use nature, and other different dimensions. (ii) The relations between the insurance premiums of commercial motor vehicle insurance and the insurance indemnity records of the previous years, traffic violation records, and other important influence factors shall be studied, and the No Claim Discount coefficient, traffic violation coefficient, and other rates adjustment reference schemes shall be formulated. (iii) Dynamic adjustments shall be made to the reference insurance premium standards for commercial motor vehicle insurance according to the operational data of the entire commercial motor vehicle insurance sector. The third task is to establish the evaluation and protection mechanism for the innovative clauses of commercial motor vehicle insurance. The IAC shall establish an innovative clause evaluation expert database for commercial motor vehicle insurance, set up an innovative clause audit committee for commercial motor vehicle insurance, establish a scientific and reasonable innovative clause evaluation mechanism for commercial motor vehicle insurance, and conduct industry evaluation for the innovation, legality, and rationality of clauses independently developed by property insurance companies. It shall explore the establishment of an innovative clause protection mechanism for commercial motor vehicle insurance and protect the innovative products of commercial motor vehicle insurance for a certain period. (2) THE TASKS OF PROPERTY INSURANCE COMPANIES The first task of insurance companies is to independently determine the clauses of commercial motor vehicle insurance. Property insurance companies may choose the industry model clauses of commercial motor vehicle insurance or independently develop innovative clauses for commercial motor vehicle insurance. A same property insurance company may use the model clauses and innovative clauses concurrently. The second task is to scientifically determine the commercial motor vehicle insurance premium rates. Property insurance companies shall, based on the non-life insurance actuarial principle, calculate their standard insurance premiums of commercial motor vehicle insurance in accordance with the standard pure risk insurance premiums and additional rates. They shall also formulate scientific and reasonable rate adjustment coefficient tables, prepare specific service regulations of rate adjustment coefficient according to the difference between the risk level of the subject matters they underwrite and the industry average risk level and the difference between the operating costs of individual business and their average operating costs, adjust the 386

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standard rates through the rate adjustment coefficients, and reasonably determine the actual rates for insured motor vehicles. (i) Independently calculate the standard additional rates for commercial motor vehicle insurance. Property insurance companies shall calculate their additional premium rates of commercial motor vehicle insurance according to their actual expenses in the most recent three years. They may calculate their additional premium rates of commercial motor vehicle insurance based on the periodical market management strategies or by reference to the average expenses of the entire insurance industry. (ii) Property insurance companies choosing to use the model clauses of commercial motor vehicle insurance may independently formulate “underwriting coefficient” and “channel coefficient” rates adjustment schemes respectively within the scope of [−15%, + 15%]. The CBIRC shall, based on the level of development of the insurance market, continuously expand the decision-making power of property insurance companies in rate adjustment. Those beyond the independent adjustment scope as specified by the CIRC shall separately report to the CBIRC for approval. (iii) After determining the commercial motor vehicle insurance premium rates schemes, property insurance companies shall evaluate their vehicle insurance premium adequacy and pricing risks, and measure the impact of such schemes on their composite cost rate and solvency. The third task is to submit the commercial motor vehicle insurance clauses and premium rates to authorities at a higher level for approval according to the law Property insurance companies shall, in accordance with the requirements of the Insurance Law, the Regulations for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies, and relevant laws and regulations, draw up the commercial motor vehicle insurance clauses and premium rates under the principles of fairness, reasonableness, scientificity, and prudence, and completely eradicate damage to the lawful rights and interests of insurance consumers and disruption of the reasonable order of the insurance market by frequent adjustment. Except for major deviation between the actuarial expectation and the reality of operation, the frequency of property insurance companies’ adjustment to the commercial motor vehicle insurance clauses and premium rates shall, in principle, not be higher than once a half year. Property insurance companies shall submit the commercial motor vehicle insurance clauses and premium rates intended to be used to the CBIRC for examination and verification. To apply for examination and verification of clauses and insurance premium rates, a property insurance company shall submit the following materials: (i) The application document; (ii) The approval form in duplicate; (iii) The clauses for commercial motor vehicle insurance. A property insurance company that opts to use the model clauses for commercial motor vehicle insurance shall explain in the application document and does not have to submit the full text of the model clauses; 387

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(iv) Commercial motor vehicle insurance premium rates and the actuarial report on premium rates signed by the person responsible for actuarial affairs; (v) Explanation of the commercial motor vehicle insurance clauses and premium rates, including analysis on the main features, the market risks and operational risks of the insurance clauses and premium rates; and a property insurance company choosing to use the model clauses of commercial motor vehicle insurance are not required to submit relevant specific analysis. (vi) A letter of declaration of the person responsible for actuarial affairs and a letter of declaration of the person responsible for legal affairs. (vii) A property insurance company independently developing innovative clauses for commercial motor vehicle insurance shall also submit the clauses innovation evaluation report issued by the IAC and provide contrast explanation for the difference between the innovative clauses and the model clauses, in addition to the aforesaid materials as specified in items (i) to (vi). The fourth task is to establish a monitoring adjustment mechanism for the commercial motor vehicle insurance clauses and premium rates. Property insurance companies shall establish a sound commercial motor vehicle insurance premium rates adjustment mechanism to dynamically monitor and analyze the degree of deviation between the actuarial assumption and the market reality. In case of significant deviation of relevant property insurance institution’s actual composite loss ratio, composite expense rates, composite cost rate, and other operating indicators for motor vehicle insurance at the later stage in the pilot areas from the expected composite loss ratio, expected composite expense rates, expected composite cost rate, and other indicators in the motor vehicle insurance premium rates actuarial report at an earlier stage, especially when the rising range of composite cost rate for motor vehicle insurance exceeds the average year-on-year variation range (the absolute value) of the property insurance institution’s composite cost rate during the corresponding period in the previous three years, the commercial motor vehicle insurance premium rates shall be adjusted in a timely manner and re-submitted to the CBIRC for approval. (c) Work procedures120 (1) PILOT PREPARATION STAGE (i) The IAC and the property insurance companies shall, according to the unified arrangements of the CBIRC, respectively set up relevant working groups, draw up their specific work plans for the reform of commercial motor vehicle insurance, specify the tasks and fulfil the responsibilities. (ii) The IAC shall formulate and issue the model clauses, supporting documents, and insurance premium standards for commercial motor vehicle insurance. Property insurance companies shall employ the model clauses

120 Ibid., s.3.

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or develop their own innovative clauses, and determine their own commercial motor vehicle insurance premium rates. (iii) Property insurance companies shall carry out business personnel training, business process reformation, information system debugging, printing of business documents, and so on in order to ensure the smooth and steady provision of commercial motor vehicle insurance underwriting and claim settlement services to clients. (2) PILOT IMPLEMENTATION STAGE Heilongjiang, Shandong, Qingdao, Guangxi, Shaanxi, and Chongqing are the six pilot areas for the reform of commercial motor vehicle insurance. (i) From 1 April 2015, property insurance companies engaged in commercial motor vehicle insurance business may, in accordance with the requirements of the Work Plan, declare the commercial motor vehicle insurance clauses and premium rates to the CBIRC and implement relevant regulatory provisions. (ii) The CBIRC may organize on-site checks on the property insurance institutions in the pilot areas one by one. The contents to be checked shall include whether institution building, process reformation, system debugging, personnel training, and other aspects satisfy the relevant requirements of the pilot reform. Companies failing to pass on-site inspections shall be ordered to make rectification within a time limit until the requirements are satisfied. (iii) Upon approval of the CBIRC, property insurance institutions in pilot areas may use new commercial motor vehicle insurance clauses and premium rates. The original commercial motor vehicle insurance clauses and premium rates shall be disused. (3) STAGE OF PILOTING AND PROMOTION The pilot reform experiences of commercial motor vehicle insurance shall be summarized. The reform program of commercial motor vehicle insurance shall be modified, improved, and promoted in due time. (d) Supervision and management121 (1) THE SUPERVISION OF THE CBIRC (i) Strengthening the supervision and management of the formulation of the commercial motor vehicle insurance clauses and premium rates by property insurance companies. A retrospective analysis shall be conducted on commercial motor vehicle insurance premium rates of each property insurance company in the pilot areas, at a minimum, once a half year. In the case of significant deviation of relevant property insurance institution’s actual composite loss ratio, composite expense rates, composite cost rate, and

121 Ibid., s.4.

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other operating indicators for motor vehicle insurance at the later stage from the expected composite loss ratio, expected composite expense rates, expected composite cost rate, and other indicators in the motor vehicle insurance premium rates actuarial report at an earlier stage, especially when the rise of composite cost rate for motor vehicle insurance exceeds the average year-on-year variation range (the absolute value) of the property insurance institution’s composite cost rate during the corresponding period in the previous three years, and no application for adjustment has been actively filed to the CBIRC, the insurance regulatory authority shall order disuse and rectification within a time limit. In case of gross violation, declaration of new commercial motor vehicle insurance premium rates shall be prohibited within a time limit. (ii) Strengthening the supervision and management of the use of the commercial motor vehicle insurance clauses and premium rates by property insurance companies. Off-site and on-site inspections shall be intensified. Companies failing to apply for approval of commercial motor vehicle insurance premium rates or use the commercial motor vehicle insurance premium insurance approved in accordance with the provisions shall be severely investigated and punished according to the law. (iii) Strengthening the supervision and management of solvency of property insurance companies. Rigid constraints of solvency shall be strengthened. Property insurance companies with inadequate solvency shall be listed as key regulatory targets which shall be subject to corresponding regulatory measures. (2) THE SUPERVISION OF THE LOCAL OFFICES OF CBIRC (i) Local offices of the CBIRC shall provide guidance, supervision, and inspection to the property insurance institutions for the reform of commercial motor vehicle insurance and report the relevant circumstances to the CBIRC. (ii) Local offices of the CBIRC shall continuously carry out off-site supervision and management. They shall pay close attention to and conduct follow-up analysis on the development of the property insurance market within their jurisdictions, the enforcement of the commercial motor vehicle insurance clauses and premium rates, and claims settlement services and the competition order; and calculate the degree of deviation of the relevant regulatory indicators of each property insurance institution from the overall level of the local market. Off-site supervision and management shall focus on: Commercial motor vehicle insurance claims settlement service quality, litigation rate, complaint rate and other indicators, and their changes. The property insurance institutions whose motor vehicle insurance composite cost rates are significantly higher than the average rate of the local market and growth rates of income from original insurance premium of motor vehicle insurance outperform the average rate of the local market after the reform is launched. 390

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The property insurance institutions whose composite cost rates of motor vehicle insurance grow substantially on a year-on-year or sequential basis, and the growth rates of income from the original motor vehicle insurance premium increase on a year-on-year or sequential basis. (iii) On-site inspections shall be intensified. Key targets of on-site inspections shall be selected according to the analysis results of off-site supervision and management, to curb acts of commercial motor vehicle insurance violating laws and regulations and prevent unfair competition. On-site inspections shall focus on the following acts: Failure to apply for approval of commercial motor vehicle insurance clauses and premium rates as required; Failure to use the commercial motor vehicle insurance clauses and premium rates approved as required; Failure to fulfil the reminding and disclosure obligations for the clauses and insurance premium rates; failure to specifically explain the difference between the insurance coverage scopes of different types of clauses, simply comparing the additional expense ratio, the individual expense floating coefficient, and other rates components, and using full insurance and entire indemnity, and other incomplete, inaccurate, and false concepts to mislead consumers in purchasing insurance; Signatures on the insurance application form, notification, and other materials on behalf of the insurance applicant; Carrying out unfair competition through false advertisement, false publicity, defaming business competitors, giving or promising to give other benefits other than insurance contracts to the proposers or the insureds; Selling commercial motor vehicle insurance at below-cost rate for the purpose of squeezing out competitors; Providing untrue financial business data of commercial motor vehicle insurance; and Deteriorating the commercial motor vehicle insurance claims settlement service quality, as well as delaying in the payment of or underpaying indemnities, and refusing to pay indemnities without a justification. (e) Work requirements122 (1) UNIFYING UNDERSTANDING AND STRENGTHENING LEADERSHIP Deepening the reform of commercial motor vehicle insurance is an important work as required in the Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry and a major decision of the State Council for promoting the reform and innovation of the insurance sector and comprehensively raising the overall development level of the sector. All entities shall set up commercial motor vehicle insurance clauses and premium rates management system leading group and a working group led by the leading principal 122 The Work Plan for Deepening the Pilot System Reform of the Administration of the Commercial Motor Vehicle Insurance Clauses and Premium Rates 2015, s.5.

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and with the competent departments involved for scientific decision-making and active implementation so as to ensure the smooth progress of the pilot reform. (2) SERIOUSLY MAKING DEPLOYMENT AND PROMOTING IN AN ORDERLY MANNER All entities shall, in accordance with the Opinions of the CIRC on Deepening the System Reform of the Administration of the Commercial Motor Vehicle Insurance Clauses and Premium Rates 2015 and the requirements of this Plan, reasonably promote the pilot reform in a selective and step-by-step manner, in light of the reality of the region and the system. Property insurance companies shall carefully organize, reasonably arrange, and rally the able forces of the legal, actuarial, business, financial, information, customer service and other relevant departments, set up working groups, specify division of duties, fully consider the possible risks and problems in the implementation of the reform, prudently formulate instructive, effective, and manoeuvrable reform implementation plans and emergency plans, and effectively prevent pricing risks, solvency risks and other operation management risks. (3) SUMMING UP EXPERIENCES AND IMPROVING POLICIES All entities shall organize the publicity and guidance of policies on the reform of commercial motor vehicle insurance, effectively interpret the reform of commercial motor vehicle insurance in the pilot areas, publicize insurance knowledge, and improve consumers’ awareness of insurance so as to create a favourable environment for the reform. All entities shall, based on the overall deployment of the reform of commercial motor vehicle insurance, conduct follow-up evaluation, research, and analysis on the effects of the pilot reform, make an in-depth analysis of the typical cases and problems, seriously summarize the sound experiences and practices during the pilot process, and actively put forward suggestions of improving the measures for the reform of the commercial motor vehicle insurance so as to lay a foundation for the comprehensive implementation of the reform of commercial motor vehicle insurance. 9.6.4 Promoting the pilot reform on commercial motor vehicle insurance clauses and premium rates on a nationwide scale From 1 June 2015, the pilot reform on commercial motor vehicle insurance clauses and premium rates was carried out in 18 regions and positive results had been achieved. Upon deliberation, the CIRC decided to promote the pilot reform on commercial motor vehicle insurance on a nationwide scale by releasing the Notice of the CIRC on Issues concerning Promoting Nationwide the Pilot Reform of the Administration System for Commercial Motor Vehicle Insurance Clauses and Premium Rates 2016.123 By 1 July 2016, all property insurance companies should stop the use of former commercial motor vehicle insurance clauses and premium rates in the regions 123 Bao Jian Chan Xian No. 113 [2016].

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under the jurisdiction of the 18 local CBIRC offices in Beijing, Hebei, Shanxi, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Jiangxi, Hainan, Guizhou, Yunnan, Tibet, Gansu, Shenzhen, Dalian, Ningbo and Xiamen, and started the use of the new commercial motor vehicle insurance clauses and premium rates approved by the CBIRC.124 All property insurance companies shall establish and improve the monitoring and adjustment mechanisms for the commercial motor vehicle insurance clauses and premium rates, and conduct dynamic monitoring and analysis of the degree of deviation between the rate actuarial assumption and actual operating conditions so as to prevent the significant deviation of the actual value of the major operating indicators of vehicle insurance from the expected value in the rate as shown in the actuarial report.125 All entities shall, in accordance with the requirements of the Opinions of the CIRC on Deepening the Reform of the Administration System for Commercial Motor Vehicle Insurance Clauses and Premium Rates 2015126 and the Notice of the CIRC on Issuing the Work Plan for Deepening the Pilot Reform of the Administration System for Commercial Motor Vehicle Insurance Clauses and Premium Rates 2015,127 effectively conduct the relevant work concerning the reform of commercial motor vehicle insurance so as to ensure that the pilot reform is boosted in a steady and orderly manner.128 9.6.5 The adjustment of premium rates of commercial motor vehicle insurance The issues on the adjustment, reporting, approval, retracing, and supervision, among others, of the premium rates for commercial motor vehicle insurance are stipulated in the Notice of the CIRC on Issues concerning Adjusting and Managing Premium Rates for Commercial Motor Vehicle Insurance 2017 (Notice 2017).129 A property insurance company using the model commercial motor vehicle insurance clauses of the Insurance Association of China may apply for developing a rate adjustment proposal based on self-determined underwriting coefficients and self-determined channel coefficients within the following range, and implement it with the approval of the CBIRC:130 (1) Within the jurisdiction of the CBIRC office in Shenzhen, the adjustment range of the self-determined underwriting coefficients was [0.70–1.25], and that of self-determined channel coefficients was [0.70–1.25].

124 The Notice of the CIRC on Issues concerning Promoting Nationwide the Pilot Reform of the Administration System for Commercial Motor Vehicle Insurance Clauses and Premium Rates 2016, s.1. 125 Ibid., s.2. 126 Bao Jian Fa No. 18 [2015]. 127 Bao Jian Chan Xian No. 24 [2015]. 128 The Notice of the CIRC on Issues concerning Promoting Nationwide the Pilot Reform of the Administration System for Commercial Motor Vehicle Insurance Clauses and Premium Rates 2016, s.3. 129 Bao Jian Chan Xian No. 145 [2017]. 130 The Notice of the CIRC on Issues concerning Adjusting and Managing Premium Rates for Commercial Motor Vehicle Insurance 2017, s.1.

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(2) Within the jurisdiction of the CBIRC office in Henan, the adjustment range of the self-determined underwriting coefficients was [0.80–1.15], and that of self-determined channel coefficients was [0.75–1.15]. (3) Within the jurisdictions of the CBIRC offices in Tianjin, Hebei, Fujian, Guangxi, Sichuan, Qinghai, Qingdao, and Xiamen, the adjustment range of the self-determined underwriting coefficients was [0.75–1.15], and that of self-determined channel coefficients was [0.75–1.15]. (4) In the other areas within China, the adjustment range of the self-determined underwriting coefficients was [0.85–1.15], and that of self-determined channel coefficients was [0.75–1.15]. By virtue of s.12 of the Notice of the CBIRC on Issuing the Guiding Opinions on the Implementation of Comprehensive Reform of Motor vehicle insurance 2020, the range of the self-determined underwriting coefficients and self-determined channel coefficients are gradually to be integrated into independent pricing coefficient. In the first step, the range of the independent pricing coefficient is determined to be [0.65–1.35], and the second step is to let the insurers freely determine the range of the independent pricing coefficient. In order to better protect the rights and interests of consumers, in the initial stage of the comprehensive reform, stricter restrictions are imposed on the upper limit of the independent pricing coefficient for new cars. Property insurance companies shall, according to the requirements of the Measures for the Administration of the Insurance Clauses and Premium Rates of Property Insurance Companies 2010 and relevant regulatory documents, submit application materials on commercial motor vehicle insurance clauses and premium rates to the CBIRC. The CBIRC will approve commercial motor vehicle insurance clauses and premium rates under the principles of protecting the public interest and preventing unfair competition. As needed for work, in the process of approval, expert discussion meetings may be organized, and professional firms may be hired to conduct assessment.131 Where all the expected values of the composite cost rate, composite expense rate, and other main indicators of national or local motor vehicle insurance in the actuarial report on rating of a property insurance company are not higher than the averages of them over the previous three years, and the ratio of outstanding loss reserve movement [outstanding loss reserve movement – recovered outstanding loss reserve) / earned premium] is not lower than the average of the indicator over the previous three years, the property insurance company may briefly explain the name and serial number of the model commercial motor vehicle insurance clauses to be used, the rate calculation formula, and the rate adjustment range in its application materials, and need not submit a detailed rate proposal. Property insurance companies shall establish regular retracing and revision mechanisms for commercial motor vehicle insurance clauses and premium rates. After a product is approved, if the actual values of the composite cost rate, 131 Ibid., s.2.

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composite expense rate, ratio of the outstanding loss reserve, and other indicators of an insurance company’s motor vehicle insurance significantly deviate from the actuarial expected values in the application materials submitted, the property insurance company shall proactively revise the rate proposal and re-submit it to the CBIRC for approval, to strictly prevent the pricing risks and operational risks of commercial motor vehicle insurance.132 Where the actual values of the aforesaid motor vehicle insurance indicators of a property insurance company significantly deviate from the actuarial expected values, the insurance regulator may order the property insurance company to stop using the flawed commercial motor vehicle insurance products and amend the rate proposal. The amendment includes, but is not limited to, the adjustment range of the self-determined underwriting coefficients and the self-determined channel coefficients of the company. Under serious circumstances, the insurance regulator may, according to the law, prohibit the property insurance company from declaring new commercial motor vehicle insurance clauses and premium rates during a certain period.133 Any difference between the actual value and the actuarial expected value of an indicator constitutes deviation. Whether the deviation is significant shall be determined by the insurance regulator by a comprehensive consideration of the property insurance company’s market impact, historical operation conditions, and volatility of the indicator, among others. Where the deviation exceeds the average volatility (absolute value) of the indicator over the previous three years, it is a significant deviation in principle. Matters not covered by this Notice 2017 shall be governed by the Opinions of the CIRC on Deepening the Reform of the Administrative System of Commercial Motor Vehicle Insurance Clauses and Premium Rates 2015,134 the Work Plan for the Pilot Program of Deepening the Reform of the Administrative System of Commercial Motor Vehicle Insurance Clauses and Premium Rates 2015,135 and other relevant provisions. 9.6.6 Regulatory requirements for commercial motor vehicle insurance premium rates For the purpose of strengthening the regulation of commercial motor vehicle insurance premium rates and protecting the lawful rights and interests of consumers, the relevant requirements for the commercial motor vehicle insurance premium rates are provided in the Notice of the General Office of the CBIRC on Regulatory Requirements for Commercial Motor Vehicle Insurance Rates 2018.136 All property insurance companies shall submit the commercial motor vehicle insurance premium rate schemes of all regions (excluding Guangxi Zhuang

132 133 134 135 136

Ibid., s.3. Ibid., s.4. Bao Jian Fa No. 18 [2015]. Bao Jian Chan Xian No. 24 [2015]. Yin Bao Jian Ban Fa No. 57 [2018].

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Autonomous Region, Shaanxi Province, and Qinghai Province) pursuant to the requirements of this Notice.137 All property insurance companies shall strictly follow the principle of reasonableness, fairness and sufficiency in formulating rate schemes, and shall not engage in unfair competition in any form.138 All property insurance companies shall submit the average usage of the discount coefficients for new motor vehicle business premium rates.139 All property insurance companies should submit the value ranges and usage rules of commission charges. For the purpose of this Notice, the commission charges refer to all the fees paid to insurance intermediaries and personal agents (salesmen), including commission charges, service charges, promotion expenses, salaries, performance pay, bonus, and commission, and so on. In particular, the value ranges and usage rules of new motor vehicle business commission charges shall be listed separately.140 Senior executives for actuarial business or chief actuaries of all property insurance companies shall be responsible for the formulation of rate schemes, while senior executives for motor vehicle insurance shall be in charge of the management and control of the implementation of premium rate schemes. The aforesaid senior executives shall sign the statement of responsibility. Chief actuaries (or the persons responsible for actuarial business) shall issue the actuarial evaluation opinion for a premium rate scheme and sign it.141 All property insurance companies shall submit anew the approval materials for commercial motor vehicle insurance products in accordance with the requirements of this Notice. Any matter not mentioned in this Notice shall be governed by the relevant provisions in the Notice of the CIRC on Issues concerning Promoting Nationwide the Pilot Reform of the Administration System for Commercial Motor Vehicle Insurance Clauses and Premium Rates 2016,142 Notice of the CIRC on Issues concerning Adjusting and Managing the Premium Rates for Commercial Motor Vehicle Insurance 2017,143 and Notice of the CIRC on Adjusting the Range of Self-determined Pricing for Commercial Motor Vehicle Insurance in Some Regions 2018.144 9.6.7 The guiding opinions on the implementation of comprehensive reform of motor vehicle insurance The CBIRC has decided to carry out comprehensive reform of motor vehicle insurance and issued the Guiding Opinions on the Implementation of Comprehensive

137 The Notice of the General Office of the CBIRC on Regulatory Requirements for Commercial Motor Vehicle Insurance Rates 2018, s.1. 138 Ibid., s.2. 139 Ibid., s.3. 140 Ibid., s.4. 141 Ibid., s.5. 142 Bao Jian Chan Xian No. 113 [2016]. 143 Bao Jian Chan Xian No. 145 [2017]. 144 Bao Jian Chan Xian No. 61 [2018]).

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Reform of Motor vehicle insurance on 2 September 2020.145 Being effective on 19 September 2020, the Guiding Opinions have introduced the following seven new rules. First, the limit of liability for compulsory motor vehicle insurance has been substantially increased. The total liability limit has been increased from ¥122,000 yuan to ¥200,000 yuan, of which the death and disability compensation limit has been increased from ¥110,000 yuan to ¥180,000 yuan, the medical expenses compensation limit has been increased from ¥10,000 yuan to ¥18,000 yuan, and the property damage compensation limit has remained unchanged. The limit of non-liability compensation is adjusted according to the same proportion. The limit of compensation for death and disability is increased from ¥11,000 yuan to ¥18,000 yuan, the limit of compensation for medical expenses is increased from ¥1,000 yuan to ¥1,800 yuan and the limit of compensation for property damage remains ¥100 yuan.146 Second, under the principle of not increasing consumer premiums, the insurers shall be supported to expand the scope of commercial motor vehicle insurance coverage. On the basis of the existing insurance liability in the Model Clauses of the Comprehensive Commercial Motor Vehicle Insurance (2014 version), the main liability clauses shall be expanded to cover new liabilities, such as, the theft of the whole vehicle, broken glass, spontaneous combustion, engine damages by water, excluding deductibles, and so on.147 Third, based on the level of economic and social development, insurers shall be supported to increase the limit of commercial liability insurance from the range of ¥50,000 to ¥5 million yuan to the range of ¥100,000 to ¥10 million yuan, which is more conducive to meeting consumer risk protection needs and better economic compensation.148 Fourth, the insurance industry shall be supported to formulate model clauses for new energy vehicle insurance, accident insurance for drivers and persons on board the vehicle, and motor vehicle extended guarantee insurance, and to explore the development of innovative products such as vehicle mileage insurance in new energy vehicles and qualified traditional vehicles. The insurance industry shall be guided to standardize value-added services, and to formulate model clauses for value-added services, such as, road rescue, driving services for others, and vehicle safety inspections so as to provide consumers with more standardized and rich motor vehicle insurance protection services.149 Fifth, the insurance industry is guided to lower the upper limit of the additional expense rate for commercial motor vehicle insurance products from 35% to 25%, and the expected loss ratio to increase from 65% to 75%.150 145 The CBIRC Guiding Opinions on the Implementation of Comprehensive Reform of Motor Vehicle Insurance was issued on 2 Sept 2020 and became effective on 19 Sept 2020. 146 The Guiding Opinions on the Implementation of Comprehensive Reform of Motor Vehicle Insurance 2020, s.4. 147 Ibid., s.6. 148 Ibid., s.8. 149 Ibid., s.9. 150 Ibid., s.11.

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Six, the range of the self-determined underwriting coefficients and self-determined channel coefficients are gradually to be integrated into independent pricing coefficient. In the first step, the range of the independent pricing coefficient is determined to be [0.65–1.35], and the second step is to let the insurers freely determine the range of the independent pricing coefficient. In order to better protect the rights and interests of consumers, in the initial stage of the comprehensive reform, stricter restrictions are imposed on the upper limit of the independent pricing coefficient for new cars.151 Seven, the no-claim preferential treatment coefficient shall be further optimized. The insurance industry shall be guided to revise the no-claim preferential treatment coefficient for commercial motor vehicle insurance; the range of payment records shall be expanded from the previous year to at least the previous three years, and the rate of premium increase for consumers who only make occasional compensation claim shall be reduced.152 9.7 Regulation of insurance clauses and premium rates of personal insurance Insurance clauses and premium rates of personal insurance are regulated mainly by the Measures for the Administration of Insurance Clauses and Premium Rates of Personal Insurance Companies. The Measures was first formulated by the CIRC on 30 December 2011,153 and revised on 19 October 2015.154 Insurance companies are required to draft fair and reasonable insurance clauses and premium rates in accordance with the Insurance Law and the relevant CBIRC provisions without prejudice to the lawful rights and interests of insurance applicants, insureds, and beneficiaries. Insurance companies shall assume corresponding responsibility for their drafted insurance clauses and premium rates.155 Insurance companies shall submit their insurance clauses and premium rates to the CBIRC for approval or recordation pursuant to the Measures.156 Insurance companies shall establish a scientific and efficient personal insurance development management mechanism that meets the market demand to track and analyze their operations on a regular basis, discover issues related to insurance

151 Ibid., s.12. 152 Ibid., s.13. 153 The CIRC Order No. 3 [2011]. 154 The CIRC Order No. 3 [2015]. The Measures came into force on the date of issuance, and repealed the following regulations: the Interim Measures for Naming Personal Insurance Products (the CIRC No. 42 [2000]) issued on 23 March 2000, the Notice on Liberating the Short-term Accident Insurance Rates and Simplifying the Recordation Formalities for Short-term Accident Insurance (the CIRC No. 78 [2000]) issued on 16 May 2000, the Measures for the Administration of Approval and Recordation of Personal Insurance Products (the CIRC Order No. 6 [2004]) issued on 30 June 2004, and the Notice on Issues concerning the Measures for the Administration of Approval and Recordation of Personal Insurance Products (the CIRC No. 76 [2004]) issued on 1 July 2004. 155 The Measures for the Administration of Insurance Clauses and Premium Rates of Personal Insurance Companies 2015, art.3. 156 Ibid., art.4.

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clauses and premium rates in their operations and management in a timely manner and take appropriate measures to address such issues.157 Insurance companies shall maximize their core competitiveness, rationally allocate company resources, and develop their types of insurance products in light of macro-economic policies, market demand, and their strategic objectives.158 9.7.1 Design and classification of personal insurance Personal insurance shall be divided into life insurance, annuity insurance, health insurance, and accidental injury insurance.159 “Life insurance” means personal insurance with the life of a person as the subject matter insured, including but not limited to term life insurance, whole life insurance, and endowment insurance.160 Term life insurance is life insurance with a fixed duration in which the payment of insurance benefit is conditioned upon the death of the insured. Whole life insurance is life insurance with a whole life duration in which the payment of insurance benefit is conditioned upon the death of the insured. Endowment insurance is life insurance in which the payment of insurance benefit is conditioned upon both the death and the survival of the insured. “Annuity insurance” means personal insurance in which the payment of insurance benefit is conditioned upon the survival of the insured and the survival benefit is paid in instalments at an agreed interval.161 Pension annuity insurance is annuity insurance for old-age security. Pension annuity insurance shall meet the following conditions:162 (1) The age agreed upon in the insurance contract for paying survival benefit to the insured is not lower than the retiring age prescribed by the state. (2) The interval between two consecutive payments does not exceed one year. “Health insurance” means personal insurance in which the payment of insurance benefit is conditioned upon losses incurred for health reasons, including but not limited to disease insurance, medical insurance, disability income insurance, and health care insurance.163 Disease insurance is health insurance in which the payment of insurance benefit is conditioned upon the occurrence of a disease agreed upon in the insurance contract. Medical insurance is health insurance in which the payment of insurance benefit is conditioned upon the occurrence of a medical activity agreed upon in the insurance contract to cover as agreed upon the insured’s medical expenses during receipt of treatment.

157 158 159 160 161 162 163

Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11.

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REGULATION OF THE INSURANCE BUSINESS

Disability income insurance is health insurance in which the payment of insurance benefit is conditioned upon the loss of working ability caused by a disease or accidental injury agreed upon in the insurance contract to cover as agreed upon any income decrease or interruption of the insured during a certain period. Health care insurance is health insurance in which the payment of insurance benefit is conditioned upon the occurrence of a care need caused by any daily living handicap agreed upon in the insurance contract to cover as agreed upon the health care expenses of the insured. “Accidental injury insurance” means personal insurance in which the payment of insurance benefit is conditioned upon the occurrence of an accident resulting in the death or disability of the insured or the occurrence of any other accident as agreed upon in the insurance contract.164 Life insurance and health insurance may cover total disability liability. Where health insurance includes two or more kinds of health coverage, the primary liability shall be determined according to general actuarial principles, and the insurance type shall be determined based on the primary liability. The disease insurance in long-term health insurance may cover death insurance liability, but the amount of death benefit shall not exceed the maximum benefit amount for diseases. Other health insurance may not cover death insurance liability, except death insurance liability resulting from a disease.165 Medical insurance and disease insurance may not cover pure endowment insurance liability. Accidental injury insurance may cover medial insurance liability resulting from accidental injuries. Insurance only covering medical insurance liability resulting from accidental injuries shall be determined as medical insurance. Insurance companies shall strictly comply with the classification standards for life insurance, annuity insurance, health insurance, and accidental injury insurance in these Measures, except as otherwise specified by the CBIRC.166 Personal insurance shall be named in the following format:167 “Name of insurance company” + “auspicious or descriptive words” + “insurance type” + “(design type)” The “Name of insurance company” in the preceding paragraph may be the full or abbreviated name of an insurance company; and the number of auspicious or descriptive words may not exceed 10. For additional coverage, “additional” shall be affixed after the “name of insurance company.” For group insurance, “group” shall be indicated in the name. The insurance type of pension annuity insurance in annuity insurance is “pension annuity insurance,” while that of other annuity insurance is “annuity insurance”; and the insurance type of accidental injury insurance is “accidental injury insurance.”168

164 165 166 167 168

Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16.

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REGULATION OF THE INSURANCE BUSINESS

The design types of personal insurance shall include but not be limited to general type, participating type, unit-linked type, and universal type.169 The design types of participating, unit-linked, and universal personal insurance shall be indicated in the name, while that of general personal insurance need not be indicated in the name.170 9.7.2 Approval and recordation of insurance clauses and premium rates The head office of an insurance company shall be responsible for submitting insurance clauses and premium rates to the CBIRC for approval or recordation.171 Insurance companies shall submit the insurance clauses and premium rates of the following types of insurance to the CBIRC for approval before use:172 (1) (2) (3) (4)

Types Types Types Other

of insurance involving the public interest; of insurance which is compulsory according to the law; of newly developed life insurance as set out by the CBIRC; types of insurance as set out by the CBIRC.

The types of insurance other than those in the preceding paragraph shall be reported to the CBIRC for recordation. An insurance company which reports insurance clauses and premium rates to the CBIRC for recordation shall submit:173 (1) a checklist for a personal insurance company to report insurance clauses and premium rates for recordation; (2) insurance clauses; (3) a schedule of premium rates; (4) a relevant actuary report signed by the appointed actuary; (5) a written statement of the appointed actuary; (6) a written statement of the appointed legal counsel; and (7) other materials as set out by the CBIRC. An insurance company which reports the insurance clauses and premium rates of participating insurance, unit-linked insurance, or universal insurance shall, in addition to those required in article 21, submit:174 (1) financial management measures; (2) business management measures; (3) information disclosure management rules; (4) business plans and their effects on solvency; and (5) product brochures. For participating insurance, the measures for calculating and distributing dividends as well as the principles for allocating income and amortizing expenses shall also be submitted; and for unit-linked insurance or universal insurance, the sales management measures including but not limited to marketing channels and sales territories shall also be submitted. If any of the above materials to be submitted by an insurance company is identical with the corresponding material for the same type of insurance of the company already approved or recorded by the CBIRC, the submission of the material may be waived, but the waiver shall be noted in the checklist. 169 170 171 172 173 174

Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

401

REGULATION OF THE INSURANCE BUSINESS

An insurance company which submits insurance clauses and premium rates for approval shall, in addition to those in items (2) to (7) of article 21 and those in article 22 of the Measures 2015, submit:175 (1) A completed application form for the approval of insurance clauses and premium rates of a personal insurance company; (2) A checklist for a personal insurance company to report insurance clauses and premium rates for approval; and (3) Explanations of insurance clauses and premium rates, including but not limited to their major characteristics, market risk and operating risk analysis, and corresponding management and control measures. An insurance company which submits the following insurance clauses and premium rates for approval or recordation shall, in addition to those required in articles 21, 22, and 23 of the Measures 2015, respectively, submit:176 (1) If there is a cash value, written materials including cash value illustrations and electronic documentation including a whole cash value table for each age; (2) If there is a reduced paid-up clause, written materials including reduced paid-up premium illustrations and electronic documentation including a whole reduced paid-up premium table for each age; (3) If rate floating or parameter adjustment is permitted by the CBIRC, rate floating management measures or product parameter adjustment measures signed by the appointed actuary; and (4) If the insurance duration exceeds one year, electronic documentation on profit testing models. Where an insurance company submits insurance clauses and premium rates for approval or recordation, the actuary report submitted shall, at a minimum, include:177 (1) data sources and pricing basis; (2) pricing methods and pricing assumptions; and if the insurance duration exceeds one year, profit testing parameters, profit testing results, and sensitivity analysis of changes in key parameter; (3) computing methods for statutory reserves; (4) major risks and corresponding management opinions; (5) matters requiring special mention by the appointed actuary; and (6) other matters as set out by the CBIRC. Where an insurance company submits the following insurance clauses and premium rates for approval or recordation, the actuary report submitted shall, in addition to article 25 of the Measures 2015, comply with the following provisions:178 175 176 177 178

Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26.

402

REGULATION OF THE INSURANCE BUSINESS

(1) If there is a cash value, the computing methods for cash values shall be specified; (2) If there is a reduced paid-up clause, the computing methods for reduced paid-up premium shall be specified: (3) If there are benefit illustrations, the computing methods for benefit illustrations shall be specified. After receiving an application of an insurance company for approval of insurance clauses and premium rates, the CBIRC shall proceed according to the following provisions:179 (1) If the application materials are incomplete, the CBIRC shall, within five working days of receipt of the materials, notify the insurance company at one time of all necessary supplements and corrections. (2) If the application materials are complete or the insurance company has submitted all supplements and corrections, the CBIRC shall accept the application and issue a written certificate bearing a seal for acceptance use only to the insurance company. The CBIRC shall, within 20 working days of accepting an application for approval of insurance clauses and premium rates, make a decision to approve or disapprove the application. If a decision cannot be made within 20 working days, with the approval of the person in charge of the CBIRC, the approval time limit may be extended by ten working days. The CBIRC shall notify the insurance company of reasons for extension.180 In the case of approval, the CBIRC shall publish its approval decision on the CBIRC bulletin or website; or in the case of disapproval, the CBIRC shall notify in writing the insurance company of the decision, with an explanation of the reasons for disapproval, and the insurance company’s right to apply for administrative reconsideration or file an administrative lawsuit. The CBIRC may conduct an expert review of the insurance clauses and premium rates submitted for approval, and notify in writing the insurance company of the time necessary for the review.181 The CBIRC may organize a public hearing on insurance clauses and premium rates involving the public interest, and shall conduct such hearings in accordance with the Administrative Licensing Law.182 The time necessary for an expert review or a public hearing shall not be counted in the approval time limit as mentioned in article 28 of the Measures 2015.183 Where an insurance company withdraws its application for approval of insurance clauses and premium rates after the application is accepted but before a decision to approve or disapprove the application is made, the insurance company

179 Ibid., art.27. 180 Ibid., art.28. 181 Ibid., art.29. 182 The Administrative Licensing Law of the People’s Republic of China was enacted on 27 August 2003 and came into force on 1 July 2004.　 183 The Measures for the Administration of Insurance Clauses and Premium Rates of Personal Insurance Companies 2015, art.29.

403

REGULATION OF THE INSURANCE BUSINESS

shall apply in writing to the CBIRC for the withdrawal, and the CBIRC shall, in a timely manner, terminate the examination of the application for approval of insurance clauses and premium rates and return the application materials to the insurance company.184 Where, after an insurance company’s application for approval of insurance clauses and premium rates is accepted but before a decision to approve or disapprove the application is made, the insurance company modifies the insurance clauses and premium rates, it shall apply to the CBIRC for withdrawing the application.185 Under the circumstance as described in the preceding paragraph, the approval time limit shall be recounted from the day when the CBIRC receives complete application materials as modified. An insurance company may modify the disapproved insurance clauses and premium rates and submit them again to the CBIRC for approval.186 An insurance company shall submit insurance clauses and premium rates for recordation no later than ten working days after use.187 After receiving the recordation materials from an insurance company, the CBIRC shall proceed according to the following provisions:188 (1) If the recordation materials are incomplete, the CBIRC shall notify the insurance company at one time of all supplements and corrections to be submitted in ten working days. (2) If the recordation materials are complete or the insurance company has submitted all supplements and corrections as required, the CBIRC shall archive the recordation materials and issue a recordation receipt to the insurance company. (3) If discovering that the insurance clauses and premium rates submitted for recordation fall under the circumstances in article 136 of the Insurance Law,189 the CBIRC shall order the insurance company to immediately suspend the use of such clauses and rates. 9.7.3 Modification and suspension from use of insurance clauses and premium rates An insurance company which modifies the approved or recorded insurance clauses and premium rates by changing the coverage, insurance type, or pricing method

184 Ibid., art.30. 185 Ibid., art.31. 186 Ibid., art.32. 187 Ibid., art.33. 188 Ibid., art.34. 189 Article 136 of the Insurance Law: “Where any insurance clause or premium rate used by an insurance company violates a law or administrative regulation or the provisions of the insurance supervision and regulation authority of the State Council, the insurance supervision and regulation authority shall order the insurance company to stop using it and make correction within a prescribed time limit; and if the circumstances are serious, may prohibit the insurance company from applying for new insurance clauses or insurance premium rates within a prescribed time limit.”

404

REGULATION OF THE INSURANCE BUSINESS

shall submit the insurance clauses and premium rates for approval or recordation again.190 An insurance company which modifies the approved or recorded insurance clauses and premium rates without changing the coverage, insurance type, or pricing method shall report the modification to the CBIRC for recordation within ten working days after modification and submit:191 (1) A checklist of modification recordation submissions; (2) The reasons for modification and a comparative statement of major modifications; (3) The approved or recorded insurance clauses; (4) The relevant materials as modified; (5) A written statement of the appointed actuary; (6) A written statement of the appointed legal counsel; and (7) Other materials as set out by the CBIRC. If there are no changes but the change of the name of personal insurance due to the name change of an insurance company, submissions in items (3), (4), and (5) of the preceding paragraph may be waived. Where an insurance company decides to suspend the use of any insurance clauses and premium rates across the country, it shall submit a report to the CBIRC within ten working days after suspension, explaining the reasons for suspension, relevant measures for follow-up services, and other matters, and send a copy thereof to each local office of the CBIRC at the place where such clauses and rates were used.192 Where an insurance company decides to suspend the use of any insurance clauses and premium rates in certain regions, it may not use such clauses and rates for publicity or misleading sale. An insurance company’s branch offices at and below the provincial level shall not decide the suspension of use of any insurance clauses and premium rates. Where an insurance company decides to resume the sale of any insurance clauses and premium rates suspended from use, it shall submit a report to the CBIRC within ten working days after resuming the sale, explaining the reasons for resumption, management plans, and other matters, and send a copy thereof to each local office of the CBIRC at the place where such clauses and rates are to be used.193 9.7.4 Appointed actuary and appointed legal counsel The appointed actuary of an insurance company shall issue a written statement of the appointed actuary regarding the insurance clauses and premium rates submitted for approval or recordation, and sign the relevant actuarial report, floating rate management measures, or product parameter adjustment measures.194 190 The Measures for the Administration of Insurance Clauses and Premium Rates of Personal Insurance Companies 2015, art.35. 191 Ibid., art.36. 192 Ibid., art.37. 193 Ibid., art.38. 194 Ibid., art.39.

405

REGULATION OF THE INSURANCE BUSINESS

The appointed actuary of an insurance company shall be responsible for the following aspects of the insurance clauses and premium rates submitted for approval or recordation: (1) The classification is accurate and the naming complies with the Measures. (2) The actuarial report is complete. (3) The actuarial assumptions and methods comply with the general actuarial principles and the actuarial provisions issued by the CBIRC. (4) For a type of insurance with benefit illustrations, the benefit illustration methods comply with the general actuarial principles and the relevant provisions issued by the CBIRC. (5) The premium rating is reasonable and complies with the principles of sufficiency, appropriateness, and fairness. (6) Other responsibilities as set out by the CBIRC. An insurance company shall appoint a legal counsel, and report it to the CBIRC for recordation.195 The appointed legal counsel of an insurance company shall meet the following conditions:196 (1) Having a domicile within the territory of China. (2) Having a university diploma at or above the undergraduate level. (3) Having a Chinese bar admission certificate or a certificate of legal professional competence. (4) Holding a position of departmental head or above in the company as a regular employee of the company. (5) Having five or more years of experience in the insurance or legal profession of China, including three or more years of legal experience in the insurance sector. (6) Not having received any administrative punishment for legal malpractice in the last three years. (7) Not having received any criminal punishment. (8) Other conditions as set out by the CBIRC. The appointed legal counsel of an insurance company shall perform the following duties:197 (1) Participating in the formulation of personal insurance product development strategies. (2) Examining materials related to insurance clauses. (3) Periodically analyzing lawsuits arising from insurance clauses. (4) Reporting significant hidden risks in insurance clauses to the CBIRC in a timely manner. (5) Other duties as set out by the CBIRC or the by-laws of the insurance company. 195 Ibid., art.40. 196 Ibid., art.41. 197 Ibid., art.42.

406

REGULATION OF THE INSURANCE BUSINESS

The appointed legal counsel of an insurance company shall issue a written statement of the appointed legal counsel regarding the insurance clauses submitted for approval or recordation, and be responsible for the following aspects of the clauses:198 (1) The insurance clauses are fair and reasonable, without prejudice to the public interest or the lawful rights and interests of insurance applicants, insureds, and beneficiaries. (2) The insurance clauses are accurate in wording and precise in logic. (3) The product brochure, if any, is consistent with the insurance clauses, is complete and true, and complies with the relevant provisions issued by the CBIRC. (4) The insurance clauses comply with the Insurance Law, other laws and administrative regulations, and the relevant provisions issued by the CBIRC. (5) Other responsibilities as set out by the CBIRC. An insurance company which reports on its appointed legal counsel for recordation shall submit the following materials in duplicate to the CBIRC:199 (1) A completed recordation form for information on the appointed legal counsel; (2) Photocopies of the identification and certificate of domicile of the proposed appointed legal counsel; (3) Photocopies of the educational credentials and certificate of professional qualification of the proposed appointed legal counsel; (4) Certificates of work experience; (5) Other materials as set out by the CBIRC. An insurance company shall enhance management of the appointed legal counsel, establish relevant rules on the appointed legal counsel, provide the appointed legal counsel with information necessary for performance of his or her duties, and ensure that the appointed legal counsel is able to independently perform his or her duties.200 Where the appointed legal counsel of an insurance company leaves office for reasons such as resignation, removal, or dismissal from office, the insurance company shall submit a report to the CBIRC within 30 working days after making a decision to approve the resignation of or remove or dismiss the appointed legal counsel from office, along with the following materials:201 (1) An explanation of the reasons for removing or dismissing the appointed legal counsel from office; (2) A photocopy of the removal or dismissal decision or decision to approve resignation;

198 199 200 201

Ibid., art.43. Ibid., art.44. Ibid., art.45. Ibid., art.46.

407

REGULATION OF THE INSURANCE BUSINESS

(3) A departure report prepared by the appointed legal counsel or a departure explanation report prepared by the insurance company if the appointed legal counsel fails to prepare a departure report. 9.7.5 Legal liability An insurance company which fails to apply for approval of insurance clauses and premium rates as required shall be punished by the CBIRC in accordance with article 164 of the Insurance Law.202 Where the insurance clauses and premium rates used by an insurance company fall under any of the following circumstances, the CBIRC shall order it to suspend the use of, and amend during a specified period, such clauses and rates; and if the circumstances are serious, may prohibit it from applying for new insurance clauses and premium rates during a certain period:203 (1) The public interest is prejudiced; (2) Unfairness or price monopoly is caused by the insurance clauses and premium rates, infringing upon the lawful rights and interests of insurance applicants, insureds, or beneficiaries; (3) The design of clauses or the premium rating is inappropriate, which may endanger the solvency of the insurance company; (4) Otherwise violating any law or administrative regulation or the provisions issued by the CBIRC. An insurance company which commits any of the following conduct shall be punished by the CBIRC in accordance with article 169 of the Insurance Law:204 (1) Failing to submit insurance clauses and premium rates for recordation as required; (2) Failing to report insurance clauses and premium rates suspended from use as required; (3) Failing to submit or preserve any other report, statement, document, or material related to insurance clauses and premium rates as required or failing to provide relevant information or material as required. 202 Article 164 of the Insurance Law: “Where anyone, in violation of this Law, commits any of the following conduct, the insurance supervision and regulation authority shall order it to make correction and impose a fine of ¥50,000 yuan up to ¥300,000 yuan upon it; and, if the circumstances are serious, restrict its scope of business, order it to stop accepting new business or revoke its business operation license: (1) (2) (3) (4) (5) (6) (7)

Failing to draw the guarantee fund as required or illegally using the guarantee fund; Failing to draw or carry forward any liability reserve fund as required; Failing to pay the insurance protection fund or draw the provident funds as required; Failing to make reinsurance as required; Failing to use the capital of an insurance company as required; Setting up a branch office without approval; or Failing to apply for approval of insurance clauses or premium rates as required.”

203 The Measures for the Administration of Insurance Clauses and Premium Rates of Personal Insurance Companies 2015, art.48. 204 Ibid., art.49.

408

REGULATION OF THE INSURANCE BUSINESS

An insurance company which commits any of the following conduct shall be punished by the CBIRC in accordance with article 170 of the Insurance Law:205 (1) It prepares or provides any false report, statement, document, or material in reporting insurance clauses and premium rates for approval or recordation. (2) It prepares or provides any false report, statement, document, or material in reporting the appointed legal counsel for recordation. (3) It fails to use the approved or recorded insurance clauses and premium rates as required. An insurance company which violates paragraph 3 of article 37 of these Measures shall be warned and fined not more than ¥30,000 yuan by the CBIRC.206 An insurance company which uses any insurance clauses and premium rates suspended from use for misleading sale shall be punished by the CBIRC in accordance with article 161 of the Insurance Law.207 Where, in violation of the Measures, an insurance company appoint a person not meeting the prescribed conditions to the position of legal counsel of the company, the CBIRC shall order it to take corrective action during a specified period; and if it fails to do so during the specified period, issue a warning to and impose a fine of not more than ¥10,000 yuan on it.208 Where any rules of the CBIRC provide otherwise for the appointed actuary or the appointed legal counsel of an insurance company, such rules shall apply. Where any rules of the CBIRC provide otherwise for the administration of insurance clauses and premium rates of group insurance, such rules shall apply.209 9.7.6 Issues concerning the Measures for the administration of insurance clauses and premium rates of personal insurance To regulate the administration of insurance clauses and insurance premium rates of personal insurance companies and facilitate the implementation of the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies, the CIRC issued the Notice of the CIRC on Several Issues concerning the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies 2012.210 205 Ibid., art.50. 206 Ibid., art.51. 207 Ibid., art.52. Article 161 of the Insurance Law: “Where an insurance company commits any of the conduct prescribed in article 116 of this Law, the insurance supervision and regulation authority shall order it to make correction and impose a fine of ¥50,000 yuan up to ¥300,000 yuan upon it; and, if the circumstances are serious, restrict its scope of business, order it to stop accepting new business or revoke its business operation license.” 208 The Measures for the Administration of Insurance Clauses and Premium Rates of Personal Insurance Companies 2015, art.53. 209 Ibid., art.54. 210 Bao Jian Fa No.2 [2012].

409

REGULATION OF THE INSURANCE BUSINESS

The insurance clauses and insurance premium rates of the following personal insurance products shall be submitted to the CBIRC for approval:211 (1) Life insurance products other than general, participating, universal, and investment-linked life insurance products; (2) Annuity insurance products other than general, participating, universal, and investment-linked annuity insurance products; (3) Group participating life insurance products and group participating annuity insurance products which are not developed by reference to the Actuarial Provisions on Individual Participating Insurance enclosed in the Notice on Issuing the Actuarial Provisions on New-type Personal Insurance Products 2003;212 and (4) Other insurance products subject to approval as set forth by the CBIRC. Insurance clauses and insurance premium rates other than those as mentioned in the preceding paragraph shall be submitted to the CBIRC for filing. The endowment insurance products developed by insurance companies shall meet the following conditions:213 (1) The first payment of survival benefit shall be made three years after the insurance policy takes effect. (2) The insurance duration shall not be fewer than five years. (3) For investment-linked and universal endowment insurance products, if the insured is an adult, the death benefit at the time of issuance of an insurance policy may not be lower than 105% of the premium paid or 105% of the account value of the insurance policy; for other types of endowment insurance, if the insured is an adult, the death benefit at the time of issuance of an insurance policy may not be lower than 105% of the premium paid. (4) Death insurance shall cover, at a minimum, liability for death from disease and liability for accidental death. Insurance companies shall not develop group endowment insurance.214 The annuity insurance developed by insurance companies may cover the liability for death benefit payment or liability for total disability benefit payment, but the death benefit paid may not exceed the greater of the premium paid and the cash value of an insurance policy.215 Variable annuity insurance shall be governed by the relevant provisions of the Notice of the CIRC on Issuing the Interim Measures for the Administration of Variable Annuity Insurance 2011.216 211 The Notice of the CIRC on Several Issues concerning the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies 2012, s.1. 212 Bao Jian Fa No. 67 [2003]. 213 The Notice of the CIRC on Several Issues concerning the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies 2012, s.2. 214 Ibid., s.3. 215 Ibid., s.4. 216 Bao Jian Fa No. 25 [2011].

410

REGULATION OF THE INSURANCE BUSINESS

Universal insurance or investment-linked insurance may provide a continuity bonus but shall satisfy the following requirements:217 (1) If the bonus is paid at a certain percentage of the account value, cumulative premiums paid, or premium paid in a lump sum, the first payment of the bonus shall be made five years after the insurance policy takes effect. (2) If the bonus is paid at a certain percentage of the premium paid for the current period, the bonus may be paid since the insurance applicant pays the second instalment of premiums, but may not exceed 2% of the premium paid for the current instalment. If no premium is paid for an instalment, no bonus shall be paid for that year. When submitting insurance clauses and insurance premium rates for approval or filing, insurance companies shall submit written materials in duplicate and a compact disc containing the electronic documentation of such materials. Insurance companies shall submit the electronic documentation of profit test models in EXCEL format and submit the electronic documentation of relevant materials for approval or filing in PDF format. The electronic documentation of profit test models, actuarial report, and other materials shall be submitted separately. Insurance companies shall convert electronic documentation into compressed files through a client program, fill out a list of compressed file packages of personal insurance products, and submit the compressed files and the list of compressed file packages of personal insurance products to the CBIRC on compact disc.218 Insurance companies may apply floating rates to short-term accidental injury insurance which has passed the filing procedure with the CBIRC, but uniform floating range or measures shall be determined by the head office of an insurance company. The floating rates of short-term personal health insurance shall comply with the relevant provisions of the CBIRC.219 Insurance companies may sell a combination of insurance clauses and insurance premium rates which have passed the filing procedure with the CBIRC, but such sales may not change the insurance liability, exceptions, duration, and cash value or violate article 7 of this Notice.220 Insurance companies shall strengthen their management of insurance clauses and insurance premium rates currently in use, track and analyze their operations on a regular basis, and, in case of any serious issues regarding insurance clauses and insurance premium rates, take effective measures in a timely manner and report to the CBIRC and local CBIRC offices.221 The local CBIRC offices may require the branch offices of insurance companies to report information regarding insurance clauses and insurance premium rates in light of the local circumstances.222 217 The Notice of the CIRC on Several Issues concerning the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies 2012, s.5. 218 Ibid., s.6. 219 Ibid., s.7. 220 Ibid., s.8. 221 Ibid., s.9. 222 Ibid., s.10.

411

REGULATION OF THE INSURANCE BUSINESS

Insurance clauses and insurance premium rates which have passed the approval or filing procedure with the CBIRC before the Measures come into force may remain to be used; those submitted to the CBIRC for approval or filing after the Measures come into force shall comply with the Measures and this Notice.223 The administration of insurance clauses and insurance premium rates of the branches of American International Assurance Co., Ltd. shall be governed by the Measures and the provisions of this Notice regarding the head offices of personal insurance companies.224 9.8 Development of insurance products by property insurance companies To regulate the development of the insurance products by property insurance companies and enhance the quality of the supply of insurance products, in accordance with the Insurance Law and the Measures for the Administration of Insurance Clauses and Insurance Rates of Property Insurance Companies, the CIRC developed the Guidelines for the Development of Insurance Products by Property Insurance Companies and released the Notice on issuing the Guidelines on 30 December 2016.225 The Guidelines became effective on 1 January 2017. According to the Guidelines, the term of “insurance product” means a unit that is composed of the clauses and premium rates of one or more main insurance, to which the clauses and premium rates of several additional insurance may be attached, and that may be independently sold by the insurance company.226 9.8.1 Basic requirements for product development In the development of insurance products, an insurance company shall comply with the provisions of the Insurance Law and relevant laws and regulations and shall not violate the insurance principles, violate the public order or good customs, or damage the public interest and the lawful rights and interests of insurance consumers. In the development of insurance products, an insurance company shall comprehensively consider its underwriting capacity, risk unit division, reinsurance support, and other factors and shall not endanger its solvency and financial soundness.227 To develop insurance products, an insurance company shall adhere to the following principles:228 (1) Principle of insurable interest. An insured in property insurance shall have an insurable interest in the subject matter insured when an insured incident 223 Ibid., s.11. 224 Ibid., s.12. 225 Bao Jian Fa No. 115 [2016] (see accessed on 13 October 2020). 226 The Guidelines for the Development of Insurance Products by Property Insurance Companies 2016, art.3. 227 The Guidelines for the Development of Insurance Products by Property Insurance Companies 2016, art.5. 228 Ibid., art.6.

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REGULATION OF THE INSURANCE BUSINESS

(2) (3) (4) (5)

occurs. A proposer in personal insurance shall have an insurable interest in the life insured when an insurance contract is concluded. Principle of indemnity. The principle of indemnity shall be followed for property insurance products and the insured shall be strictly prohibited from obtaining unjust benefits. Principle of good faith. The insurance clauses shall specify the rights and obligations of the proposer and the insured and shall not damage the lawful rights or interests of the proposer and the insured. Principle of aleatory contract. There is uncertainty as to whether the risks covered by insurance products would occur, the size of loss, and so on. Principle of risk pricing. The determination of premium rates shall be based on the measurement of the actual risk level and insurance liability, to ensure that the insurance premium matches with the risk.

An insurance company shall not develop the following insurance products:229 (1) There are no legally recognized interests in the subject matter insured; (2) An insurance product whose insured incident will not cause actual losses to the insured; (3) An insurance product in which the risks underwritten are determined, for example, the risk of loss will not actually occur or the risk of loss is determined; (4) An insurance product that covers against speculative risk with probability of loss and profit; (5) A gimmick product that speculates in concept and has no substantive content or meaning; (6) An insurance product that provides no actual security and simply aims at reducing or increasing price; (7) An insurance product that guarantees “zero insurance premium” or “refunding insurance premium if no insured incident occurs,” or refunds other unjust benefits; (8) Other insurance products in violation of laws and regulations, insurance principles, public order, and good customs.

When developing an insurance product, especially a personal insurance product, an insurance company shall follow the principles of popularization and standardization, use plain language that is easy to understand, and effectively protect the lawful rights and interests of the proposer and the insured.230 Insurance products include individual products and non-individual products. “Individual product” means an insurance product that is for a natural person as the insured and “non-individual product” means an insurance product that is not for a natural person as the insured. 229 Ibid., art.7. 230 Ibid., art.8.

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9.8.2 Naming rules The names of insurance clauses and insurance premium rates shall be clear and able to objectively and comprehensively reflect the main contents of the insurance liability, shall not use any terms that easily cause ambiguity, shall not misinterpret the insurance liability, and shall not mislead the consumers.231 The clause and premium rate of main insurance shall be named in the following format: Name of the insurance company + (Geographical name of the local product) + description of the main insurance liability (type of insurance) + (version).232 The clause and premium rate of additional insurance shall be named in the following format: (Name of the insurance company) + (name of main insurance) + additional + (Geographical name of the local product) + description of the main insurance liability (type of insurance) + (version). The contents in the brackets are optional. The full name or abbreviation of the company may be used as the “name of the insurance company.” “Geographical name of the local product” means the full name or abbreviation of the administrative division used in the business operation of a local product. “Description of the main insurance liability,” as determined by the company, shall contain the main insurance liability of the clause. The name of the insurance type may be used where the insurance liability is able to be clearly classified as a certain insurance type. “Version” may include the applicable specific region, specific sales object, specific business nature, version number, and other contents. The name of the clause and premium rate of additional insurance that does not include the name of the main insurance shall include the name of the insurance company. In principle, the personalized name shall not be used in the name of the insurance clause and insurance premium rate, except as otherwise prescribed by the CBIRC on the naming of specific insurance types. The insurance types of an insurance company include motor vehicle insurance, agriculture insurance, enterprise property insurance, household property insurance, engineering insurance, liability insurance, credit insurance, guarantee insurance, vessel insurance, cargo transportation insurance, special risk insurance, accident insurance, short-term health insurance, and others. The term “others” means the insurance type of insurance products whose specific insurance type and clear attribution are unable to be defined.233 The name of an insurance product shall be governed by the rules on the naming of the insurance clause and insurance premium rate and be consistent with the name of the clause and premium rate of the main insurance in principle. A personalized title may be added after the name of an insurance company for the name of an insurance product. A personalized title shall not have more than ten words or contain any vulgar or indecent term with the nature of speculation.234

231 The Guidelines for the Development of Insurance Products by Property Insurance Companies 2016, art.9. 232 Ibid., art.10. 233 Ibid., art.11. 234 Ibid., art.12.

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9.8.3 Requirements on the insurance clauses In the development of the insurance clauses, an insurance company may refer to the following frame factors: general provisions, insurance liability, liability exemption, insurance amount/liability limit and deductible amount (rate), insurance period, obligations of the insurer, obligations of the insurance applicant/insured, handling of claims, handling of disputes, application of law, miscellaneous, interpretation, and so on.235 The specific contents of the insurance clauses may be increased or decreased according to the features of all insurance types. The insurance clauses shall be rigorously developed and shall not be excessively broad. The proposer, the insured, the subject matter insured, and other contents may be agreed in the general provisions of insurance clauses.236 The following contents may be agreed in the insurance liability in the insurance clauses:237 (1) Causes of losses. The causes of losses during the insurance period shall be specified and the insurer shall be responsible for indemnity in accordance with the agreement in the insurance contract. (2) Contents of losses. The type of losses during the insurance period shall be specified and the insurer shall be responsible for indemnity in accordance with the agreement in the insurance contract. (3) Other loss of costs.The insurer shall be responsible for indemnity as agreed in the insurance contract for other necessary and reasonable costs paid by the insured. The following contents may be agreed in the liability exemption in the insurance clauses:238 (1) Exception of circumstances. The circumstances under which an insurer is not responsible for compensation shall be specified. (2) Exception of causes. The causes of losses and costs for which the insurer is not responsible for compensation shall be specified. (3) Exception of losses. The losses and fees for which the insurer is not responsible for compensation shall be specified. (4) Other exceptions. Other losses, expenses, and liabilities not covered in the scope of insurance liability for which the insurer is not responsible for compensation. All clauses involving the contents that an insurer does not assume, is exempted from, and reduces the insurance liability shall be specified in part of the liability

235 The Guidelines for the Development of Insurance Products by Property Insurance Companies 2016, art.13. 236 Ibid., art.14. 237 Ibid., art.15. 238 Ibid., art.16.

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exemption. The following contents may be agreed in the insured amount/liability limit and deductible amount (rate) in the insurance clauses:239 (1) The insured amount/liability limit shall be separately determined by the insured and the insurer and shall be specified in the insurance policy. The insured amount agreed in the insurance clauses shall not exceed the insurable value when the insurance policy is purchased. (2) The deductible amount (rate) shall be determined by the proposer and insurer when entering into an insurance contract and be specified in the insurance policy. The insurable value shall be agreed in the insurance clauses in marine insurance under the relevant provisions of the Maritime Code.240 A specific insurance period and the starting time and finishing time as specified in the insurance policy may be agreed in the insurance term in the insurance clauses.241 The insurer’s obligations can be agreed in the insurance policy, including issuing insurance policies, notifying the insured of supplying further proofs and materials of the claim in a timely manner at one time, and determining insurance payment in a timely manner, and other matters. The specific contents of the obligations of the insurer may be increased or decreased according to the different types of insurance.242 The proposer’s or the insured’s obligations can be agreed to in the insurance policy, including the pre-contract duty of disclosure, duty of paying insurance premiums, duty of preventing risk and mitigating loss, duty of notification of significant increase of risk during the insurance period, duty of notification of accidents, duty of providing claim assistance, duty of assistance in subrogation, and duty of providing certificates and documents, and so on. The specific contents of the obligations of the proposer and the insured may be increased or decreased according to the different types of insurance.243 The basis for the determination of the liability for compensation, methods for the calculation of the losses of subject matter insured, methods for the calculation of the deductible amount (rate), compensation method, handling of residual value, subrogation, and other contents may be agreed to in the part of handling claims in the insurance policy.244 The following contents may be agreed to in the handling of disputes in the insurance clauses: the disputes arising from the fulfilment of an insurance contract shall be resolved by the parties through consultation. Where the consultation fails, the disputes may be submitted to the arbitration institution as specified in the insurance policy for arbitration; where no arbitration institution is specified in the insurance policy and no arbitration agreement is concluded after the occurrence 239 240 241 242 243 244

Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

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of the disputes, a lawsuit may be filed with the People’s Court of China according to law.245 The laws applicable to the handling of disputes over insurance contracts shall be agreed to in the application of law in the insurance clauses. The following contents may be agreed to in miscellaneous in the insurance clauses:246 A proposer that requires termination of the contract before the insurance liability commences shall pay commission fees to the insurer as agreed in the contract, and the insurer shall refund the insurance premium. Where the proposer requires termination of the contract after the insurance liability commences, the insurer shall refund the insurance premium to the proposer after deducting the receivable part from the day of commencement of insurance liability to the day of contract termination as agreed in the contract. For a cargo transportation insurance contract or a voyage insurance contract for a means of transport, once the insurance liability commences, neither of the parties to the contract shall terminate the contract. The interpretations to terminologies involved in the insurance clauses may be agreed to in the interpretations to the insurance clauses.247 9.8.4 Requirements on insurance premium rates Insurance premium rates shall be determined under the principles of rationality, fairness, and adequacy.248 An insurance company shall, on the basis of the empirical analysis and reasonable expectations, scientifically set actuarial assumptions, give comprehensive consideration to the factors of market competition, and set reasonable price for the products.249 An insurance company shall fully maximize the incentive and restraint role of insurance premium leverage, reinforce the advance prevention of risks, reduce the occurrence of risks and accidents, and promote the emergency management of work safety and emergencies. An insurance company shall raise the insurance premium rates for severely dishonest subjects and restrict the provision of insurance services thereto. The insurance premium rate consists of the standard premium rate and the rate adjustment coefficient. The standard premium rates to be determined include the pure risk loss ratio and additional rates.250 An insurance company shall measure the pure risk loss ratio according to the actual risk level or refer to and use the pure risk loss ratio of the industry.251 The company shall rationally determine 245 Ibid., art.23. 246 Ibid., art.24. 247 Ibid., art.25. 248 The Guidelines for the Development of Insurance Products by Property Insurance Companies 2016, art.26. 249 Ibid., art.27. 250 The Guidelines for the Development of Insurance Products by Property Insurance Companies 2016, art.28. 251 Ibid., art.29.

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the additional rates. Additional rates consist of the commission and handling fees, business operation and management expenses, profits, and risk surcharge, among others. The additional rate shall not be excessively high and therefore damage the interests of the insurance applicant and the insured.252 An insurance company shall rationally determine the rate adjustment coefficient. As the rational reflection of the risk difference and cost difference, a rate adjustment coefficient shall not affect the rationality, fairness, or adequacy of the overall rate level.253 9.8.5 Organization system for the development of products An insurance company shall develop its product development and management system and specify the organizational structure, division of functions, work flow, assessment, rewards, punishments, and other contents.254 An insurance company shall set up a product management committee or establish a similar mechanism, led by the primary person in charge of a company and participated in by the responsible persons of the relevant departments, that will be responsible the deliberation of the company’s major issues on product development and management.255 An insurance company shall designate a specialized department to perform the functions of product development and management and shall be responsible for the centralized management of the whole product flow. The product development department of an insurance company shall appoint full-time product development personnel to be responsible for the development, pricing, research, management, and other work of the insurance products.256 The relevant business department of an insurance company may appoint relevant personnel to be responsible for the product research, argumentation, development, and management of the business line. All provincial branch companies of an insurance company may appoint relevant persons to be responsible for the research, argumentation, and other work of the local products. The primary person in charge of an insurance company shall assume the leadership responsibilities for the product development and management of the company, and the person in charge of the development and performing the functions of product development and management shall be directly responsible for the product development and management of the company. The sales department and branch offices shall be directly responsible for the sale of the products.257 The actuarial examiner and legal examiner shall be determined by an insurance company, be respectively responsible for the verification of actuarial pricing for products and the examination of the legality and compliance for the clauses and assume corresponding legal liability. 252 253 254 255 256 257

Ibid., art.30. Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35.

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An insurance company may study and establish a product development incentive mechanism, encourage the business departments and branch companies to intensify product research and development, and encourage product innovation. The company shall be encouraged to realize professional research and development and to strengthen the innovation capacity for insurance products through establishing an innovation laboratory for insurance products and other forms.258 9.8.6 Product development process An insurance company shall, in light of its reality, develop its product development process and continuously optimize and adjust it.259 During the product development process, an insurance company shall fully solicit the opinions and suggestions of insurance consumers and respect the professional advice of the actuarial examiner and legal examiner. In the development of an insurance product, an insurance company may refer to and use the model clauses and pure risk loss ratio of the industry. An insurance company shall be encouraged to strengthen the research and reference of the international insurance products and continuously improve the quality of products. The product development process of an insurance company shall include planning and preparation, research and argumentation, development of clauses, rate pricing, verification of internal argumentation, submission for approval and recordation (registration), launching, and publicity.260 An insurance company shall reasonably determine its product development plan according to the market demand and its development plan, adopt scientific research methods to collect, review, and analyze the market demand information, similar product information, and other data, and effectively carry out various preparatory work.261 An insurance company shall strengthen the research and argumentation for the development of clauses and rates, effectively conduct feasibility analysis for product development, accurately analyze the potential risks, develop risk control measures in a scientific manner, and specify the business operation and management plans for the sale and promotion of products, underwriting, claims, and other subsequent links.262 An insurance company shall, according to the requirements of the laws, regulations, and the regulatory provisions, develop the essential elements for the development of clauses and premium rates and the development of other items.263 In the development of guarantee insurance products, an insurance company shall develop corresponding risk control measures and submit relevant materials when submitting materials to the CBIRC for approval and recordation. 258 Ibid., art.36. 259 The Guidelines for the Development of Insurance Products by Property Insurance Companies 2016, art.37. 260 Ibid., art.38. 261 Ibid., art.39. 262 Ibid., art.40. 263 Ibid., art.41.

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An insurance company shall establish a clear internal examination and argumentation mechanism for product development. A legal examiner of an insurance company shall examine and sign for the legality and compliance of the insurance clauses; an actuarial examiner shall examine and sign for the rate pricing and actuarial report. The development of highly policy-oriented products, products to be submitted for examination and approval, pioneering products in the industry, products with relatively high expected income from insurance premiums or insured amount, products with relatively high risks, products with special risks or subject matter insured, and products with unique business operation model, and other key products shall be submitted to the product management committee of the company and be specified in the documents submitted.264 An insurance company shall, according to the laws, regulations, and regulatory provisions, submit the insurance clauses and insurance premium rates developed to the CBIRC for approval and recordation. Products subject to independent registration as required by the Notice of the CIRC on Reforming the Independent Registration of the Recordation Products of Property Insurance Companies and the Notice of the General Office of the CIRC on Launching the Independent Registration Platform for the Recordation Products of Property Insurance Companies shall be registered on the independent registration platform.265 An insurance company shall effectively complete the information disclosure of products as required.266 The liability exemption clauses, deductible amount, deductible rate, proportional compensation or payment, and other clauses exempting an insurer from liability or mitigating the liability of the insurer in a standard contract provided by an insurance company shall be specified in words, fonts, symbols, or other conspicuous signs that are sufficient to draw the attention of the insurance applicant, and the concepts, contents, and legal consequences of the clauses exempting the insurer from liability in the insurance contract shall be explained in writing or verbally to the extent that ordinary people may understand.267 An insurance company shall objectively and accurately publicize insurance products and shall not mislead insurance consumers. Insurance clauses and insurance premium rates that have not been approved or registered shall not be publicized or sold.268 Where the name of an insurance product is inconsistent with the name of the insurance clause and insurance premium rate, the applicable name of the insurance clause and insurance premium rate shall be specified in the insurance contract and the insurance publicity materials. An insurance company shall strengthen the management of the guarantee insurance products, specify the types of the insurance applicant and the insured of the guarantee insurance clauses, further strengthen the explanation of insurance liability

264 265 266 267 268

Ibid., art.42. Ibid., art.43. Ibid., art.44. Ibid., art.45. Ibid., art.46.

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and liability exemption, and effectively strengthen the protection of the interests and rights of the insurance applicant and the insured.269 When providing guarantee insurance services, an insurance company shall not replace a product with a term longer than one year in a disguised manner with a product with a term shorter than one year through renewal year by year, issuing several insurance policies, and other ways. 9.8.7 Assessment, revision, review, and cancellation An insurance company shall assess the sales information, cash flow, capital occupation, profits, and other information of the products on sale whose premiums of issued policies of the current term account for over 5% as required by the supervision rules of the insurance company on solvency. Products launched for less than two years shall be assessed at least once every half-year, and products launched for more than two years shall be assessed at least on an annual basis. For products on sale whose premiums of issued policies of the current term account for over 5%, the adequacy of their insurance premiums shall be assessed at least once a year.270 An insurance company shall, according to the market information, reflection of insurance consumers, reporting by news media and others, closely follow up and assess in a timely manner the legality, compliance, and adaptability of its clauses, especially the newly developed clauses; revise in a timely manner the insurance clauses with problems; and stop selling products unsuitable to be continuously sold.271 An insurance company shall conduct rationality assessment, verification, and adjustment for the insurance premium rates as required according to the historical experience data, business operation information, withdrawal of reserves, and other actual situations. An insurance company shall review the insurance products on an annual basis and cancel the insurance products that are no longer sold in a timely manner.272 An insurance company shall develop annual product assessment reports, conduct statistics and analysis of the information on development of products, operation, and use of products, revision of products, cancellation of products, and other items, and submit them to the CBIRC before the end of each March after submitting them to the product management committee of the company for deliberation and adopting.273 Matters not covered by the development of the insurance products shall be governed by the relevant provisions of the CBIRC, except as otherwise prescribed by the agricultural insurance (agriculture-related insurance), motor vehicle insurance, accident insurance, health insurance, and other insurance types.274 269 Ibid., art.47. 270 The Guidelines for the Development of Insurance Products by Property Insurance Companies 2016, art.48. 271 Ibid., art.49. 272 Ibid., art.50. 273 Ibid., art.51. 274 Ibid., art.52.

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9.9 Improving the supervision of insurance products of property insurance companies In order to deepen the reform of delegating power and streamlining administrative procedures, continuously strengthen and improve product supervision, and enhance the quality of property insurance products, the CBIRC recently issued the Notice of the General Office of the CBIRC on Further Strengthening and Improving the Supervision on the Products of Property Insurance Companies on 19 February 2020, which came into force on 1 March 2020.275 The Notice consist of four parts: (1) Improving the management methods and the supervision mechanism; (2) Clarifying the filing process and standardize product filing; (3) Relevant work requirements; and (4) Other matters.They are examined one by one in the sections that follow. 9.9.1 Improving the management methods and the supervision mechanism276 (a) Adjust the scope of product approval and filing277 The original Notice of CIRC on the Relevant Issues Concerning the Implementation of the Measures for the Administration of Insurance Clauses and Premium Rates of Property Insurance Companies 2010278 stipulates that motor vehicle insurance, guarantee insurance, and credit insurance with a term for more than one year are required to be submitted to the CBIRC for approval. In order to further improve the efficiency of products supervision and strengthen the effectiveness of products supervision, the commercial motor vehicle insurance using the model insurance clauses, credit insurance, and guarantee insurance products with a term of more than one year are changed from approval to filing, and products that originally belonged to the filing category are still subject to filing management. At the same time, the CBIRC will adhere to the principle of combining decentralization and supervision with equal emphasis and continue to strengthen the supervision of the registered products. (b) Implement product classification supervision and territorial supervision279 The CBIRC is responsible for filing and supervising the insurance products that use model insurance clauses for commercial motor vehicle insurance and the agriculture insurance products subsidized by central finance (hereinafter, “motor and

275 Notice of the General Office of the CBIRC on Further Strengthening and Improving the Supervision on the Products of Property Insurance Companies 2020 (see accessed on 11 July 2020). 276 Notice of the General Office of the CBIRC on Further Strengthening and Improving the Supervision on the Products of Property Insurance Companies 2020, s.1. 277 Ibid., s.1(1). 278 Bao Jian Fa No. 43 [2010]. 279 Notice of the General Office of the CBIRC on Further Strengthening and Improving the Supervision on the Products of Property Insurance Companies 2020, s.1(2).

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agriculture insurance products”); other products are under the jurisdiction of the local Banking and Insurance Regulatory Bureau (BIRB). The CBIRC will adjust in a timely manner the scope of products to be filed and supervised by the BIRB in accordance with changes in market conditions and product regulatory needs. (c) Further clarify product supervision responsibilities280 The CBIRC is responsible for studying and formulating product supervision policies, system rules, and work plans, organizing and implementing nationwide product off-site inspections, and filing and supervision of motor and agriculture insurance products.The BIRB is responsible for the specific organization and implementation of product supervision regulations as well as the filing and supervision of products other than the motor and agriculture insurance products, including the following: (1) it shall implement the supervision of local products, follow up and monitor the company’s products, and take supervisory measures in a timely manner for problematic products; (2) it shall implement supervision on personal products and high-risk products as key areas, safeguard the legitimate rights and interests of insurance consumers, and prevent potential risks; (3) it shall organize and implement off-site inspections of company products within the jurisdiction and cooperate with the nationwide off-site inspection of products; (4) it shall conduct well for information disclosure and complaints-handling related to products; (5) it shall deal with other matters assigned by the CBIRC. (d) Strengthen product withdrawal mechanism281 For products that violate the Insurance Law and other relevant laws and regulations, do not meet the principles of insurance, violate public order and good customs, use gimmicks or hype, damage the public interest and the legitimate rights and interests of insurance consumers, and endanger the company’s solvency and financial stability, once such a product is found, the company shall be ordered to stop using or modify it within a time limit in strict accordance with the relevant regulations. If the circumstances are serious, the company shall be forbidden to declare new products within a certain period. 9.9.2 Clarify the filing process and standardize product filing282 (a) The entity to submit products for filing283 The head office of the property insurance company shall be the entity to submit products for filing. In addition to the motor and agriculture insurance products, the products that are used beyond the scope of a single province (autonomous region, municipality directly under the Central Government, and cities with separate 280 Ibid., s.1(3). 281 Ibid., s.1(4). 282 Notice of the General Office of the CBIRC on Further Strengthening and Improving the Supervision on the Products of Property Insurance Companies 2020, s.2. 283 Ibid., s.2(1).

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plan) shall be filed by the property insurance company head office with the local BIRB where the head office is located. The products that are used only within a certain province (autonomous region, municipality directly under the Central Government, cities with separate plan), the property insurance company’s head office shall file the products with the local BIRB where the products are used. (b) The method of product submission284 All documents and materials for the products to be filed shall be submitted electronically, and after operation and use, the products shall be submitted for filing according to regulations. Among them, commercial vehicle insurance products that use model insurance clauses, agriculture insurance, and agricultural-related insurance products (including the type subsidized by central finance, the type subsidized by local finance, the type with no financial subsidy and agricultural-related insurance product) shall be submitted through the CBIRC’s “Insurance Products Electronic Reporting and Management Information System”. Other products are submitted through the Insurance Association of China’s “Independent Registration Platform for Property Insurance Company Recorded Products”. The Insurance Association of China is responsible for importing product registration data into the “Insurance Products Electronic Reporting and Management Information System” in a timely manner, and the BIRB uses the system administrator account to record and issue record numbers and other subsequent operations. (c) Materials to be submitted for filing the products285 The materials submitted for filing by a property insurance company shall generally include filing documents, filing forms, texts of insurance terms and premium rates, actuarial reports, feasibility reports, and other materials prescribed by the CBIRC. The following materials should also be provided for the filing of the following insurance products: (1) for commercial motor vehicle insurance products, explanation of the policy terms and premium rate and the approvals or opening documents for newly established branches shall be provided; (2) for agriculture insurance and agriculture-related insurance products subsidized by government finance, at least relevant materials that can truly reflect the opinions of the local government’s finance, agriculture, and forestry departments (such as the start-up plan issued by the government) shall be provided; (3) for financing credit insurance and guarantee insurance products, materials such as the review and risk control measures of the company’s product management committee shall be provided; (4) other product filing materials shall meet the requirements of the product independent registration guidelines. In addition, where a product is modified, a comparison table and revision description of the insurance clauses or premium rates before and after the revision shall be provided.

284 Ibid., s.2(2). 285 Ibid., s.2(3).

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9.9.3 Relevant work requirements286 (a) Requirement for property insurance companies287 All property insurance companies shall pay great attention to product management and earnestly assume the main responsibility of product management, shall strictly carry out product legal review, actuarial review, and compliance review. Consumer protection review shall also be conducted for products sold directly to individuals. Product development and use shall be standardized. Product management and control shall be strengthened. Product clean-up and revision shall be done, and the companies shall continuously improve product quality and level. (b) Requirement for the Insurance Association of China (IAC)288 The IAC shall give full play to the industry’s self-discipline function, perform well in the daily management and service of product registration, strictly guarantee the safe operation of the product’s independent registration platform, improve the emergency response mechanism, and continuously optimize the functions of the system platform. It shall study and establish product evaluation and innovative product protection-related mechanisms to promote industry innovation and market vitality. (c) Requirement for Banking and Insurance Regulatory Bureaus (BIRBs)289 Every BIRB shall coordinate product supervision, strengthen organizational guarantees, and ensure that all product supervision responsibilities are put in place. They shall build a product supervision team and continuously improve the professionalism and level of product supervision. They shall implement various product supervision regulations to maintain a good market order and product ecology. 9.9.4 Other matters290 The provisions of this CBIRC Notice shall apply to insurance products of Chinese export credit insurance companies except the products of the medium and longterm export credit insurance and overseas investment insurance.291 This Notice is implemented from 1 March 2020. If previous relevant regulations are inconsistent with this Notice, this Notice shall prevail.292

286 Notice of the General Office of the CBIRC on Further Strengthening and Improving the Supervision on the Products of Property Insurance Companies 2020, s.3. 287 Ibid., s.3(1). 288 Ibid., s.3(2). 289 Ibid., s.3(3). 290 Notice of the General Office of the CBIRC on Further Strengthening and Improving the Supervision on the Products of Property Insurance Companies 2020, s.4. 291 Ibid., s.4(1). 292 Ibid., s.4(2).

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9.9.5 Summary The issuance of this Notice is an important step of reform taken by the CBIRC to streamline administrative procedures and delegate power. It is also an important policy measure to coordinate regulatory resources and form a joint force of supervision. It will help to further improve the product supervision of property insurance companies and stimulate the market vitality of product innovation. The CBIRC Notice includes the following key points: (1) The CBIRC policy filing and approval requirements for two major classes of insurance have changed. The following two classes no longer require formal approval from the CBIRC: the commercial motor vehicle insurance using the model insurance clauses, credit insurance and guarantee insurance products with a term of more than one year. These products are still required to register with the CBIRC. (2) The CBIRC registration for insurance products (policies) must be made by the relevant insurer’s head office, except those policies which are used within a province and these policies can be registered with the local BIRB by such insurer’s branches. (3) For the first time ever, the CBIRC has expressly added to its criteria that an insurer must apply in manufacturing insurance policies (legal, actuarial and compliance) the requirement to include policy wording which is aimed at protecting the customer. This new consumer protection perspective has, however, for the interim, only been applied to the manufacture of personal lines of general insurance sold directly to individual insureds. 9.10 Strengthening the supervision of personal insurance products For the purposes of effectively conducting supervision over personal insurance products, maximizing the role of the market in the allocation of resources, enhancing the core competitiveness of personal insurance products, preventing the risks of personal insurance products, and promoting the supply-side structural reform of personal insurance, the CIRC issued and implemented the Notice of the CIRC on Strengthening the Supervision of Personal Insurance Products on 2 September 2016.293 The CBIRC shall manage personal insurance products by conducting ex post recordation and spot check. Unless prior approval is explicitly required, the personal insurance products developed and designed by an insurance company shall be subject to ex post recordation, that is, a report shall be made to the CBIRC for recordation within ten working days after the sale of products.294 The CBIRC shall issue an acknowledgement of receipt (list of materials for recordation) to the insurance company after receiving the company’s product 293 Bao Jian Fa No. 199 [2016] (see accessed on 13 October 2020). After the issuance of this Notice, the new insurance products submitted for approval or recordation shall be strictly governed by the requirements of this Notice. 294 The Notice of the CIRC on Strengthening the Supervision of Personal Insurance Products 2016, s.1.

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materials for recordation. The acknowledgement of receipt received by the insurance company only represents the submission of complete materials required for recordation. The CBIRC will conduct ex post spot check of the products received in accordance with the law according to its regulatory functions. The CBIRC shall establish an exit mechanism for personal insurance products. Where the CBIRC discovers through spot check and determines that an insurance company’s product for recordation is involved in any violation of law or regulation, it will order the insurance company to cease the use of the product involved in the violation and release to the public information on the suspension of the sales of the product.295 An insurance company shall strengthen its business management of products granted recordation and actively withdraw those with low level of consumer recognition and/or poor sales from the market. Where a company finds in actual business operations that any product violates any law or regulation or falls under any unfair or irrational circumstance, it shall actively withdraw the product from the market and report to the CBIRC. The CBIRC shall establish an accountability mechanism for personal insurance products. Insurance companies shall assume the primary responsibility for products granted recordation.The general manager of an insurance company shall be responsible for leading product development and management and be directly responsible for the examination, signature, and issuance of product recordation reports submitted to the CBIRC. The chief actuary of an insurance company shall be responsible for actuarial check of products and be directly responsible for the rationality, sufficiency, appropriateness, and fairness of the classification of product designs and the determination of fee rates. The person responsible for legal affairs of an insurance company shall be responsible for examining the lawfulness of products and be directly responsible for the fairness, rationality, and regulatory compliance of clauses and the accuracy and preciseness of clause statements.296 Where an insurance company commits any of the following conduct, the CBIRC shall, in light of the seriousness of circumstances, prohibit it from declaring new products with three months or one year as of the date of determination of the regulatory violation, and in light of the seriousness of circumstances, shall take such measures as holding interviews, circulating a notice of criticism, legally giving a warning, and withdrawing office qualifications against the general manager, the chief actuary, the person responsible for legal affairs, and other relevant liable persons of the insurance company: (1) Any product granted recordation that violates any law or regulation or any other provisions of the CBIRC; (2) The insurance company fails to use any insurance products granted approval or recordation according to relevant provisions; (3) Any other conduct recognized by the CBIRC. 295 Ibid., s.2. 296 Ibid., s.3.

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An insurance company shall establish a retrospective mechanism for personal insurance products. An insurance company shall form a work team for product development and management consisting of relevant persons in charge of product actuary, financial affairs, sales, and investment, among others, in which the general manager serves as the team leader. It shall, on an annual basis, retrospect the structural features, regulatory compliance, business operations, and withdrawal of products, as well as the pricing interest rate, occurrence rate, expense ratio (including initial cost, and management fee, among others), surrender rate, rate of return on investment, and other actuarial assumptions used in the determination of product fee rates, based on the actual business operations, form a retrospective report, have it deliberated at the meeting of the board of directors, include it in the annual product summary report, and submit it to the CBIRC for future reference.297 Where an insurance company has any of the following problems in product retrospective work, the CBIRC shall require the insurance company to make rectification within a prescribed time limit; if it fails to do so, the CBIRC shall legally take such regulatory measures as holding interviews, circulating a notice of criticism, and prohibiting the declaration of new products within a certain time limit against the insurance company in accordance with the law: (1) The insurance company fails to voluntarily cease the sale of any individual product granted recordation of which the annual premium income is less than one million yuan and the total number of the insurance policies sold annually is less than 5,000 unless that the insurance product is on the market for less than one year. (2) The insurance company fails to discover and report in a timely and active manner any violation of law or regulation or unfair or irrational circumstance in the products granted recordation. (3) The insurance company fails to track and analyze the business operations of products, fails to monitor and conduct self-inspection of the determination and implementation of fee rates, or fails to make adjustments to the problems found in a timely manner. (4) Any other problem recognized by the CBIRC. An insurance company shall establish the mechanism for the disclosure of information on personal insurance products. An insurance company shall, when submitting product materials to the CBIRC for recordation, actively disclose product recordation materials other than those involving any state secret, trade secret, or personal privacy through the company’s official website or the platform of industry association. An insurance company shall have sufficient determination basis and complete confidentiality measures for product recordation materials prohibited from disclosure due to involvement of any trade secret.298 An insurance company shall strengthen the sales management of new-type personal insurance products. An insurance company shall strictly regulate the sales of new-type personal insurance products, and strengthen control over the authenticity 297 Ibid., s.4. 298 Ibid., s.5.

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of clients’ information so as to ensure the authenticity and integrity of clients’ information. When an insurance company publicizes and sells new-type personal insurance products, it shall strictly abide by the Measures for the Administration of Information Disclosure of New-Type Personal Insurance Products,299 and when demonstrating policy benefits, it shall demonstrate the benefits of new-type products that can be distributed in the future by three levels: high, middle, and low, and shall not commit any of the following conduct:300 (1) The insurance company promises benefits other than guaranteed benefits, or enters into a benefit guarantee agreement with the client or agency (including all kinds of institutions such as banks, post offices, and insurance agencies). (2) The insurance company publicizes products using words like “interest” and “expected return”. (3) The insurance company fails to publicize the insurance duration of the insurance product in accordance with the terms of the insurance product. (4) The insurance company sells new-type personal insurance products through the Internet channel in any region where no branch office is formed. (5) The insurance company participates in Internet bidding sales activities. An insurance company shall strengthen the business management of universal insurance. An insurance company shall establish separate accounting rules for universal insurance and manage universal accounts separately. An insurance company shall scientifically and rationally determine the actual settlement interest rate for universal insurance according to the actual investment of separate assets of universal accounts. When the actual rate of return on investment of a universal account is lower than the actual settlement interest rate for three consecutive months and the special reserves cannot cover the difference, the actual settlement interest rate for the current month shall not be higher than the minimum guarantee interest rate or the actual rate of return on investment, whichever is higher.301 The rate of return on investment as mentioned in this Notice is the financial rate of return (financial rate of return = (investment income + profits and losses of changes in fair value + other income – assets impairment loss) / average balance of funds in application *100%). 9.11 Regulation of product development and design of personal insurance companies For the purposes of implementing the requirements of the Notice of the CIRC on Addressing Regulatory Deficiencies to Establish a Rigorous and Effective Insurance Regulation System 2017,302 conducting effective regulation of personal 299 The CIRC Order No. 3 [2009] (see accessed on 13 October 2020). 300 The Notice of the CIRC on Strengthening the Supervision of Personal Insurance Products 2016, s.6. 301 Ibid., s.7. 302 Bao Jian Fa No. 44 [2017].

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insurance products, ensuring compliance of the product development and design of insurance companies, causing personal insurance products to practically play their role in providing security and return to their nature of insurance, and preventing business risks, the CIRC published the Notice of the CIRC on Regulating the Product Development and Design of Personal Insurance Companies on 11 May 2017.303 According to this Notice, insurance companies shall develop and design insurance products in adherence to the following principles:304 (1) Developing personal insurance products that help secure and improve the people’s livelihood, by focusing on the needs of consumers. (2) Developing personal insurance products consistent with the products’ own laws and the direction of the national development strategy, by practical consideration of China’s national conditions and industry development. (3) Developing personal insurance products with prominent security functions and in line with loss sharing, risk spreading, and the law of large numbers, by basing them on the fundamental principles of insurance and learning from international experience. Insurance companies are supported and encouraged to vigorously develop the following personal insurance products:305 (1) The term life insurance products and whole life insurance products developed by insurance companies shall focus on serving the security plan for the death risks of consumers, and the risk coverage levels of such products shall continue to be raised. Insurance companies are supported and encouraged to differentiate pricing for term life insurance products and whole life insurance products, differentiate the health status and smoking status of the insured, and improve the scientific pricing of products. (2) The long-term annuity insurance products developed by insurance companies shall focus on serving the accumulation of long-term survival and long-term pensions for consumers and provide consumers with long-term and continuous survival and pension receiving services. (3) The health insurance products developed by insurance companies shall focus on serving the health protection planning for consumers to see a doctor and seek medical treatment and continuously improve the coverage and protection. (4) The exclusive insurance protection products developed by insurance companies for specific groups of people shall focus on supporting major national 303 Bao Jian Ren Shen Xian No. 134 [2017] (see accessed on 12 July 2020). This Notice became effective as of the date of publication. If the relevant regulations previously issued by the CIRC are inconsistent with this Notice, this Notice shall prevail. After the issuance of this Notice, new insurance products submitted for approval or filing must strictly comply with the requirements of this Notice. 304 The Notice of the CIRC on Regulating the Product Development and Design of Personal Insurance Companies, s.1. 305 Ibid., s.2.

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development areas such as supporting the development of the country’s real economy and the country’s strategy to combat poverty. The insurance products developed and designed by the insurance companies shall properly meet the following requirements:306 (1) For endowment insurance products and annuity insurance products, the first survival insurance payment shall be five years after the policy takes effect, and the annual payment or partial payment shall not exceed 20% of the insurance premium paid. (2) The design of universal insurance products and unit-linked insurance products shall provide functions such as irregular and additional insurance premiums and flexible adjustment of insurance amounts. Insurance companies shall not design universal insurance products or unit-linked insurance products in the form of additional insurance. (3) The survival insurance premium paid by nursing insurance products before the expiration of the insurance period shall be based on the condition that the insured needs the nursing care caused by his or her disability to the daily life as stipulated in the insurance contract. (4) The survival insurance premium paid by the disability income loss insurance product before the expiration of the insurance period shall be subject to the payment condition that the insured’s loss of working ability is due to illness or accidental injury as stipulated in the insurance contract. (5) For group medical insurance products, the medical premiums collected by insurance companies shall be used for the payment of insurance proceeds for medical insurance liability, and the determination of the product premium rate shall meet the requirements of relevant regulatory regulations. (6) The name of the insurance product shall be clear, highlighting the liability characteristics of the insurance product. The insurance product name, product brochure, and related product promotional materials shall not contain expressions such as “finance” or “investment plan”. (7) If an insurance company sells a product in combination, it shall clearly inform consumers in the product sales and product publicity materials that it is an “insurance product combination” or “insurance product plan”. If an insurance company develops or designs a life insurance product in violation of regulatory rules, or deliberately circumvents regulatory rules through product design, the CBIRC will impose administrative penalties in accordance with the law, take a certain period of time to prohibit the declaration of new products, order the company to stop accepting some or all of its new business, and seriously hold the company’s general manager, chief actuary, and other responsible persons accountable.307

306 Ibid., s.3. 307 Ibid., s.4.

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9.12 Regulation of information disclosure of insurance products The regulations just mentioned are concerned with the insurance policy terms and premium rates. The insurers must follow these regulations in manufacturing their insurance policies. It is a normal practice that standard-form contracts are used for consumer insurance. The standard-form contracts are advantageous in several respects.308 However, the major disadvantage is that the insurer with superior knowledge and bargaining power may impose its will on a weaker and less informed insured. Usually, the insurers draft the terms on the basis of two considerations: on the one hand, the insurers need to make the terms of the contract attractive to the potential insureds for marketing purposes; on the other, the insurers need to make the terms well defined for the purpose of management of risk and control of the liability of payment under the policy. Thus, the insurers often use complex wordings to limit or exclude their liability which an ordinary insured cannot easily understand. The insured is in a weak bargaining position of “taking it or leaving it”, so for the purpose of protecting the consumers, the insurance contracts must be made transparent to the insureds so that the insureds can enter into the contracts on the basis of a proper understanding of the terms of the contracts. In order to achieve the goal of transparency of a standard-form contract to the insureds before concluding the contract and to protect the legitimate rights and interests of the insureds and beneficiaries, Chinese law adopts a number of approaches: first, the insurers are required, by article 17 of the Insurance Law, to explain the content of the contracts and to clearly explain the exclusion clauses to the insured before the conclusion of a contract, otherwise the exclusion clauses are ineffective.309 This approach is concerned with the insurer’s pre-contractual duty for contractual transparency as required by insurance contract law, which has been considered by the author elsewhere.310 Second, the standard-form insurance contracts must be formulated transparently by the insurers and must meet the statutory requirements of the Insurance Law and regulatory requirements of the CBIRC and are subject to the scrutiny and administration of the CBIRC; this second approach has just been considered in this chapter. Third, the CBIRC provides regulatory rules in relation to information disclosure of insurance products to require the insurers to disclose information of the products in a transparent 308 Considerable time is saved that otherwise would be required to negotiate individual contracts. Judicial interpretation of one contract can serve as a guide for the interpretation of similar kinds of contracts. Risk can be evaluated by the insurer on a more predictable basis. 309 Article 17 of the Insurance Law provides that; When standard clauses provided by the insurer are adopted for concluding an insurance contract, the standard clauses provided by the insurer to the proposer shall be attached to the insurance application form, and the insurer shall explain contents of the contract to the proposer. When concluding an insurance contract, the insurer shall make notes on clauses which exempt the insurer of its liabilities on the application form, the insurance policy, or other certificate that are so conspicuous as to draw the proposer’s attention, and make specific and clear explanations thereof to the proposer orally or in writing; otherwise such clauses shall have no effect.

310 See Zhen Jing, Chinese Insurance Contracts: Law and Practice (1st edn, Informa Law from Routledge 2017) 287–334.

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manner. This kind of regulation is in fact for the sake of providing detailed rules for the insurers to follow in their performance of the duty of explanation of the content of the contract to the insured as required by article 17 of the Insurance Law. In order to make insurance products transparent to insureds, the CBIRC issues regulatory rules which require the insurers to disclose information about their insurance products in a way that an ordinary insured can understand the meaning of the insurance clauses. Let’s take disclosure of information on life insurance products as an example to see how the CBIRC requires the insurers to perform their duties in respect of disclosure of information about the life insurance products. The regulatory rules in relation to disclosure of information about life insurance products are set out by the CIRC in the following regulations: (1) The Measures for the Administration of Information Disclosure of Newtype Personal Insurance Products in 2009 (hereinafter, the Measures 2009) which were issued on 25 September 2009 and came into force on 1 October 2009.311 (2) The Notice of CIRC on Issues Concerning the Implementation of the Administrative Measures for the Information Disclosure of New-type Personal Insurance Products 2009 which were issued on 27 September 2009 and came into force on 1 October 2009.312 (3) Notice of the China Insurance Regulatory Commission on the Interpretation of the Relevant Articles in the Administrative Measures for the Information Disclosure of New-type Personal Insurance Products 2009 which were issued and implemented on 12 November 2009.313 The term “new-type personal insurance products” as mentioned in the Measures 2009 refers to unit-linked (or investment-linked) insurance, universal insurance, participating insurance, and other products approved by the CBIRC.314 The term “information disclosure” refers to describing the characteristics of new-type products, illustrating the estimation of insurance policy benefits, and introducing business performance and other relevant information to the proposer, the life insured and beneficiaries, and the general public by life insurance companies and their agents.315 The requirement of information disclosure of the insurance products enables the potential insureds to understand the features of the products and to make an informed decision on purchasing a particular product.

311 The CIRC Order No. 3 [2009] (see accessed on 13 October 2020). 312 Bao Jian Fa No. 104 [2009] (see accessed on 13 October 2020). 313 Bao Jian Shou Xian No. 1161 [2009] (see accessed on 13 October 2020). 314 The Measures for the Administration of the Information Disclosure of New-type Personal Insurance Products 2009, art.2. 315 Ibid., art.3.

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9.12.1 General requirements on information disclosure of personal insurance products To launch a new-type product, an insurance company shall make a product description and an insurance information notice and disclose information according to the Measures 2009.316 Information can be disclosed in a number of ways: (1) explanations and introductions on media or company websites; (2) explanations and introductions in product presentations; (3) explanations and introductions made by salespersons; (4) return visits made by customer service staff; and (5) reports sent on a regular basis.317 Insurance companies must use plain and intelligible language in information disclosure to accurately describe the product. They must be responsible for the objectiveness and authenticity of the information disclosed by them and may not omit any important information. They must not provide false information to proposers, life insureds, beneficiaries, and the general public, and they must not mislead them or conceal information from them.318 When selling a new-type product, an insurance company shall present the insurance clauses and the product description to insurance proposers. When selling a new-type product to an individual, it shall also present the insurance information letter.To conclude an insurance contract which adopts the standard clauses provided by the insurance company, the company must provide a proposal form together with the standard clauses to the proposer and explain the contents of the contract to the proposer. For a new-type product sold to individuals, the insurance proposal form provided by the insurance company shall have a declaration column for the proposer to sign on it after he or she has handwritten the sentence that “I have read the insurance clauses, the product description and the insurance information letter and I am aware of the characteristics of this product and the uncertainty of the insurance policy benefits”.319 His or her handwriting the sentence is not to affect the definite benefits which the proposer, the insured, and the beneficiary may enjoy according to the insurance contract.320 The unit-linked insurance, universal insurance, participating insurance, and other new products have the characteristics different from life insurance products at a fixed rate. The main purpose of requiring proposers to handwrite the statement as just mentioned is to inform the proposers of the risks and assist them to correctly understand the insurance products they are purchasing and the risks they may possibly face.321 The term “insurance policy benefits” refers to all the benefits related to the insurance contract which the proposer, the insured, and the beneficiary may enjoy, including both definite benefits and non-guaranteed benefits. The term

316 Ibid., art.4. 317 Ibid., art.3. 318 Ibid., art.5. 319 Ibid., art.6. 320 The Notice of the CIRC on the Interpretation of the Relevant Articles in the Measure for the Administration of the Information Disclosure of New-type Personal Insurance Product 2009, s.3. 321 Ibid., s.1.

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“the uncertainty of the insurance policy benefits” in the declaration requiring the proposer to handwrite only aims at the non-guaranteed benefits part of new-type products, that is, the bonus distribution of participating insurance, the part of the universal insurance settlement interest rate exceeding the minimum guaranteed interest rate as well as the unit price of unit-linked insurance in the investment accounts.322 Where an insurance company demonstrates the insurance policy benefits in the product description or any other publicity materials, it shall demonstrate the benefits that can be distributed in the future by three levels: high, middle, and low. Benefit demonstration follows the prudential principle. The return-on-investment assumptions used in the benefit demonstration of participating insurance products and unit-linked insurance products and the settlement interest rate assumptions of universal insurance may not exceed the maximum limit prescribed by the CBIRC.323 The CIRC set out detailed rules in respect of demonstration of the insurance policy benefits to the proposers in the Notice of the CIRC on Issues Concerning the implementation of the Measures for Administration of the Information Disclosure of New-type Personal Insurance Products in 2009.324 This kind of regulation is in fact for the sake of providing detailed rules for the insurers to follow in their performance of the duty of explanation of the content of the contract to the insured as required by art.17 of the Insurance Law. It is required by the Notice that when an insurance company demonstrates the insurance policy benefits in the product description or any other publicity materials, the return-on-investment assumptions as used in the benefit demonstration of participating insurance products shall not be higher than 6%, 4.5%, and 3% for the high level, the middle level, and the low level, respectively, and the cumulative annual interest rate of cash bonus shall not be more than 3%. The return-on-investment assumptions as used in the benefit demonstration of unit-linked insurance products shall not be higher than 7%, 4.5%, and 1% for the high level, the middle level, and the low level, respectively. The return-on-investment assumptions as used in the benefit demonstration of universal insurance products shall not be higher than 6%, 4.5%, and the minimum guaranteed rate for the high level, the middle level, and the low level, respectively. In particular, the return-on-investment assumptions as used in the benefit demonstration of participating insurance products refer to assumptions on the actual return-on-investment used to calculate the bonus shares of participating insurance products, and the return-on-investment assumptions as used in the benefit demonstration of unit-linked insurance products refer to the returnon-net investment less the management fees of assets involved in the unit-linked insurance products.325 In the disclosure of information on new products, insurance companies and their agents may not use ratios to make simple comparison with other insurance 322 Ibid., s.2. 323 The Measures for the Administration of the Information Disclosure of New-type Personal Insurance Products 2009, art.7. 324 The Notice of CIRC on Issues Concerning the Implementation of the Administrative Measures for the Information Disclosure of New-type Personal Insurance Products 2009, s.1. 325 Ibid.

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products or bank savings, funds or treasury bonds, nor conduct misleading or false promotion to proposer, the life insured, beneficiary, and the general public.326 Except for group insurance products, an insurance company shall set up a return visit (follow-up) system for new products with a term of one year or more. The return visit system shall contain the time limits, manners, contents, success rate, and problem handling arrangement of the return visit.327 The return visit to a proposer of a new product shall be done within the cooling off period. The return visit shall be first made via telephone where recordings shall be made; if that fails, the return visit can be made by letter or meeting where an acknowledgement signed by the proposer shall be obtained; if none of these ways just mentioned works out, the insurance company shall make detailed records about the specific situation and the reasons why the return visit fails. An insurance company shall properly keep the recordings and other proofs of a return visit from the day when the insurance contract is terminated for at least five years if the insurance duration is less than one year or for at least ten years if the insurance duration is one year or more.328 9.12.2 Management of information disclosure materials The appointed legal counsel and the appointed actuary of an insurance company shall ensure that the product brochures are objective, true, and without any major omission and satisfy the relevant information disclosure requirements of these Measures.329 Other information disclosure materials of a new-type product of an insurance company shall be consistent with the insurance clauses and the product brochure.330 Insurance companies shall satisfy the requirements of these Measures in illustrating the future payment of benefits of new-type products to insurance applicants, insureds, beneficiaries, and the general public.331 The information disclosure materials of new-type products shall be managed by an insurance company in a unified way. The information disclosure materials designed or printed by any provincial branch of an insurance company shall be subject to the approval of the insurance company. Except for provincial branches, no other branch offices of insurance companies may design, print, or modify the information disclosure materials of new-type products.332 No insurance company may authorize its agents to design, print, or modify the information disclosure materials of new-type products. Insurance agents may not design, print, or modify the information disclosure materials of new-type products sold by them on a commission basis.333 326 The Measures for the Administration of the Information Disclosure of New-type Personal Insurance Products 2009, art.8. 327 Ibid., art.9. 328 Ibid., art.10. 329 Ibid., art.11. 330 Ibid., art.12. 331 Ibid., art.13. 332 Ibid., art.14. 333 Ibid., art.15.

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Insurance companies and their agents may not use information disclosure materials inconsistent with the insurance clauses and the product brochures of new-type products.334 9.12.3 Specific requirements on information disclosure for unit-linked insurance products In addition to setting out general provisions in relation to information disclosure of new insurance products, the Measures for the Administration of Information Disclosure of New-Type Personal Insurance Products 2009 provide detailed rules for information disclosure for each type of new products, that is, unit-linked insurance, universal insurance, and participating insurance. The specific rules for these three types of insurance products are considered in the following sections. Where the unit-linked insurance developed by an insurance company provides a proposer with the option to transfer the insurance premium into the investment account during the cooling-off period, such an option shall be stated in the insurance policy and insurance clauses. The insurance company shall remind the proposer to indicate in the insurance policy whether the proposer will transfer the insurance premium agreed upon in the insurance contract into the investment account during the cooling-off period.335 Where a proposer choosing to transfer the insurance premium into the investment account during the cooling-off period decides to rescind the contract during the cooling-off period, except for the production cost of the insurance policy and the asset management fee, the insurance company shall refund the balance of the account and other fees collected to the proposer; where a proposer choosing to transfer the insurance premium into the investment account upon expiration of the cooling-off period decides to rescind the contract during the cooling-off period, the insurance company shall, after deducting the production cost of the insurance policy, refund the full premium to the proposer. The product brochures of unit-linked insurance products contain risk alert, basic characteristics of the product, the investment account of the policy, illustration of benefits, and cooling off period and surrender of the policy.336 Risk alert: (i) An alert to the fact that the product is unit-linked insurance with investment risks to be assumed by the insurance applicant shall be indicated in a conspicuous position of the cover of the product brochure in boldface and in a font larger than that of the body text; (ii) If the mode of payment is flexible, there shall be a special alert to the risks that may arise and the adverse consequences if the insurance applicant stops paying the premium. Basic characteristics: The operating principles, product coverage, and exclusions of unit-linked insurance. Introduction to the investment account: (i) The assets allocation goals, principles, investment strategies, investment vehicles, and proportions, among others, of the 334 Ibid., art.16. 335 Ibid., art.17. 336 Ibid., art.18.

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investment accounts linked to the product; (ii) The charts of changes in the unit selling price of each investment account linked to the product at the end of each month in the last ten years; if any investment account has been operating for less than ten years, a chart of changes in the unit selling price of each account at the end of each month during the period of its continued existence; (iii) The fees drawn from each investment account and the time of drawing; (iv) The valuation methods of investment units; (v) The major investment risks facing each investment account; (vi) If there is a benchmark for comparison of investment performance of investment accounts, the benchmark for comparison of investment performance and its computation method. For a unit-linked insurance product with its assets under the custody of a commercial bank, the name of the custodian bank shall also be disclosed. Benefit illustration: (i) Benefit illustration shall, in tables, predict the future payment of benefits from the investment portion, and at a minimum include premiums paid regularly or in a lump sum, top up premiums, and accumulative premiums; charges, among which the initial charges, policy overhead, risk premium, and other major charges shall be listed item by item; the value in an investment account; and the value of an investment account, death benefit, and cash value under different assumed rates of return on investment; (ii) If the insurance period is less than ten years, the policy benefits at the end of a year of all policies must be illustrated year by year; or if the insurance period is more than ten years, the policy benefits at the end of a year of all policies must be illustrated year by year for the last ten years; (iii) In benefit illustration, the assumed rates of return on investment of the assets corresponding to the unit-linked insurance must be stated, and it shall be indicated in a conspicuous font that the benefit illustration is based on the assumed investment yield of the company, that it does not represent the historical business performance of the company nor the future business performance of the company, and that the actual investment yield may be a negative value. Cooling-off period and surrender: (i) The definition, starting time, and number of days of a cooling-off period; (ii) The insurance applicant’s options during the cooling-off period and the amount that shall be refunded if the insurance contract is rescinded during the cooling-off period under different options; (iii) The charges to be deducted for surrender after the cooling-off period and the computation methods of the surrender value. Where, before the maturity of an insurance policy, the balance in the policy account is not enough for payment of the current risk premium and other fees, the insurance company shall alert the proposer in a timely manner and notify the proposer of the legal consequences of failing to pay the relevant fees in a timely manner.337 An insurance company providing unit-linked insurance shall announce the unit prices of investment accounts on its website or public media recognized by the CBIRC once every week at a minimum.338

337 Ibid., art.19. 338 Ibid., art.20.

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An insurance company shall retain the historical information on the unit prices of investment accounts for the last ten years or more on its website; or if the unitlinked insurance has not been operated for ten years, shall retain all the historical information on the unit prices of investment accounts since the unit-linked insurance is launched. An insurance company shall publish the historical information on the unit prices of investment accounts on its website in a manner convenient for the general public to consult. An insurance company providing unit-linked insurance shall publish an information announcement on its website or public media recognized by the CBIRC once every half year at a minimum. The information announcement shall contain:339 (1) A brief introduction to each investment account, including the investment strategies, the major investment vehicles, and the proportions of all assets; (2) A brief description of the financial status of each investment account; (3) A comparison in tables of the rates of return on investment of each investment account in the years since it is opened; (4) The asset valuation principles of the unit-linked insurance accounts, including the valuation principles and treatment methods of all kinds of securities, whether they are listed and publicly traded or not; (5) The computation formulas of the rates of return on investment of the unit-linked insurance accounts and other financial indicators related to business performance; (6) The market values and proportions of the stocks in different sectors in the stock assets at the end of the reporting period; (7) the book balances and proportions of bonds of different kinds and bonds of different credit standings in the bonds assets at the end of the reporting period; (8) The net values and proportions of funds of different kinds in the fund assets at the end of the reporting period; (9) Changes of the asset custodian bank during the reporting period; and (10) Other information that shall be publicly disclosed according to the requirements of the CBIRC. An insurance company which provides unit-linked insurance products shall, if any matter requiring the disclosure of an interim report occurs, disclose information according to the relevant provisions.340 An insurance company shall agree in an insurance contract that one policy status report shall be provided to the proposer every year. The policy status report shall contain:341 (1) Information on the insurance policy, including but not limited to the name of the insurance product, the serial number of the insurance policy, the

339 Ibid., art.21. 340 Ibid., art.22. 341 Ibid., art.23.

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(2)

(3) (4) (5)

effective date of the insurance policy, the name of the proposer, the name of the insured, and the reporting period; The balance of each investment account on a policy anniversary (if the policy anniversary is the date of assets valuation) or the first date of assets valuation after a policy anniversary (if the policy anniversary is not the date of assets valuation), including the number of units held, unit value, and total value of the account; The changes of the investment units under the policy during the reporting period and the balances of the investment accounts at the beginning and end of the reporting period; The premiums paid regularly or in a lump sum, partial drawing, account transfer, policy overhead, death risk premiums, top up premiums, and other matters that occur during the reporting period item by item; and Other important information that occurs during the reporting period and requires notification of the insurance applicant.

A policy status report may not be used for other purposes such as sales promotion. A return visit (follow-up) on a proposer for unit-linked insurance shall: (1) Confirm whether the proposer has purchased the insurance product and whether the proposer has signed the insurance policy in person; (2) Confirm whether the proposer knows the starting time and number of days of the cooling-off period and the proposer’s rights during the coolingoff period; (3) Confirm whether the proposer knows the coverage and exclusions; (4) Confirm whether the proposer knows that the return on investment of unit-linked insurance is uncertain and the actual return on investment may be a negative value and that the benefit illustration in the promotional materials is based on assumed invest yield and does not represent the actual benefits in the future; (5) Confirm whether the proposer knows the fee deduction items and the deduction proportions or amounts; and (6) Confirm whether the proposer knows the loss that may occur in the case of surrender. 9.12.4 Specific requirements on information disclosure for universal insurance products The product brochures of universal insurance products contain risk alert, basic characteristics of the product, account of the policy, illustration of benefits, and cooling off period and surrender of the policy.342 For the sake of alerting the risk, the fact that the product is universal life insurance and the surplus between the crediting interest rate and the minimum guaranteed interest rate is uncertain shall be indicated in a conspicuous position of

342 Ibid., art.25.

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the cover page of the product brochure in bold and in a font larger than that of the body text. If the mode of payment is flexible, there shall be a special alert to the risks that may arise and the adverse consequences if the proposer stops paying the premium.343 The basic characteristics of the product include the operating principles of universal life insurance, product coverage, exclusions, policy benefits, and major investment strategies of universal life insurance.344 The policy account includes the computation methods of the value of the policy account and the charges, deduction proportion (or amount) of charges, and time of deduction, which are presented item by item.345 The policy benefits of universal life insurance at the end of a year shall be illustrated in tables, which shall, at a minimum, include (i) premiums paid regularly or in a lump sum, top up premiums, and accumulative premiums; (ii) charges, among which the initial charges, policy overhead, risk premium, and other major charges shall be listed item by item; (iii) the value in the universal life insurance policy account; and (iv) the balance of the policy account, death benefit; and cash value of the insurance policy at the end of a year under different assumed crediting interest rates.346 If the insurance period is less than ten years, the policy benefits at the end of a year must be illustrated year by year; if the insurance period is more than ten years, the policy benefits at the end of a year must be illustrated year by year for the last ten years. In benefit illustration, the assumed crediting interest rates of universal life insurance used in illustration must be indicated. It must be indicated in a conspicuous font that the benefit illustration is based on the actuarial and other assumptions of the company, that it does not represent the historical business performance of the company nor the future business performance of the company, that the investment yield above the minimum guaranteed interest rate is uncertain, and that the actual policy account benefits may be lower than the illustrated middle or high level.347 With respect to cooling off period, the product brochures must specify the definition, starting time, and number of days of a cooling-off period and the proposer’s rights in the cooling-off period. The charges to be deducted for surrender after the cooling-off period and the computation methods of the surrender value shall be clearly set out in the product brochures.348 An insurance company shall agree in an insurance contract that one policy status report at a minimum shall be provided to the proposer every year. The policy status report shall contain (1) information on the insurance policy, including but not limited to the name of the insurance product, the serial number of the insurance policy, the effective date of the insurance policy, the name of the proposer, the name of the insured, and the reporting period; (2) the changes in the value of the insurance policy during the reporting period; and (3) the annualized crediting

343 344 345 346 347 348

Ibid., art.25(1). Ibid., art.25(2). Ibid., art.25(3). Ibid., art.25(4). Ibid., art.25(4). Ibid., art.25(5).

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interest rate of each month in the reporting period. A policy status report may not be used for other purposes such as sales promotion.349 A return visit (follow-up) to the proposer for universal life insurance shall: (1) confirm whether the proposer has purchased the insurance product and whether the proposer has signed the insurance policy in person; (2) confirm whether the proposer knows the starting time and number of days of the cooling-off period and the proposer’s rights during the cooling-off period; (3) confirm whether the proposer knows the coverage and exclusions; (4) remind the proposer that the yield above the minimum guaranteed interest rate is uncertain, depending on the actual business performance of the company; (5) confirm whether the proposer knows the fee deduction items and the deduction proportions or amounts; and (6) confirm whether the proposer knows the loss that may occur in the case of surrender.350 9.12.5 Specific requirements on information disclosure for participating insurance products The product brochures of participating insurance products contain risk alert, basic characteristics of the product, dividends and distribution of dividends, illustration of benefits, and cooling off period and surrender of the policy.351 Risk alert: An alert to the fact that the product is participating insurance and the distribution of dividends is uncertain shall be indicated in a conspicuous position of the cover of the product brochure in boldface and in a font larger than that of the body text. If the distribution of dividends is in the form of reversionary dividend, the conditions for obtaining terminal dividend shall be particularly indicated. Basic Characteristics: The product coverage, exclusions, policy benefits, and the major investment strategies of participating insurance. Dividends and distribution of dividends: (i) stating the sources of dividends of the product, including but not limited to mortality margin, expense margin, and interest margin, and providing a brief explanation; (ii) stating the modes of dividend distribution, whether it is cash dividend or reversionary dividend, and whether there is terminal dividend, and providing a brief explanation; (iii) stating the manners of realizing dividends, including but not limited to direct collection, use of dividends to offset insurance premium, and dividend accumulation; and (iv) stating the dividend distribution policies and the factors affecting the determination of the dividend levels of insurance policies. Benefit illustration: (i) The policy benefits of universal life insurance at the end of a year shall be illustrated in tables, which shall, at a minimum, include the insurance premium of each year and the accumulative total; maturity benefit, death benefit, termination benefit, and other guaranteed benefits; and dividend of the current year, cumulative dividend, and other non-guaranteed benefits. If the dividend is reversionary, the terminal dividend may be illustrated in the table, but the conditions for obtaining terminal dividend shall be particularly stated. The accumulative total 349 Ibid., art.28. 350 Ibid., art.29. 351 Ibid., art.30.

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of annual dividend and terminal dividend shall not exceed the maximum amount prescribed by the CBIRC; (ii) If the insurance period is less than ten years, the policy benefits at the end of a year of all policies must be illustrated year by year; if the insurance period is more than ten years, the policy benefits at the end of a year of all policies must be illustrated year by year for the last ten years; (iii) In benefit illustration, it shall be indicated in a conspicuous font that the benefit illustration is based on the actuarial and other assumptions of the company, that it does not represent the historical business performance of the company nor the future business performance of the company or the prospective business performance of the company, and that the dividend distribution of insurance policies is uncertain; (iv) In benefit illustration, it is not allowed to disclose the rate of return on investment of the participating insurance illustrated. Cooling-off period and surrender: (i) The definition, starting time, and number of days of a cooling-off period and the proposer’s rights in the cooling-off period; (ii) The charges to be deducted for surrender after the cooling-off period and the computation methods of the surrender value. No insurance company may use dividend rate, rate of return on investment, or any other ratio to describe the dividend distribution of participating insurance.352 An insurance company shall agree in an insurance contract that one dividend notification at a minimum shall be provided to the insurance applicant each year. The dividend notification shall contain:353 (1) Information on the insurance policy, including but not limited to the name of the insurance product, the serial number of the insurance policy, the effective date of the insurance policy, the name of the proposer, the name of the insured, and the reporting period; (2) The insurance premium of the insurance policy in each year and the total dividends that have been distributed to the proposer by the end of the last policy year; (3) The dividend distribution policy; (4) the quota of dividends to be distributed in the current year and the total dividends distributed to the proposer; and (5) the dividend distributed to the proposer in the current year. The insurance company may not publicly disclose or advertise the business performance or dividend level of participating insurance, except for the dividend notification to the insurance applicant. A return visit on a proposer for participating insurance shall:354 (1) Confirm whether the proposer has purchased the insurance product and whether the proposer has signed the insurance policy in person; (2) Confirm whether the proposer knows the starting time and number of days of the cooling-off period and the proposer’s rights during the coolingoff period; 352 Ibid., art.31. 353 Ibid., art.32. 354 Ibid., art.33.

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(3) Confirm whether the proposer knows the coverage and exclusions; (4) Confirm whether the proposer knows that the benefit illustration in the promotional materials is based on the actuarial assumption of the company and that the dividend distribution of the insurance policy is uncertain; and (5) Confirm whether the proposer knows the loss that may occur in the case of surrender. 9.12.6 Legal liability Where an insurance company fails to conduct a return visit in a timely manner according to the requirements of the Measures 2009 or the return visit conducted fails to meet the requirements of the Measures 2009, the CBIRC or the local office thereof shall order it to take corrective action, issue a warning to it, and impose a fine of not less than one but no more than three times the amount of illegal income, not exceeding ¥30,000 yuan; or a fine of not more than ¥10,000 yuan if there is no illegal income. The CBIRC or the local office thereof shall issue a warning to and impose a fine of not more than ¥10,000 yuan on the directly liable executive in charge or any other directly liable persons.355 Except for the provisions on follow-ups of the Measures 2009, where an insurance company fails to disclose information according to the requirements of the Measures 2009, the CBIRC or the local office shall order it to take corrective action during a specified period; if it fails to do so, the CBIRC shall impose a fine of not less than ¥10,000 yuan but no more than ¥100,000 yuan. The CBIRC or the local office shall issue a warning to and impose a fine of not less than ¥10,000 yuan but no more than ¥30,000 yuan on the directly liable executive in charge or any other directly liable person.356 9.13 Premium rate adjustment and information disclosure of long-term medical insurance products In recent years, health insurance has developed rapidly. As one of the main types of health insurance, medical insurance has also been welcomed by consumers and widely interested in the market. The statistical data show that in 2019, the original insurance premium income of medical insurance was ¥244.2 billion yuan, a yearon-year increase of 32%, much higher than the industry’s total premium growth rate (about 12%), accounting for 34.6% of the total health insurance premiums.357 However, in terms of time limit, most of them are one-year business, and there are few long-term medical insurance products, which cannot effectively meet the long-term health protection needs of the people.

355 Ibid., art.34. 356 Ibid., art.35. 357 See the website of the CBIRC accessed on 12 October 2020.

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In November 2019, the CBIRC issued the Measures for the Administration of Health Insurance 2019,358 which stipulates that insurance companies can agree to adjust the rate of long-term medical insurance products. Its main purpose is to guide insurance companies to develop and sell long-term medical insurance products. It can effectively resolve the problem that short-term medical insurance cannot be renewed due to product suspension and other reasons, and it is also in line with international practice. In order to regulate the development and sales of long-term medical insurance products with adjustable rates and protect the legitimate rights and interests of consumers, the General Office of the CBIRC promulgated the Notice on Issues Concerning the Premium Rate Adjustment of Long-term Medical Insurance Products on 25 March 2020.359 Adjusting the rates of long-term insurance products is a new practice in China, but it is relatively mature in the international market, especially in the field of medical insurance, which is a common practice in many developed markets such as the United States, United Kingdom, South Korea, Hong Kong, and so on. During the formulation of the Notice, the CBIRC solicited opinions from all quarters, drawing on international experience, and determined the following principles for the formulation of the Notice:360 The first one is to encourage product innovation. In order to further enrich health insurance products, insurance companies are encouraged to provide consumers with medical insurance products that have a longer coverage period and more adequate protection responsibilities; this is to respond to social concerns and to systematically resolve the problem that patients and elderly people have difficulty in purchasing commercial medical insurance. The second is to adhere to market orientation. The product pricing and rate adjustment power should be given to the market, and each company should scientifically and rationally determine the timing and the scale of rate adjustment based on the actual operation of medical insurance. The third is to strengthen information disclosure. Rate adjustment should adhere to the principles of openness and transparency. By regulating product terms, product descriptions, rate adjustment announcements, and rate adjustment information disclosure, any unreasonable rate adjustments by insurance companies can be restricted. The fourth is to protect the legitimate rights and interests of consumers. On the basis of adhering to marketization, basic requirements for rate adjustment should be set up, the situations where an insurance company may not raise rates should be refined, insurance companies’ operating and sales behaviour must be standardized, disciplinary measures for violations should be clarified, and consumer rights protection must be strengthened. 358 The CBIRC Order No. 3 [2019]; Health insurance is considered in detail at chapter 16. 359 See accessed on 12 October 2020. 360 The press conference on 2 April 2020 for the publication of the Notice (see accessed on 12 October 2020).

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9.13.1 Development of long-term medical insurance products with adjustable premium rate Insurance companies shall develop and design long-term medical insurance products with adjustable premium rates which are confined to those that are priced at natural premium rates and whose policy period exceeds one year or those whose policy period does not exceed one year but which contain guaranteed renewable clauses. The name of long-term medical insurance products with adjustable premium rates shall contain the words “×× medical insurance (adjustable premium rates)”.361 When an insurance company develops and sells long-term medical insurance products with adjustable premium rates, it shall formulate the measures for adjusting premium rates of long-term medical insurance and specify the triggering conditions, internal decision-making mechanisms, and working procedures for such adjustment. The triggering conditions for premium rate adjustment shall be clear and objective, including actual compensation, medical inflation, and major changes in national medical insurance policies. An insurance company shall disclose the methods for adjusting the premium rates, the name and marketing date of long-term medical insurance products with adjustable premium rates, and previous premium rate adjustments in the “long-term medical insurance” sub-column under the “special information” column in the “public information disclosure” special column on its website.362 9.13.2 The requirement for the rate adjustment Long-term medical insurance products shall be subject to premium rate adjustment on a product-by-product basis. The time for the first premium rate adjustment shall be no earlier than three years from the date when the product makes its debut, and the time interval for premium rate adjustment shall not be shorter than one year.363 An insurance company may determine different premium rate adjustment ranges for the insured in different groups, but the grouping method shall be consistent with the product pricing policy and shall not exceed the upper limit of premium rate adjustment agreed upon in the product terms. The insurance company shall not implement the differential policies on premium rate adjustment because of the difference in the physical conditions of the individual insured. The terms of long-term medical insurance products with adjustable premium rates shall meet the following requirements:364 (1) A reminder (or prompt) shall be put at the beginning position of the clauses, in bold type and at least one font size larger than the body text,

361 The Notice of the General Office of the CBIRC on Issues Concerning the Premium Rate Adjustment of Long-term Medical Insurance Products 2020, s.1. 362 Ibid., s.2. 363 Ibid., s.3. 364 Ibid., s.4.

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showing that the product is a long-term medical insurance product with adjustable premium rates, and its premium rates may be adjusted during the policy period or the guaranteed renewal period. (2) The clauses shall explain the relevant situation of the rate adjustment in detail, including but not limited to: (i) The specific trigger conditions for rate adjustment, including specific indicators and adjustment standards; (ii) The time for the first rate adjustment and the shortest time interval for subsequent rate adjustment; (iii) The upper limit of each rate adjustment; (iv) The procedure of each rate adjustment, including the method of publicity, the period of publicity, and so on; (v) The company informs the proposer about the time and method of rate adjustment matters, as well as the proposer’s rights and obligations regarding the rate adjustment. An insurance company that sells long-term medical insurance products with adjustable rates shall provide the proposer with the product brochure, and shall stipulate in the insurance policy how the proposer accepts the rate adjustment information. The product specification shall include but not be limited to the following:365 (1) Risk alert. At a conspicuous position of the product specification, use bold letters that are at least one size larger than the text to indicate that the product is a long-term medical insurance product with adjustable rate. The rate may be adjusted during the insurance period or guaranteed renewal period. (2) Insurance liability and exemption. (3) The basis and procedure of rate adjustment and the way in which the proposer obtains relevant information. (4) The time when the product is put to market, the time when the first rate adjustment shall be done, the minimum time interval for subsequent rate adjustment, and upper limit for each rate adjustment. (5) The proposer’s rights and obligations regarding the rate adjustment. (6) The demonstration of the protection provided by this product in the form of a hypothetical case, and the annual rate adjustment situation that the proposer may face. Among them, the rate adjustment demonstration can distinguish between different rate adjustment situations, but at least it should include the case of demonstrating with the upper limit of the rate adjustment agreed in the policy terms. Insurance companies that sell long-term medical insurance products with adjustable rates shall strengthen sales staff training and management, strictly regulate the conduct of sales, and guide proposers to correctly understand long-term medical insurance products with adjustable rates. In addition to complying with laws and regulations that the sales personnel must provide the proposer with the contract text and clearly explain the clauses exempting the insurer from liability, they shall also provide product brochure to the proposer, make clear reminder to the proposer 365 Ibid., s.5.

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the characteristics of long-term medical insurance products with variable rates and the situation of the adjustable rate, and explain to the proposer in detail that the proposer has the right to surrender or to not renew the policy after the rate adjustment, and the loss or risk that may be brought by the surrender or non-renewal, and other important content of the contract.366 9.13.3 Circumstance under which an insurer is not permitted to raise rate Where an insurance company that sells a long-term medical insurance product with an adjustable rate has one of the following circumstances, it shall not be allowed to raise the rate of the product in the current year:367 (1) In the previous year, the compensation rate of this product was less than 85%, and was lower than 10% or more of the industry’s average compensation rate of long-term medical insurance products; (2) In the previous year, there were disputes and complaints about this product by a group of people; (3) Other situations where the CBIRC requires that the rate shall not be raised. Here, the compensation rate = (annual compensation amount for long-term medical insurance product + year-end outstanding claims reserve − the beginning of the year’s outstanding claims reserve) ÷ (long-term medical insurance product annual premium income + beginning of the year unearned liability reserve − the year-end unexpired liability reserve), where the liability reserve refers to the liability reserve drawn in accordance with the relevant actuarial provisions of the CBIRC. The industry’s average compensation rate is regularly produced and published by the Insurance Association of China. 9.13.4 Information disclosure in relation to rate adjustment When an insurance company adjusts the rate, the rate adjustment shall be publicized in the “Long-Term Medical Insurance” sub-section of the company’s website, explaining the reason for the rate adjustment, the rate adjustment decision-making process, and the rate adjustment result. The proposer shall be notified in the manner agreed in the insurance policy. The insurance company shall respond promptly and clearly to the questions raised by the proposer during the public announcement period. The insurance company can adjust the rate 30 working days after the announcement,.368 The insurance company shall notify the proposers of the reasons for the rate adjustment and the adjusted rate in the manner as stipulated in the insurance policy, informing them that they have the right to surrender or refrain from renewal and the possible loss or risk that may be brought about by the surrender or nonrenewal of the policy.369 366 367 368 369

Ibid., s.6. Ibid., s.7. Ibid., s.8. Ibid., s.9.

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If an insurance company adjusts the rate of a long-term medical insurance product, it shall explain the rate adjustment in a separate chapter in the annual product summary report. The content includes but is not limited to: product name of the rate adjustment, reason of rate adjustment, company decision-making process, announcement of rate adjustment and feedback of proposers, customers’ surrender after the rate adjustment, renewal of the policy, and the impact of the rate adjustment on the product pricing, reserve assessment, profit test, solvency, and so on.370 The insurance company shall seriously answer the proposer’s questions about the adjustment of the rate, properly handle the complaints and disputes arising therefrom, and do well in customer service.371 If the insurance company has failed to implement the relevant provisions of this Notice, the long-term medical insurance products with adjustable sales rates are misleading and deceptive, the rate adjustment process does not meet the relevant regulations, and the customer service is not in place, causing group visits and disputes, the CBIRC will impose administrative penalties on the insurance company or take administrative supervision measures in accordance with the law and hold relevant personnel accountable.372 The Insurance Association of China shall establish and improve a database of long-term medical insurance products with adjustable rates, collect and organize the information about business operation of related products, regularly summarize the long-term medical insurance data of the industry, and publish relevant information such as the industry’s average compensation rate in an appropriate manner.373 Through the introduction of the rate adjustment mechanism, the Notice tackles the institutional obstacles that have plagued the development of medical insurance. It clearly conveys a positive signal to encourage the development of long-term medical insurance, and helps to provide consumers with insurance products with longer protection period and more comprehensive coverage, thus better responding to consumers’ long-term health care needs. 9.14 Regulation of actuaries Premium rate is determined by actuarial calculation. Regulation in respect of actuaries is an important aspect of regulation of the insurance business. The CIRC/ CBIRC has enacted a number of regulations in this respect: (1) Administrative Measures for Chief Actuaries of Insurance Companies (2010 Amendment), which were first issued by the CIRC on 28 September 2007 and amended according to the Decision of the CIRC on Amending Some Rules by the CIRC on 3 December 2010.374

370 371 372 373 374

Ibid., s.10. Ibid., s.11. Ibid., s.12. Ibid., s.13. The CIRC Order No. 10 [2010].

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(2) Notice of the CIRC on Strengthening the Management of Chief Actuaries of Personal Insurance Companies which was issued on 1 August 2013 and became effective on 5 August 2013.375 (3) Notice of the CIRC on Issues concerning Further Improving the Actuarial System of Personal Insurance which was issued and implemented on 2 September 2016.376 (4) Notice of the General Office of the CBIRC on Issuing the Actuarial Provisions on General Personal Insurance, which was published on 21 January 2020.377 (5) Notice of the General Office of the CBIRC on Relevant Matters Regarding Strengthening the Actuarial Supervision of Personal Insurance, which was published on 21 January 2020.378 Recently, in order to develop more risk protection products, and improve the actuarial regulation of insurance products, the CBIRC issued the Actuarial Provisions on General Personal Insurance (21 January 2020). The Provisions are very technical, so it is appropriate just to take a look at the major points of the Provisions. The Actuarial Provisions focuses on the following aspects of regulatory objectives: First, to promote the development of risk protection products to better protect the rights and interests of insurance consumers. The minimum cash value parameters of risk protection products, such as health insurance, accident insurance, term life insurance, and whole life insurance, have been adjusted. This helps to lower the prices of such products, increase customers’ willingness to purchase such products and incentivize the insurance companies to develop and sell such products. The upper limit of the average additional expense rate for annuity products and most single-premium products has been lowered to make the products more competitive so consumers can get real benefits. The minimum cash value threshold for long-term savings products such as annuities has been raised, which is conducive to better protecting the rights and interests of consumers and reducing disputes. Second, to integrate and refine regulatory provisions and improve the actuarial regulatory system. The relevant provisions on long-term ordinary life insurance and short-term ordinary life insurance have been integrated, providing reasonable treatment methods for premium, cash value, and liability reserve of long-term and short-term insurance products, respectively. According to the product features, the regulatory provisions have been refined, and different corresponding parameters will be set to support the development of risk protection products such as health insurance, accident insurance, term life insurance, and whole life insurance. Third, to make up for the weak links in the actuarial regulatory system. The relevant actuarial provisions on health insurance products have been supplemented, 375 Bao Jian Shou Xian No. 620 [2013] (see accessed on 13 October 2020). 376 Bao Jian Fa No. 76 [2016] (see accessed on 13 October 2020). 377 See accessed on 13 October 2020. 378 See accessed on 13 October 2020.

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and relevant requirements for health insurance valuation assumptions have been added. Relevant actuarial provisions on products with guaranteed renewal have been replenished to promote the healthy development of such products. Adapting to the rapid changes in the current market, relevant requirements such as undue liability reserves on stepped premiums (or hybrid, non-level premiums) have been added. The implementation of the Actuarial Provisions will help to further improve the insurance regulatory system, better protect the rights and interests of insurance consumers, and meet consumers’ growing demand for risk protection. It will help to promote the life insurance sector to adhere to its original function of protection and achieve high-quality development. 9.15 Regulation of the reinsurance business Reinsurance is a means whereby the original insurer can spread the risks covered among other insurers both national and international, thereby reducing his or her own exposure and losses on business written. The concept of reinsurance plays an essential role in the insurance industry, is used in every class of the insurance business and operates across national boundaries.379 The party that diversifies its insurance portfolio is known as the ceding party. The party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsurer. According to art.28 of the Insurance Law, a reinsurance contract is a contract under which an insurer transfers a portion of its written insurance business to another insurer (or insurers) by way of cession; the transaction is reinsurance.380 9.15.1 Legal framework for reinsurance Matters on reinsurance are governed by the Insurance Law and the relevant regulations. In the Insurance Law, articles 28 and 29 are related to reinsurance contracts, and articles 102 to 105 are concerned with the management of the reinsurance business. The Insurance Law authorizes the regulatory authority to formulate regulations to regulate the operation of the reinsurance business. Where an insurer transfers a portion of its written business to another insurer by way of cession, the transaction is reinsurance. When requested by the reinsurer, the cedant (the reinsured) shall inform the reinsurer in writing of the cedant’s own liabilities and the relevant information with respect to the primary insurance.381 The reinsurer shall not demand payment of premium from the proposer of the primary insurance. The insured or the beneficiary of the primary insurance shall not make claims to the reinsurer for indemnity payment or insurance benefits. The cedant shall not refuse or delay fulfilment of its liabilities of its primary insurance on the grounds that the reinsurer fails to fulfil the reinsurance liabilities.382 379 380 381 382

R. Merkin, Colinvaux’s Law of Insurance (11th edn, Sweet & Maxwell 2016) para 18-001. The Insurance law, art.28. Ibid. Ibid., art.29

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The self-retained insurance premium in the current year of an insurance company which operates the property insurance business shall not exceed four times the sum of its actual capital and provident funds.383 The liability undertaken by an insurance company for each risk unit, namely, the maximum loss caused by a single insured incident shall not exceed 10% of the sum of its actual capital and provident funds. The excess shall be reinsured. Insurance companies shall classify risk units according to the provisions of the insurance supervision and regulation authority of the State Council.384 The method of measuring risk units and the plan for arranging catastrophic risk of an insurance company shall be filed with the insurance supervision and regulation authority of the State Council. Insurance companies shall submit their methods for classifying risk units and arrangement plans on risk of major disasters to the insurance supervision and regulation authority of the State Council for archival purposes.385 Insurance companies shall make reinsurance according to the provisions of the insurance supervision and regulation authority of the State Council and select their reinsurer in a prudent way.386 In accordance with the Insurance Law, the CIRC enacted the first Regulations on Administration of Reinsurance Business in 2005, which was amended in 2010 and 2015 (hereinafter, the Regulations 2015);387 it also promulgated a piece of regulation specifically for property reinsurance on 12 January 2012, namely, the Regulations on Administration of Reinsurance of Property Insurance Companies 2012,388 which governs property reinsurance business (hereinafter, Regulations 2012). Currently, in addition to provisions in Insurance Law, the Regulations 2015 and the Regulations 2012 are the two major pieces of legislation governing the reinsurance business in China. They provide rules for reinsurance contracts and reinsurance regulation. In addition, there is another legislation relating to financial management for reinsurance business, that is, Accounting Standards for Enterprises No. 26 − Reinsurance Contracts 2006, which was enacted by the Ministry of Finance of China on 15 February 2006 and governs the reinsurance business from financial perspective.389 In marine insurance, there is a provision about reinsurance in the Maritime Code of the PRC, art.218(2) of the Code provides that “the insurer may reinsure the insured subject matter. Unless otherwise agreed in the contract, the original insured shall not be entitled to the benefit of the reinsurance.” That means that in 383 Ibid., art.102. 384 Ibid., art.103. 385 Ibid., art.104. 386 Ibid., art.105. 387 The Regulations on Administration of Reinsurance Business (the CIRC Order No. 3 [2015]) (see

accessed on 13 October 2020). 388 Bao Jian Fa No. 7 [2012] (see accessed on 13 October 2020). 389 The Ministry of Finance No. 3 [2006] (see accessed on 13 October 2020).

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marine insurance, the insurer can reinsure his or her risk underwritten with other insurers in order to spread risk. It also indicates that the original insured cannot claim directly against the reinsurer unless the contract agrees otherwise. 9.15.2 Scope of the reinsurance business According to articles 95 and 96 of the Insurance Law, with the approval of the insurance supervision and regulation authority, the insurance companies may conduct ceding (outward) and inward reinsurance business in respect of the following insurance business: (1) Personal insurance business, including life insurance, health insurance, accident insurance, and so on; (2) property insurance business, including property loss or damage insurance, liability insurance, credit insurance, surety bond, and so on; (3) other insurance-related business approved by the CBIRC. Generally, the reinsurance business includes life reinsurance and non-life reinsurance. The insurance company shall make separate business records and calculation for life reinsurance and non-life reinsurance.390 For some large risks the CBIRC encourages insurance companies to arrange reinsurance. For example, the CBIRC encourages the insurance companies and insurance brokers to provide reinsurance services for agriculture insurance and disaster insurance such as earthquake and flood.391 In addition, aviation and space insurance, nuclear insurance, oil insurance, and credit insurance are also expressly included in the Regulations 2015 for which reinsurance should be arranged.392 9.15.3 The types of reinsurance business The Insurance Law does not classify types of reinsurance. According to the Regulations 2015,393 there are four types of reinsurance: treaty reinsurance, facultative reinsurance, proportional reinsurance and non-proportional reinsurance. (a) Treaty reinsurance The term “treaty reinsurance” under the Regulations 2015 refers to the type of reinsurance transaction whereby an insurance company signs a contract in advance with another insurance company under which the original insurance company agrees to cede partial insurance business it is undertaking in a certain period to the other insurance company.394 This type of reinsurance transaction is arranged by an agreement or treaty in advance between the reinsured and reinsurer, this is a pre-negotiated agreement between the parties. Under treaty reinsurance the

390 391 392 393 394

The Regulations 2015, art.9. Ibid., art.7. Ibid., art.11. Ibid., art.2. Ibid., art.2(4).

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reinsured agrees to cede and the reinsurer agrees to underwrite through reinsurance a certain class or multiple classes of business risks. The most usual type of treaty reinsurance is obligatory, so that both parties are bound to act according to the pre-made agreement. Insurance risks accepted by the reinsured are automatically ceded to the reinsurer according to the treaty, and the reinsurer must accept them. There is no freedom of choice to each party in treaty reinsurance.395 The Regulations 2012 also highlight the importance of the terms of a treaty reinsurance contract, stating that: A property insurance company shall pay particular attention to the formulation of clauses of reinsurance treaties and consult and reach an agreement with the reinsurer on main terms before the reinsurance treaty officially comes into force. The property insurance company shall enter the reinsurance treaty business information into its business and financial systems no later than ten working days after confirmation of the treaty. Unless the property insurance company and the reinsurer have agreed in writing on an extension, both parties shall finish signing the official reinsurance treaty within three months after the reinsurance treaty officially comes into force.396

(b) Facultative reinsurance In contrast to treaty reinsurance, the term “facultative reinsurance” under the Regulations 2015 refers to the type of reinsurance under which an insurance company makes decision temporarily through consultation with another insurance company(s) that it shall effect reinsurance with the latter for the insurance business it is undertaking.397 A facultative reinsurance arrangement is to cover either a single risk or a specific type of exposure. Each risk is individually underwritten by the reinsurer and it is basically an optional reinsurance which is normally carried out on a policy by policy basis.398 Facultative reinsurance is usually a one-off arrangement for a single risk. A good example of the use of facultative reinsurance is a property risk with a very high total insurable value such as a ship, an aircraft, or an event with high risk (e.g. the launch of a satellite). The primary insurer does not have the capacity itself to provide the requested value to be insured. To provide the coverage, the primary insurer submits the risk to the reinsurer to facilitate the coverage. If the reinsurer agrees, coverage is written and a facultative reinsurance contract is formed. The essential characteristic of facultative reinsurance is that both the reinsured and reinsurer are free to choose whether to cede and accept, respectively, any particular

395 Peter Cave, ‘The Nature of Reinsurance’ in R. Merkin (eds), A Guide to Reinsurance Law (Informa 2007) 8. It is said that treaty reinsurance is a “deal”, which once agreed gives cover for a range of risks in a particular way, over a period of time. Once the terms of the treaty are agreed between the parties the reinsured has automatic cover for all risks as specified for a pre-agreed period – normally 12 months. 396 The Regulations on Administration of Reinsurance of Property Insurance Companies Regulations 2012, Ch.3, s.2(1)(2). 397 The Regulations 2015, art.2(5). 398 Peter Cave, ‘The Nature of Reinsurance’ in R. Merkin (eds), A Guide to Reinsurance Law (Informa 2007) 8. It is said, Facultative reinsurance is an optional reinsurance normally on a policy by policy basis. The reinsured does not have to reinsure the risk, and the reinsurer(s) has the right to decline or offer alternative terms.

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risk. The reinsured will retain an agreed proportion of the risk and transfer some or all of the remainder to the reinsurer. By virtue of Regulations 2012, a property insurance company needs to arrange a facultative reinsurance in the following six situations:399 (1) Where a proportional reinsurance treaty does not provide sufficient coverage, and extra underwriting capacity is needed, a facultative reinsurance may then be arranged, mainly for the large commercial risk business with high insured amount. (2) Within the scope of the proportional reinsurance, but the insured amount is very low and does not reach the “line” under the surplus reinsurance. The business is retained by the property insurance company. A facultative reinsurance may then be arranged for the business with small insurable value but with high risk. (3) For the business where the proportional reinsurance treaty does not provide automatic underwriting, a facultative reinsurance may then be needed, mainly for high-risk business, a new insurance product, or a small scheme insurance business. (4) Where the insurance company has only arranged non-proportional reinsurance, and some types of insurance have not been covered by this nonproportional reinsurance. (5) The facultative reinsurance shall be arranged for the purpose of limiting the risk exposure of the ceding company and for the purpose of risk transfer of the ceding company, mainly due to the need for the entire risk control of the company. (6) The facultative reinsurance shall be arranged for the introduction of technology and assistance in the development of insurance underwriting scheme. (c) Proportional reinsurance The term “proportional reinsurance” under the Regulations 2015 refers to the type of reinsurance under which the amount of the retention of the ceding insurance company and the amount of business of the ceded insurance company are determined on the basis of the insurance amount.400 It is also known as “reinsurance on insurance amount”. Under this type of reinsurance, the proportion of the retention of the reinsured and the proportion of the ceded business are all calculated on the basis of decided proportions in terms of the insurance amount. The proportions of insurance amount of the parties form the basis for the allocation of the premium and the share of the indemnity payment.401 Proportional insurance can be divided into quota share reinsurance and surplus reinsurance. (I) Quota share reinsurance. Quota share reinsurance refers to the type of reinsurance whereby the insurer cedes insurance business proportionately

399 The Regulations 2012, Ch.3, s.3(1)(2). 400 The Regulations 2015, art.2(6). 401 Bingzhi Hu, Reinsurance (China Finance Press 1998) 59.

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based on the insured amount.402 For example, insurer A accepted a risk with the insurance amount of ¥100,000. Insurer A retained 40% of the risk, and 60% is ceded to insurer B. The reinsurance is called 60% quota share reinsurance. The premium and the responsibilities are also shared between the reinsured (insurer A) and the reinsurer (insurer B), according to this percentage. So under a quota share insurance, the primary insurer and the reinsurer use a fixed percentage in sharing the amounts of insurance, premiums, and payment of losses (including loss adjustment expenses).403 Quota share reinsurance can be used with both property insurance and liability insurance but is more frequently used in property insurance. (II) Surplus reinsurance. Surplus reinsurance refers to the type of reinsurance whereby reinsured and the reinsurer make an arrangement based on “lines”. The reinsured determines a maximum sum insured per risk up to which it is prepared to be liable. Risks that exceed the reinsured’s retention (surpluses) are borne by the reinsurer. The reinsurer’s lines thus vary according to the level of the retention and the sum insured of the reinsured contract. The reinsurer’s liability is generally limited to a multiple of the reinsured’s retention. Surplus treaty is a type of proportional reinsurance treaty in which the ceding company determines the maximum loss that it can retain for each risk in the portfolio. This amount is defined as “a line”. The reinsured and the reinsurer reach an agreement by which the insured will retain and the reinsurer will accept the specified amount separately. The distinguishing characteristic of surplus share reinsurance is that when an underlying policy’s total amount of insurance exceeds a stipulated amount, or line, the reinsurer assumes the surplus share of the amount of insurance.404 Surplus reinsurance is an automatic reinsurance that requires an insurer to cede and the reinsurer to accept the part of every risk that exceeds the insurer’s predetermined retention limit. The reinsured’s share of the premiums and losses is the proportion that the line bears to the total amount of insurance. The reinsurer’s share of the premiums and losses is the proportion that the amount ceded bears to the total. According to the Regulations 2012: [I[n the formulation of a proportional treaty, particular attention shall be paid to the reinsurance scope, treaty type, treaty term, underwriting ability, limit per accident (both 402 Juan Du and Ling Chen, Reinsurance (2nd edn, Shanghai University of Finance and Economics Press 2015) 4. 403 Most reinsurance agreements specify a maximum coverage amount limitation above which responsibility for additional coverage limits or losses reverts to the primary insurer (or is taken by another reinsurer).With a pro rata reinsurance agreement, that maximum amount is stated in terms of the coverage limits of each policy subject to the treaty (see accessed 20 July 2020) See also Bingzhi Hu, Reinsurance (China Finance Press 1998) 60. 404 See accessed 13 July 2020; See also Xuan Du & Ling Chen, Reinsurance (2nd edn, Shanghai University of Finance and Economics 2015) 27.

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parties to reinsurance), reinsurance commission fee, accounting clauses, exceptions, errors and omissions, treaty statements, treaty amendment and termination, the handling of unearned premiums and undue liability, scope of territory, jurisdiction of courts, and arbitration.405

(d) Non-proportional reinsurance The term “non-proportional reinsurance” under the Regulations 2015 refers to the type of reinsurance under which the amount of the retention of the ceding insurance company and the amount of the ceded insurance company are determined on the basis of the amount of indemnity.406 Non-proportional reinsurance also known as excess of loss reinsurance. Losses excess of the ceding company’s retention limit are paid by the reinsurer up to a maximum limit. That means that the reinsurer has an obligation towards the reinsured only if individual losses or aggregated loss amounts exceed the amount set forth in the reinsurance treaty (retention). The reinsurer is then obliged to indemnify the reinsured for the loss exceeding this amount (excess loss) on a non-proportional basis.407 By virtue of the Regulations 2012: [I]n the formulation of a non-proportional treaty, particular attention shall be paid to the reinsurance scope, treaty term, starting point for compensation, and the maximum underlying retention on the basis of the insured amount or liability limit, the maximum limit of protective liability, the stratification of liability limit, premium rate, liability recovery times, treaty type (such as risk excess, accident excess, and excess of loss ratio), definition for each accident in excess of compensation, exceptions, scope of territory, jurisdiction of courts, and arbitration.408

9.15.4 Parties to a reinsurance contract The contracting parties of a reinsurance contract are the reinsured and reinsurer. The reinsured, called the cedant, is the insurer of the original insurance. The reinsurer, called the acceptor, is the insurer of the reinsurance. The reinsured cedes part of its written business to the reinsurer, and the reinsurer accepts the business according to the agreement. Article 3 of the Regulations 2015 defines the parties of a reinsurance contract, which provides that in a reinsurance contract, a reinsurance ceding company (the reinsured) under this Regulation refers to an insurance company that transfers part of its insurance business to another insurance company (the reinsurer); a reinsurance company, under this Regulation refers to an insurance company that accepts insurance business transferred to him or her from the reinsurance ceding company. The former is called reinsured, and the latter called reinsurer. The reinsured and the reinsurer are contracting parties in a reinsurance contract. 405 The Regulations 2012, Ch.3 s 2(1) (4). 406 The Regulations 2015, art.2 (7). 407 See accessed 0n 13 July 2020. See also Bingzhi Hu, Reinsurance (China Finance Press 1998) 90; Haichao Li & You Luan, Reinsurance Law and Practice (Qinghua University Press and Beijing Jiaotong University Press 2015) 23. 408 The Regulations 2012, Ch.3 s 2(1) (5).

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The insured is a relevant third party in a reinsurance contract who makes a primary insurance contract with the reinsured (the insurer in the primary contract), who has the obligation to pay the premium to the reinsured, and who (if the insured and the beneficiary is the same person) has the right to claim against the reinsured where the insured event occurs. The insured has no direct relationship with the reinsurer.409 9.15.5 Contents of a reinsurance contract Although there is a lack of legal provision in China, according to the reinsurance slips, in a reinsurance contract, the followings should be included:410 (1) The names and the addresses of the reinsured and the reinsurer; (2) The reinsurance period. Basically, the period of the original insurance and the period of the reinsurance are consistent. But the parties may make agreement on the matter when the reinsurance period begins. (3) Reinsurance business clause, including the type of the reinsurance contract (marine, fire, property or cargo transportation insurance, and so on). (4) Basic clauses: such as, “follow the fortunes clause”, “claims control clause”, “errors or omissions clause”, “inspection clause”, “arbitration clause”, and so on. (5) Enforcement clause: under this clause, the type of reinsurance, the scope of reinsurance and the area of reinsurance and the liabilities of the reinsurer are provided. (6) Exception clause; (7) Reinsurance premium clause; (8) Commission clause; (9) Compensation clause; (10) The remedies for breach of the contract; (11) Termination of the reinsurance contract; (12) Arbitration clause; (13) Currency clause. 9.15.6 Standard clauses in a reinsurance contract There are some standard clauses commonly used universally in international reinsurance market. Because reinsurance transaction is an international business, these standard clauses are universally employed.These standard clauses are also employed in reinsurance contracts in China. For example, claims control clause, claims cooperation, and follow the settlements clauses are typical clauses of a reinsurance contract and are commonly incorporated in reinsurance contracts. 409 The Insurance Law, art.29. 410 See the Placement Slip of the Houlder Insurance Brokers Far East Limited; Placing Slip of the Property & Casualty Insurance Company Ltd of the People’s Republic of China. See Bixin Jiang, Insurance Disputes (Law Press China 2014) 67; See also Xiaoming Xi (Editor), The Insurance Law of the PRC – Insurance Contract – Understanding and Adaptation of the Provisions (China Legal Publication House 2010) 190.

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Claims Control clause.411 A claims control clause frequently appears in reinsurance policies and is directed at giving reinsurers the right to handle and investigate claims made on the reinsured. Often the insured and the reinsured are in a foreign jurisdiction. For this reason, the reinsurers, who ultimately will pay all or almost all of any valid claim under the policy, wish to ensure that they have full control.412 Claims cooperation clause.413 In contrast, a claims cooperation clause gives the reinsured the power to manage claims but requires it promptly to provide the reinsurers with information about any claim, to cooperate with reinsurers in relation to the claim, and not to settle claims without the approval of reinsurers. A claims cooperation clause will generally be found in reinsurance policies where the reinsured has retained a more substantial proportion of the risk.414 Errors and omissions clause. A clause is often inserted in the reinsurance contract stating: Any inadvertent error or omission on the part of either the reinsured or the reinsurer shall not relieve the other party from any liability which would have attached hereunder, provided that such errors or omissions shall be rectified as soon as possible after discovery. Nevertheless, nothing contained in the article shall be held to override any of the terms and conditions of this agreement and no liability shall be imposed on the other party greater than would have attached thereunder had such errors or omissions not occurred.415

Follow the settlements clause.416 A “follow the settlements clause” permits the reinsured to settle any claim as it sees fit and, essentially, provided the settlement is proper, business-like, was entered into in bona fide, and the claim is covered under the terms of the reinsurance, the reinsurer must reimburse the reinsured for all payments made to the insured, whether it agreed to them or not. This clause is incorporated into the reinsurance contract with the intention of obliging reinsurers to indemnify their reinsured against compromises of the insured’s claim without proof of liability being required.417 This clause is also used in the China reinsurance 411 The Regulations 2012, Ch.3, s1(6)(3). 412 For example, a clause may be incorporated in a reinsurance contract stating: It is a condition precedent to any liability under this Policy that the Reinsured shall furnish the Underwriters with all the information available respecting such loss or losses, and the Underwriters shall have the right to appoint adjusters, assessors and /or surveyors and to control all negotiation, adjustments and settlements in connection with such loss or losses.

See Insurance Co of Africa v Scor (UK) Reinsurance Ltd [1985] 1 Lloyd’s Rep. 312. 413 The Regulations 2012, Ch.3, s1(6)(3). 414 For example, a clause may be included in a reinsurance contract stating: It is a condition to liability that all claims be notified immediately to the Underwriter subscribing to his policy, and the Reassured hereby undertake in arriving at the settlement of any claim they will co-operate with the reassured Underwriter, and that no settlement shall be made without the approval of the Underwriters subscribing to this Policy.

See Insurance Co of Africa v Scor (UK) Reinsurance Ltd [1985] 1 Lloyd’s Rep. 312. 415 See the Placement Slip of China Property Insurance Company Ltd and other reinsurance companies, art.7. 416 The Regulations 2012, Ch.3, s1(6)(3). 417 In Excess Insurance Co Ltd v Mathews (1925) 31 Com.Cas.43, the clause obliged reinsurers “to pay as may be paid thereon and to follow their settlements”. See MacGillivray on Insurance Law (12 edn, 2012) para 34–080.

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market. For example, in the Placement Slip of China Property Insurance Company Limited, the wording of “Loss Settlement” clause is as follows: All loss settlements made by the Reinsured shall be binding upon Reinsurer provided such settlements are within the terms and conditions of the original policies and/or contracts and within the terms and conditions of this Agreement including compromise settlements made in a business-like manner and amounts falling to the share of the Reinsurer shall be payable by them upon reasonable evidence of the amount for which the Reinsured is liable to pay being given by the Reinsured.418

Follow the fortune clause. Various types of “follow the fortunes” clause occur in a reinsurance contract, derived from treaty wordings. The principles embodied in the follow-the-fortunes doctrine represent one of the hallmarks of the reinsurance relationship. Simply stated, if the reinsured pays a claim reasonably and in good faith, and the claim falls within the terms of the underlying contract and the reinsurance contract, the reinsurer must pay.419 In the United States, the “follow the fortunes” clause is used interchangeably with the “follow the settlements” clause to express a similar interpretation that the reinsurer cannot second guess the reinsured’s settlement made in good faith.420 9.15.7 Retention of the insurance business Certain rules concerning the retention of the insurance business are set up in the Regulations 2015: (1) The insurance company shall make sure that the retention of premium and the retention of liability of each unit risk are ascertained in accordance with provisions in the Insurance Law;421 the exceeding portion shall be reinsured.422 (2) With the exception of aviation and space insurance, nuclear insurance, oil insurance, and credit insurance, a direct insurance company in conducting treaty insurance and facultative reinsurance shall comply with the following

418 See the Placement Slip of China Property Insurance Company Limited, art.12. 419 For example, in China Property & Casualty Insurance Company Placement Slip, art.15 Follow the fortune” states: (1) (2)

The liability of the Reinsurers in respect of each cession hereunder shall be subject to all the stipulations, clauses, waivers and modifications of the original policy and of any endorsement thereto, except insofar as they are contrary to the terms of this Agreement. The Reinsured shall maintain a record of all cessions hereunder and all renewals and alterations thereto but shall not be prejudiced by any inadvertent error, omission or oversight to cede what may rightfully fall under this Agreement, or to do any of the acts or things provided by the terms hereof, it being the intention of this Agreement that the Reinsurers shall follow the fortunes of the Reinsured in all matters falling under this Agreement. Any inadvertent error, omission or oversight as aforementioned shall be corrected retrospectively upon discover so that the parties thereto shall be placed so far as it is possible in the same position as if the error and/or omission had not occurred.

420 See Insurance Law Monthly, 30 Nov 2012. 421 The Insurance Law, arts.28, 102, 103 and 105. 422 The Regulations 2015, art.10.

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stipulations:423 (i) The business of each risk unit ceded to the same reinsurance company shall not exceed the insured amount or 80% of the liability of the direct insurance business; and (ii) The insured amount or limit of liability ceded to the proposer-related enterprises424 in each facultative treaty shall not exceed the insured amount or 20% of the limit of liability of the direct insurance business. (3) The insurer shall classify risk units according to the relevant regulation of the CBIRC. The method of classification of risk unit should be reported to the CBIRC for recording purposes by 31 March each year.425 (4) The insurer should scientifically and reasonably arrange reinsurance for catastrophe risk according to the actual situation. The arrangements for the catastrophe reinsurance should be reported to the CBIRC for recording purposes by 30 June each year.426 In addition, the Regulations 2012 also provides rules on the retention of the insurance business: (1) The underlying retention of a property insurance company in the current year shall not exceed four times of the total sum of its paid-up capital and its surplus reserve.427 (2) The liability assumed by a property insurance company in respect of each risk unit, that is, the liability which might arise from the maximum loss or damage caused by the occurrence of a single event insured against, shall not exceed 10% of the total sum of its paid-up capital and its surplus reserve. Reinsurance shall be arranged for the portion in excess of this limit.428 9.15.8 Confidentiality The Regulations 2015 provides that “Reinsurance ceding companies, reinsurance ceded companies and insurance brokers shall perform obligation of confidentiality for the trade secrets that are known to them in the process of carrying on reinsurance business.”429 Similar provision is also found in the Regulations 2012, which states: Both parties of a reinsurance contract and reinsurance brokers shall keep confidential on the non-public information acquired in the ordinary course of business, and shall not disclose such information to any other party without the approval of the relevant party.430

423 Ibid., art.11. 424 It could be understood that the proposal-related-enterprises here refer to the insurance companies with whom the proposer has already effected policies. Where the proposer has also taken out insurance with the insurer who wants, under facultative reinsurance, to cede some of the liabilities for the proposer to those companies who have already had insurance business with the proposer, the insurer should not cede more than 20% of its direct business with the proposer to those companies (the proposal-related enterprises). 425 The Regulations 2015, art.12. 426 Ibid., art.13. 427 The Regulations 2012, Ch.2, art.5(1). 428 Ibid., Ch.2, art.5(2). 429 Ibid., art.6. 430 Ibid., Ch.3, s 1(10).

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9.15.9 Claim management in a reinsurance contract The Regulations 2012 provides some rules on the reinsurance claim management:431 (1) Both parties to reinsurance shall conduct claim management by strictly following the agreed reinsurance contractual terms. No party shall for any reason refuse or delay the fulfilment of responsibilities in terms of giving loss notification, providing claim and settlement information, and refunding the payment of the insurance money. The principle of “following the fortunes” shall apply to indemnity refund, which means that where the ceding company determines a loss with due diligence according to insurance clauses, the claim settlement decision made by the ceding company shall automatically apply to the reinsurer. The reinsurer’s payment liability shall be limited to the scope of insurance liability prescribed in the original insurance policy and the reinsurance contract. The financial risks of bad accounts and bankruptcy of the ceding company as well as ex gratia payment (voluntary compensation made by the ceding company though being aware of that it has no actual compensation liability) without the approval of the reinsurance company are not covered in the reinsurance. (2) In proportional reinsurance, the ceding company shall calculate the refundable indemnity from the reinsurer strictly according to the proportion confirmed by both parties in the reinsurance contract. In non-proportional reinsurance, if any accident or catastrophe lasts for a period exceeding the time prescribed in the treaty for an accident or catastrophe, the ceding company shall, when calculating the amount of refundable payment from the reinsurer, select an appropriate period of time of the accident or catastrophe according to treaty clauses, and the losses that occurred outside the selected period of time shall not be included in the reinsurance treaty for refund. (3) In facultative reinsurance business, if there is any special clause in the contract (such as the claims control clause or claims cooperation clause), the ceding company shall, no matter the extent of the insured event, notify the reinsurer of the claim immediately after learning the occurrence of the insured event, notify the reinsurer of the claim settlement process in a timely manner, provide the relevant claim materials, and cooperate with the reinsurer in carrying out on-site investigations according to the agreement of the reinsurance contract. The ceding company shall actively consult with the reinsurer as to the proposal of claim settlement and reach an agreement with the reinsurer as to the claim settlement.

431 Ibid., Ch. 3, s.1(6)

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9.15.10 Reinsurance brokers It is well known that brokers play a significant role in reinsurance transaction. The majority of reinsurance business is arranged through brokers.The Regulations 2015 provides rules for the reinsurance brokers to follow:432 (1) No insurance broker shall engage in any reinsurance brokerage business detrimental to the credit and lawful rights and interests of an insurer.433 (2) An insurance broker may, according to its business needs, introduce or design a reinsurance contract.434 (3) An insurance broker shall, as agreed upon with a cedant, send account statements, settle reinsurance payments, and perform other obligations in a timely manner and shall not embezzle or withhold reinsurance premiums, recovered claims, recovered commissions, and recovered expenses.435 An insurance broker shall in a timely and accurate manner, inform the cedant of the relevant reinsurer information.436 (4) At the request of a reinsurer, an insurance broker shall, as agreed upon with the cedant, inform in writing the reinsurer of the liability retained by the cedant and the relevant direct insurance information known by the insurance broker.437 (5) At the request of a cedant or a reinsurer, an insurance broker shall cooperate in the settlement of claims according to the contractual provisions.438 9.15.11 Legal liability Where an insurance company or insurance broker conducts any outward business of reinsurance in violation of the Provisions 2015, the CBIRC shall order it to take corrective action and impose a fine of not less than ¥50,000 yuan nor more than ¥300,000 yuan on it; if the circumstances are serious, the CBIRC may restrict its scope of business, order it to stop accepting new business, or revoke its insurance business permit.439 The CBIRC shall issue a warning to and impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan on the supervising executive directly liable for a violation of these Provisions in conducting reinsurance business or any other directly liable person; if the circumstances are serious, the CBIRC shall disqualify him or her from holding the corresponding office or practicing in the relevant sector, and may prohibit a relevant liable person from access to the insurance sector for a certain period or even for life. 432 433 434 435 436 437 438 439

The Regulations 2015, Ch.3 Reinsurance Brokerage Business Ibid., art.18. Ibid., art.19. Ibid., art.20(1). Ibid., art.20(2). Ibid., art.21. Ibid., art.22. Ibid., art.33

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9.16 Conclusion China takes a strict approach for regulating and supervising the insurance business; this is compatible with the actual situation of the development of the insurance industry in China. To maintain the order of the market and safeguard the interests of the insureds, it is necessary to adopt this strict control of the insurance business at the rapid developing stage of the insurance market. For the regulation of insurance products, a combination of product approval approach and a principles-based approach is used. Insurers are required to submit certain insurance products to the CBIRC for approval, for example, the insurance clauses and premium rates of the insurance products that concern social and public interest, the compulsory insurance products, and the newly developed life insurance products must be submitted to the CBIRC for approval, while other types of insurance products are required to be submitted to the CBIRC for recordation. The CBIRC has developed detailed rules for regulation insurance clauses and premium rates of insurance products and has also formulated specific regulations for specific lines of the insurance business, such as property insurance, life insurance, reinsurance, and so on. It can be concluded that statutory and regulatory rules are in place and operate effectively in regulating the insurance business in China.

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CHAPTER 10

Regulation of the conduct of insurance companies

10.1 Introduction The key requirement of regulation of the conduct of insurers is that insurers must, in their conduct of the insurance business, treat customers fairly throughout the insurance life cycle, from the time before a contract is entered into and through to the point at which all obligations under a contract have been satisfied.1 The fair treatment of customers encompasses concepts such as ethical behaviour, acting in good faith, and the prohibition of misconduct and abusive practices. Requirements for the conduct of the insurance business help to protect insureds and promote fair consumer outcomes; to strengthen public trust and consumer confidence in the insurance sector; to minimize the risk of insurers and intermediaries following business models that are unsustainable or pose reputational risk, thereby complementing the risk management framework of a solvency regime; and to support a sound and resilient insurance industry by creating level playing fields in terms of the basis on which insurers and intermediaries can compete while maintaining business practices that support the fair treatment of customers.2 Regulation of insurers’ conduct of business is closely linked with the country’s tradition, culture, legal regime, and the degree of development of the insurance industry. For this reason, supervisory approaches to the conduct of business must suit the actual situations in these aspects of the country in order to achieve the outcome of fair treatment of customers. Regulatory requirements for the conduct of the insurance business also vary depending on the nature of the customer with whom an insurer or intermediary interacts and the type of insurance provided. The scope of requirements for conduct of the insurance business should reflect the risk of unfair treatment of customers, taking into account the nature of the customer and the type of insurance provided. In this chapter, we will see how insurers’ conduct of business throughout the insurance life cycle is regulated and how the aim of fair treatment of customers is achieved through the formulation and implementation of the regulatory requirements in China.

1 International Association of Insurance Supervisors (IAIS), the Insurance Core Principles (ICP) 19, 2019 version. 2 IAIS, the ICP 19.0.1.

DOI: 10.4324/9781351122863-10

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10.2 Legal framework for the regulation of the conduct of insurers The Insurance Law provides a number of articles regarding regulation of the conduct of insurance companies. Article 114(1) of the Insurance Law provides that: Insurance companies shall, according to the provisions of the insurance supervision and regulation authority of the State Council, fairly and reasonably determine the insurance clauses and premium rates, without prejudice to the legitimate rights and interests of proposers, the insureds and beneficiaries.

This article has already been discussed in chapter 9 of this book and will not be considered in this chapter. Article 114(2) continues, stating that “Insurance companies shall perform the obligation of paying indemnity or insurance money in a timely manner according to insurance contracts and this Law.” Articles 22–25 of the Insurance Law provide rules in relation to claims handling. All these articles are concerned with the insurer’s obligation to pay insurance money and the way in which claims should be dealt with, which will be discussed later in section 10.12. The Insurance Law also provides rules for fair competition in article 115, which stipulates that “Insurance companies shall operate business according to the principle of fair competition, and shall not commit unfair competition.” In addition, the Insurance Law (art.116) explicitly set out a list of misconduct which must not be performed by the insurers and their employees in the conduct of the insurance business. Article 116 is considered later in section 10.5. The regulatory authority (CIRC/CBIRC) have developed a series of regulations to govern the conduct of insurance companies and their employees in the areas of the conduct of insurers in advertising or selling insurance products, the determination of misleading sales of personal insurance and the liability for misleading sales of personal insurance, the basic services of the personal insurance business, telephone sales of insurance products, retrospective administration of insurance sales practices, electronic return visit of life insurance, and evaluation of the service of insurance companies and evaluation of the business operation of insurance companies. The regulations in these areas are considered in this chapter. 10.3 Regulation on the conduct of the insurance business The Provisions on Administration of Insurance Companies 20153 sets out general rules as regards insurance operations, which specifies what an insurer must do and what it must not. As to the advertising and promotion of insurance products, the business promotional materials of an insurer shall be objective, complete, and true and state the name and address of the insurance institution.4 An insurer shall disclose the relevant information according to the provisions issued by the CBIRC and must not disseminate misleading information on its insurance clauses and service quality,

3 The CIRC Order No. 3 [2015] (see accessed on 15 October 2020). 4 The Provision on Administration of Insurance Companies (2015), art.44.

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among others, by advertising or in any other manner of publicity.5 The insurers are required to alert the proposers to the exemptions of an insurers’ liability, surrender, deduction of expenses, cash value, cooling-off period, and other matters in the insurance contracts in accordance with the Insurance Law and the provisions issued by the CBIRC.6 With regard to fair dealing and competition, insurers shall follow the principle of fair competition in conducting business, and may not engage in any unfair competition.7 An insurer may not one-sidedly compare its insurance clauses and premium rates with the similar insurance clauses and premium rates of any other insurance company or with the deposit interest rates of any financial institution.8 An insurance institution may not damage the reputation of any other insurance institution by fabrication or spreading false facts. An insurer may not elbow out any other insurers in conducting the insurance business or obstruct the insurance business of any other insurers by taking advantage of the government, any government department, or any monopolistic enterprise or organization.9 An insurance institution may not persuade or induce any insurance proposers to rescind an insurance contract with any other insurance company.10 An insurance institution may not provide or promise to provide the proposer, insured, or beneficiary with any premium kickback or other benefit not agreed upon in the insurance contract.11 Except for a reinsurance company, insurers shall establish a customer service department or a consultation and complaint department according to the relevant provisions, and publish the consultation and complaint hotline. Insurers shall carefully handle insurance complaints and notify the complainants of the handling results in a timely manner.12 Insurers shall establish a registration system for the management of insurance agents and enhance the training and management the agents and may not instigate or induce insurance agents to engage in any activity violating the principle of good faith.13 An insurer may not authorize any institution or individual which has not been legally qualified to sell insurance products, nor pay any commission or other benefit to such an institution or individual.14 10.4 Regulation on the conduct of insurers in advertising or selling insurance products The conduct of insurance companies in the practice of advertising and selling insurance products is regulated by a number of regulations.

5 6 7 8 9 10 11 12 13 14

Ibid., art.45. Ibid., art.46. Ibid., art.47. Ibid., art.48. Ibid., art.49. Ibid., art.50. Ibid., art.51. Ibid., art.52. Ibid., art.53. Ibid., art,54.

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(1) The Provisions on the Administration of Insurance Companies 2015;15 (2) The Measures for the Supervision and Administration of Insurance Sales Personnel which was issued on 6 January 2013, which became effective on 1 July 2013;16 (3) The Notice of the CIRC on Promoting the Work on Notification of Important Information for Insurance Application which was issued on 22 May 2009, which became effective on 1 October 2009.17 (4) The Notice of the General Office of CBIRC on the implementation of the Main Responsibility of Insurance Companies to Strengthen the Administration of Insurance Sales Personnel, which was issued and implemented on 12 May 2020.18 By these regulations, insurers are required to promote products and service in a manner that is clear, fair, and not misleading and to provide timely, clear, and adequate pre-contractual and contractual information to customers. In the following sections we consider these regulatory requirements. 10.4.1 Advertising insurance products In respect of advertising and promotion of insurance products, the business promotional materials of an insurer must be objective, complete, and true and state the name and address of the insurance institution.19 An insurer shall disclose the relevant information according to the provisions issued by the CBIRC and must not disseminate misleading information on its insurance clauses and service quality, among others, by advertising or in any other manner of publicity.20 The insurers are required to alert the proposers to the exemptions of an insurers’ liability, surrender, deduction of expenses, cash value, cooling-off period, and other matters in the insurance contracts in accordance with the Insurance Law and the provisions issued by the CBIRC.21 10.4.2 Regulation on conduct of salespersons (a) Supervision and administration of insurance salespersons Insurance products are normally sold by insurance salespersons, who are individuals and employed by insurance companies or by insurance intermediaries to sell insurance products.22 15 The CIRC Order No. 3 [2015]. 16 The CIRC Order No.2 [2013] (see accessed on 15 October 2020). 17 Bao Jian Fa No. 68 [2009] (see accessed on 15 October 2020). 18 Yin Bao Jian Ban Fa No. 41 [2020] (see accessed on 15 October 2020). 19 The Provisions on the Administration of Insurance Companies 2015, art.44. 20 Ibid., art.45. 21 Ibid., art.46. 22 The Measures for the Supervision and Administration of Insurance Sales Personnel 2013, art.2.

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Insurance salespersons shall conduct insurance sales activities within the scope of their insurance company’s authorization. They must show the clients practice certificates in insurance sales activities23 and are prohibited from carrying on misconduct as specified in the Insurance Law.24 Insurers should take steps to rectify their salespersons misconduct.25 Insurance salespersons are not allowed to conduct any of the following acts in the course of selling insurance products:26 (1) Deceiving the proposer, insured, or beneficiary; (2) Concealing any important information on an insurance contract; (3) Obstructing the proposer from performing the obligation of telling the truth or inducing an insurance applicant not to perform the obligation of telling the truth; (4) Providing or promising to provide any benefit not under the insurance contract to the proposer, insured, or beneficiary; (5) Forcing or inducing any proposer to enter into, or restricting a proposer in entering into, an insurance contract by using any administrative power, position, or professional advantage or by any other illicit means or seeking any illicit benefit for any other institution or individual; (6) Forging or modifying without approval any insurance contract or providing any false evidentiary material for a party to an insurance contract; (7) Misappropriating, withholding, or encroaching on insurance premiums or insurance benefits; (8) Authorizing any institution or individual which is not legally qualified to engage in insurance sales; (9) Damaging the goodwill of competitors by fabrication or spreading false facts or disturbing the order of the insurance market by any other act of unfair competition. (10) Divulging any trade secret or individual privacy of the insurer, proposer, or insured known in the process of insurance sales; (11) Harassing a customer after the customer expressly refuses to take out insurance; (12) Entering into an insurance contract in place of the proposer; (13) Otherwise violating laws, administrative regulations, and the provisions issued by the CBIRC. Where any of the insurance sales personnel commits any of the conduct as set out in the preceding paragraph, he or she shall be ordered to take corrective action, and the CBIRC may take regulatory measures against the insurance company involved, such as disclosure to the public and regulatory interviews with senior executives.

23 24 25 26

Ibid., art.19. Mainly arts.116 and 131 of the Insurance Law. The Measures for the Supervision and Administration of Insurance Sales Personnel 2013, art.23. Ibid., art.24.

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An insurance company shall require an insurance agent to provide the basic information on insurance sales personnel who sell insurance products of the insurance company and their training and other information.27 Where an insurance company discovers any violations of laws and regulations by an insurance agent and its insurance sales personnel in the sales of its insurance products, the insurance company shall immediately redress such violations. If the insurance agent and its insurance sales personnel refuse to comply, the insurance company shall immediately terminate the principal–agent relationship with the insurance agent and report to the local office of the CBIRC.28 (b) The recent development in respect of administration of salespersons In order to effectively promote the implementation of the main responsibility of insurance companies; comprehensively strengthen the sales personnel of insurance companies from the aspects of strong management, quality improvement, and image building, management; promote the protection of the rights and interests of insurance consumers; and serve the high-quality development of the insurance industry, the Notice of the General Office of CBIRC on the implementation of the Main Responsibility of Insurance Companies to Strengthen the Administration of Insurance Sales Personnel 202029 has been recently issued. If any previous relevant documents are inconsistent with this Notice, this Notice shall prevail. (I) RAISE AWARENESS IN AN ALL ROUND WAY AND EFFECTIVELY IMPLEMENT LEGAL AND MANAGEMENT RESPONSIBILITIES

Assuming legal responsibility according to law. An insurance company authorizes sales personnel to sell insurance products and allows them to carry out business activities in the name of the company, relying on the company brand and credit, and must bear the legal responsibility of the sales personnel for the corresponding business activities according to law.30 Fully implementing management responsibilities. Insurance companies bear the main responsibility for the management of sales personnel. They shall establish and improve the management system of sales personnel, form a working mechanism with layers of responsibilities, and clear responsibilities for everything in every aspect.31 The corporate legal person shall bear the main responsibility for management. The chairman of the insurance company, the general manager, and the person responsible for the business management of the insurance intermediary channel shall effectively assume their responsibilities and play their leading role.32

27 Ibid., art.25. 28 Ibid., art.26. 29 Yin Bao Jian Ban Fa No. 41 [2020]. 30 The Notice of the General Office of CBIRC on the implementation of the Main Responsibility of Insurance Companies to Strengthen the Administration of Insurance Sales Personnel 2020, art.1. 31 Ibid., art.2. 32 Ibid., art.3.

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(II) STRENGTHEN STRATEGIC COORDINATION AND IMPROVE THE SALES STAFF MANAGEMENT FRAMEWORK

Establish a sales personnel management system. Insurance companies shall take salesperson development management as a systematic project and make long-term plans in combination with the company’s mid- and long-term strategies; development concepts; market positioning, resource endowments, and path selection; conduct overall planning from the corporate governance system and management structure; and make comprehensive arrangements in terms of organization, function division, working mechanism, operation process, reward, and punishment assessment, and so on.33 Establish a sales personnel management responsibility system. Insurance companies shall follow the requirements of the Notice of the General Office of CBIRC on Strengthening the Management of Intermediary Channels of Insurance Companies 2019,34 and the responsible department shall manage the entire process of sales personnel. In establishing and improving the target responsibility system, the main person in charge of the head office assumes leadership responsibility, the person in charge of management bears the management responsibility, and the person in charge of the relevant management department and branch assumes responsibility for implementation.35 (III) STRICT RECRUITMENT MANAGEMENT TO PREVENT UNQUALIFIED PERSONS FROM ENGAGING IN INSURANCE SALES

Strict recruitment conditions, standards, and procedures. Insurance companies shall formulate unified management measures for the recruitment of sales personnel and strictly review personal credit and work experience in accordance with the principle of prudence. It is strictly forbidden to recruit personnel who do not meet regulatory requirements to engage in insurance sales. Insurance companies shall actively support the industry to build a platform to strengthen the self-discipline management of sales personnel.36 Strictly control the recruitment process. Insurance companies shall strictly control the authority of recruitment, strengthen the management of recruitment publicity materials, standardize the publication of recruitment information, and strictly prohibit practices such as obscuring the main body of employment, misleading the nature of positions, confusing contract types, and exaggerating the level of income. It is strictly forbidden to encourage salespersons to change job frequently and disorderly.37 (IV) STRICT TRAINING AND MANAGEMENT TO CONTINUOUSLY IMPROVE THE PROFESSIONALISM OF SALESPERSONS

Establish a vocational training system for sales personnel. Insurance companies shall formulate training plans for sales personnel on-boarding and on-the-job stages; establish professional and stable training teams based on the company’s sales staff, 33 Ibid., art.4. 34 Yin Bao Jian Ban Fa No. 19 [2019]. 35 The Notice of the General Office of CBIRC on the implementation of the Main Responsibility of Insurance Companies to Strengthen the Administration of Insurance Sales Personnel 2020, art.5. 36 Ibid., art.6. 37 Ibid., art.7.

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business scale, and complexity of insurance products; and formulate training outlines and training materials on finance and insurance knowledge, laws and regulations, regulatory standards, professional ethics, insurance products, and so on.38 Strengthen the training of sales personnel on laws, regulations, and professional ethics. Insurance companies shall effectively enhance the salespersons’ awareness of compliance, law-abiding, and integrity and shall take laws and regulations, regulatory rules, practice rules, standards, and professional ethics as the basic content of sales personnel on-boarding and on-the-job training. The training time for each person shall be no fewer than 30 hours per year.39 Strengthen the management and control of sales personnel training effects. Insurance companies shall formulate strict sales personnel training assessment, evaluation, and reward and punishment systems, establish and improve the on-boarding and on-the-job training effectiveness assessment mechanism, and improve the management of training files. If online training is used, identification shall be carried out effectively, and complete and effective testing and evaluation shall be used to ensure the training effect. It is not allowed to handle the practice registration for unqualified personnel in the on-the-job training assessment. Before authorizing sales personnel to sell new insurance products, special training and testing shall also be organized.40 (V) STRICT QUALIFICATION MANAGEMENT AND THE ESTABLISHMENT OF A GRADING SYSTEM FOR SALESPERSONS’ SALES ABILITY Support the industry to promote the grading of salespersons’ sales ability qualification. Insurance companies shall comply with the requirements of high-quality development of the insurance industry and support industry self-regulatory organizations to take advantage of the platform to promote the salespersons’ ability classification. The Insurance Association of China and local industry self-regulatory organizations shall take into account the types of insurance products to establish a sales force qualification rating system for sales personnel and a corresponding training and testing mechanism. Qualified local industry self-regulatory organizations may first try to establish sales personnel competency grading standards, develop training materials, organize training tests, and so on, but shall not charge any fees for the training of the sales personnel.41 Establish the company’s sales ability qualification management system. Insurance companies shall strictly manage the sales authorization of insurance products, comprehensively inspect the salespersons’ years of employment, insurance knowledge, education status, and integrity records, and so on, and differentiate the sales ability qualifications to implement different authorizations, giving higher sales authority to those who have higher sales ability qualification, and lower sales authority to those who have lower sales ability. It is necessary to encourage and guide sales personnel to continuously improve professional knowledge and business abilities and actively obtain high-level sales ability qualifications.42 38 39 40 41 42

Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12.

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(VI) STRICT BUSINESS MANAGEMENT AND THE ESTABLISHMENT OF A SALESPERSON INTEGRITY SYSTEM

Strictly manage the conduct of sales personnel. The insurance company shall strictly prevent the occurrence of prohibited misconduct listed in articles 116 and 131 of the Insurance Law in the practice of the sales personnel. If a salesperson is found to be in violation of laws or regulations, he or she shall be immediately disciplined and made internally accountable.43 Strengthen the integrity management of sales personnel. Insurance companies shall enter information such as commendation awards and regulatory administrative penalties received by sales personnel into the insurance intermediary supervision information system in an accurate, timely, and complete manner in accordance with regulatory requirements.The entry of the relevant integrity record information of the resigning sales personnel shall be completed before cancelling their practice registration. Insurance companies shall carefully review the integrity records of sales personnel and be responsible for their authenticity.44 Carry out comprehensive evaluation management of sales personnel. Insurance companies shall improve the pertinence and effectiveness of sales personnel management, establish and improve the integrity evaluation system and honour system of sales personnel, and play the dual roles of positive incentive advocacy and negative warning constraints. Insurance companies shall actively explore the use of scientific and technological means to carry out customer evaluation of the salesperson’s employment process and effectively apply the customer evaluation results to the salesperson’s integrity evaluation.45 Strengthen the punishment of sales personnel for dishonesty. Insurance companies shall actively support industry self-regulatory organizations to build sales personnel dishonesty management platforms and establish a joint disciplinary mechanism for salesperson dishonesty. An insurance company shall not employ persons who are still in the state of joint disciplinary punishment for engaging in insurance sales and service activities. If an insurance company finds that a salesperson has serious dishonesty in insurance sales service activities or other economic and social activities, it shall promptly report to the dishonesty management platform and deal with it seriously until the agency (labour) contract is terminated. He or she cannot be hired again within two years after the contract is terminated.46 (VII) CONSOLIDATE THE BASIS OF THE MANAGEMENT AND CONTINUOUSLY CONTROL THE DATA QUALITY OF SALES PERSONNEL

Strengthen the information management of sales personnel. Insurance companies shall develop special information systems to record, manage, and reflect the salesperson’s identity information, business information, and financial information to ensure that the data is true, comprehensive, accurate, and traceable.47

43 44 45 46 47

Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17.

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Strengthen the basic data management of sales personnel. Insurance companies shall strictly follow the regulations on the management of sales personnel’s practice registration, and implement the practice information registration and maintenance requirements for the entire process of on-boarding and leaving the company. Insurance companies shall strengthen the audit review and verification of sales personnel data between different information systems to ensure that the company’s sales personnel have consistent data records in the registration in the insurance intermediary supervision information system, recorded data in the company’s personnel management system, submitted data to the CBIRC statistical information system, and company’s publicly disclosed data.48 Improve the management of files of the salespersons. Insurance companies shall urge branches at all levels to establish and improve the file of sales personnel, which comprehensively reflects the basic situation of sales personnel, employment training, rewards and punishments, and sales capacity qualification grading.49 (VIII) STRICT SUPERVISION AND SEVERE PUNISHMENT ACCORDING TO LAW AND SERIOUS ACCOUNTABILITY

Strict supervision according to law. The CBIRC shall continue to strengthen the supervision and inspection of the insurance company’s sales personnel management system and mechanism, strengthen the practice registration requirements, carry out personnel basic data quality governance, and use big data, the internet and other means to strengthen the salespersons’ information disclosure. The CBIRC shall study and establish an evaluation indicators system for the management of the sales team of insurance companies, focusing on aspects of recruitment, training, compliance, stability, basic data, risk control, and so on, carry out regular evaluation ratings, and take regulatory measures against insurance companies with poor ratings according to law.50 Strict punishment according to law. The CBIRC and its local offices shall severely punish the insurance companies and their management personnel who violate regulatory requirements and fail to implement the management responsibilities of sales personnel. Where an insurance company neglects the responsibility of the salespersons’ management, fails to establish a management system in accordance with the requirements of this Notice, there are gaps in the practice registration management, the practice process management is only superficial, there are violations of the law or regulations, or the relevant sales personnel have a serious breach of trust, which has a severe impact, penalties for both the company and sales personnel shall be given, and managers shall be held accountable, and regulatory measures shall be taken in accordance with the law.51 Strict territorial supervision. The local offices of the CBIRC shall fully implement their territorial responsibilities, actively explore effective supervision methods, and effectively urge insurance institutions at all levels in their jurisdictions to strengthen 48 49 50 51

Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21.

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the management of sales personnel. It is necessary to strictly investigate the sales personnel of insurance institutions to manage their dereliction of duty and responsibilities, severely crack down on the illegal acts of sales personnel, and strictly prevent potential risks such as illegal sales of non-insurance financial products.52 Serious supervision and accountability. If the supervisory department fails to fully perform its supervisory responsibilities, and the salespersons have failed to fulfil their duties, the supervisory accountability will be implemented in accordance with the law and regulations and effectively turn accountability pressure into supervisory performance power. If the local offices of the CBIRC fail to perform local regulatory responsibilities or are ineffective, and if serious violations of laws and regulations, major risks, or serious group incidents occur within the scope of the responsibilities of the sales personnel, they shall be held accountable in accordance with laws and regulations.53 10.4.3 Notification of important information in the process of sales In the process of selling insurance products by the salespersons, information about the products must be made transparent to the proposers; this can be achieved by the notification of important information about the products in the process of sales. In order to regulate the work on notification of importance information for insurance application, the CIRC formulated the Requirements for the Work on Notification of Important Information on Life Insurance for Insurance Application (hereinafter, the Requirements) and the Basic Contents of the Notification of Importance Information on Life Insurance for Insurance Application (hereinafter, the Basic Contents), which are contained in the Notice of the CIRC on Promoting the Work on Notification of Important Information for Insurance Application 2009.54 According to the Requirements, insurance companies shall establish a sound system of notification of important information for insurance application.55 They shall work out the corresponding content of notification of the important information for each specific product to indicate the characteristics and risks of the product and remind the proposers of their rights and obligations. The Basic Contents are mainly to remind the proposers of their legitimate rights and interests, and the notes for insurance application, and so on, and shall apply to individual life insurance products with a term of more than one year (excluding one year) sold by all insurance companies through individual agents or bank agents.56 Insurance companies shall clearly require their salespersons to provide proposers with notifications of important information for insurance application in the process of selling the products. The notification shall be singled out and given to a proposer before he or she fills out an insurance application form. All insurance companies 52 Ibid., art.22. 53 Ibid., art.23. 54 The Notice of the CIRC on Promoting the Work on Notification of Important Information for Insurance Application (Bao Jian Fa No. 68 [2009]). 55 Ibid., s.1. 56 Ibid., s.2.

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shall clearly require the proposers to sign the notification for confirmation, and the signing date must be no later than that on the proposal form. All insurance companies shall check the signatures of the proposers on the notification and the proposal forms to ensure the signatures of proposers are authentic and valid.57 (a) Requirements for sales of insurance A salesperson shall show his or her insurance agent sales certificate before introducing any product of an insurance company; the institutions at all levels of an insurance company shall post the insurance business operation license or the insurance marketing service license in a conspicuous place, and the agencies selling insurance as a sideline shall post the sideline insurance agency license in a conspicuous place. The salespersons shall remind the clients to inquire and check the relevant certificates and inform them of the methods for inquiry and check.58 When introducing an insurance product, a salesperson shall ask about the proposer’s needs for the insurance, the relevant information on any insurance product already purchased, and the proposer’s financial position and recommend suitable products on the basis of the proposer’s background, needs, current degree of security, economic affordability, and so on.59 A salesperson shall use the promotional materials uniformly made by the insurance company and shall not handwrite or make any promotional material related to the company or the product without permit.60 He or she shall not induce a client to purchase insurance or replace any previously purchased insurance by promising any premium rebate or other interest outside the insurance contract.61 When a client clearly refuses to purchase insurance, the salesperson shall not continue selling it to the client and disturb the normal work and life of the client.62 (b) Requirements for notification of importance insurance clauses When introducing an insurance product, a salesperson shall provide the insurance clauses and actively explain the important clauses to the proposer so as to help him or her correctly understand the insurance product, and the explanation shall include but not be limited to the following: (1) The salesperson shall remind the proposer to carefully read the insurance clauses and pay particular attention to the insurance liabilities, exemptions, rights and obligations of the insured, calculation of deductibles or deductible ratio, formalities for claiming indemnity, provisions on surrender, and so on, and remind the proposer to note whether the extent of security of the product to be purchased can satisfy his or her needs.63

57 Ibid., s.3. 58 Requirements for the Work on Notification of Important Information on Life Insurance for Insurance Application (Bao Jian Fa No. 68 [2009]), s.1(1). 59 Ibid., s.1(2). 60 Ibid., s.1(3). 61 Ibid., s.1(4). 62 Ibid., s.1(5). 63 Ibid., s.2(1)

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(2) The salesperson shall remind the proposer that most life insurance products have a long term. If the proposer needs to pay the premium by instalments, the salesperson shall clearly inform him or her of the payment schedule, advise him or her to fully consider whether he or she has sufficient and stable financial ability to pay the premium, and notify the proposer that his or her rights and interests may be affected if he or she fails to pay the premium as scheduled.64 (3) For a life insurance product with an insurance term of more than one year, the salesperson shall remind the proposer to pay attention to the relevant clauses on the cooling-off period of the product (within ten days from the date when the proposer or the insured receives the insurance policy and signs it), and clearly notify the proposer that unless otherwise agreed upon in the contract, the proposer may rescind the insurance contract unconditionally in the cooling-off period but shall return the insurance policy, and that the insurance company shall refund the entire premium and charge no fees but a cost of not more than ¥10 yuan.65 (4) The salesperson shall remind the proposer that the proposer will suffer some loss when he or she surrenders after the cooling-off period and recommend to the proposer to avoid surrendering the policy during the insurance period. The amount refunded to the proposer at the time of surrender shall be determined according to the specific agreement of the insurance contract.66 (5) If the proposer purchases new products such as participating insurance, unit-linked insurance, universal insurance, and so on, the salesperson should further remind the proposer to pay attention to special features of those products.67 (6) If the proposer purchases insurance in a bank or other part-time agency, the proposer should be reminded that the product is an insurance product and the business entity is the insurance company, and that the proposer should not compare one-sidedly the insurance products with bank deposits, government bonds, funds, and so on.68 (7) If the proposer purchases a health insurance product, the salesperson should proactively inform the proposer of: whether the policy has an agreement on medical expenses compensation principle, whether there is a deductible or the proportion payment agreement, whether there is a probation period, and whether there is a guarantee for renewal of the policy, and so on. The salesperson should explain to the proposer these relevant clauses in detail one by one.69 (8) If the proposer purchases an insurance product for his or her minor children, he or she shall be reminded that the total insurance money for the 64 65 66 67 68 69

Ibid., s.2(2) Ibid., s.2(3) Ibid., s.2(4) Ibid., s.2(5) Ibid., s.2(6) Ibid., s.2(7)

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death of the life insured shall be in accordance with the relevant provisions of the CBIRC.70 (c) Requirements on salespersons at the time of the proposer’s application for insurance At the time when a proposer is making an application for insurance, the salespersons are required to observe the following conduct:71 (1) Before the proposer fills in the proposal form, the salesperson shall remind the proposer to carefully read and sign the notification of important information concerning the application for the insurance. (2) At the time when the proposer is filling the proposal form, the salesperson shall explain to him or her the meaning of each item of the proposal form and the requirements for filling the proposal form, explain the precautions for filling out the proposal form, help the insured to read and fully understand the information about the proposal, and remind the proposer to carefully read the instructions for completing the proposal form and the insurance clauses. (3) The salesperson may make inquiries to the proposer about the relevant circumstances, and explain to him or her the relevant consequences if the proposer fails to truthfully disclose information. The salesperson shall not obstruct the proposer from fulfilling the obligation to disclose or induce him or her not to disclose the truth. (4) The salesperson shall remind the proposer to choose the way of paying premiums according to his or her actual situation and advise him or her to pay the premium by non-cash method such as bank transfer. (5) The salesperson must ensure that the proposer completes the proposal in full, reads and knows the contents of the insurance contract, and signs the completed proposal. The salesperson shall not fill in the proposal on behalf of the proposer and shall not induce the proposer to sign a blank or unfilled proposal form. (6) The salesperson shall return the application materials signed by the proposer to the insurance company. The insurance company must properly keep the application materials submitted by the proposer and must not divulge the personal information of the customer. (7) The salesperson shall inform the proposer of the customer service telephone and contact details of the insurance company and remind the proposer that he or she can consult the insurance company directly if he or she has any questions about the terms of the contract. (8) The salesperson shall inform the proposer that the insurance company will carry out the customer return visit according to the regulations, prompting the proposer to fill in the home address, contact information, and personal information accurately and completely so that the insurance company can pay a return visit in time to ensure that the proposer’s interests are effectively 70 Ibid., s.2(8) 71 Ibid., s.3.

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protected. The salesperson shall prompt the proposer to answer the questions truthfully during the return visit. If there is anything unclear, the proposer can immediately raise questions and the insurance company is required to explain it to the proposer in detail. (9) The salesperson shall remind the proposer that if he or she finds that the salesperson misleads him or her in the sales process, or if he or she believes that his or her rights have been prejudiced, he or she must retain written evidence or other evidence and report the situation to the insurance company. The proposer can also make a complaint to the local insurance regulatory bureau (or insurance industry association). If necessary, the proposer can apply for arbitration or file a lawsuit in accordance with the contract. 10.4.4 Basic contents of the notification of important information on life insurance for insurance application The CIRC formulated the Basic Contents of the Notification of Important Information on Life Insurance for Insurance Application 2009.72 The written notification has the following contents: Life insurance is a type of insurance which takes the life and body of human beings as the subject-matter insured. When the insured suffers any risk accident such as death, injury, or disease, or reaches the age or time limit as agreed on in the contract, the insurance company shall pay the insurance benefits in accordance with the insurance contract. Life insurance has the functions of security and long-term savings and may be used to make a long-term financial plan for people’s lives. In order to help you better understand and purchase life insurance products and protect your legitimate rights and interests, the CBIRC requests you (as the proposer) to read the following contents carefully before filling out the insurance application form. (a) Confirm the legal qualifications of the insurance institution and salesperson73 You may purchase insurance products from a lawful institution which holds the insurance business operation license or the sideline insurance agency license issued by the CBIRC or with a salesperson who holds the insurance agent sales certificate. If you need to check the sales qualification of a salesperson, you may request the salesperson to tell you the specific inquiry method or log on to the insurance intermediary supervision information system. (b) Select life insurance products according to your actual insurance demands and payment ability74 You may select life insurance products suitable for your own needs according to the level of your existing security, your financial strength, and other actualities. 72 Bao Jian Fa No. 68 [2009]. 73 The Basic Contents of the Notification of Importance Information on Life Insurance for Insurance Application 2009, s.1. 74 Ibid., s.2.

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Since most life insurance products have a long term, if you need to pay the premium by instalments, please fully consider whether you have enough stable financial resources to pay the premium; if you fail to pay premium on time, it may affect your rights and interests. We advise you to pay the premium by non-cash means such as bank transfer. (c) Learn in detail the clauses of an insurance contract75 You should not regard the promotion materials of an insurance product such as advertisements, announcements, and posters as an insurance contract. You should request the salesperson to provide the clauses of the relevant insurance product for you. Please read the clauses carefully and pay more attention to such contents as insurance liability, liability exemption, rights and obligations of the insurance applicant and the insured, calculation of deductibles or deductible ratio, procedures for applying for claiming indemnity, relevant clauses on surrender, expense deduction, and product term. If you have any question about the clauses, you may request the salesperson to make explanation. (d) Understand the relevant contractual provisions on cooling-off period76 For a life insurance product with a term of more than one year, there are usually contractual provisions on the cooling-off period (within ten days from the date when the insurance applicant or the insured receives the insurance policy and signs it). Except as otherwise agreed upon in the contract, you may rescind the insurance contract unconditionally in the cooling-off period but should return the insurance policy, and the insurance company shall refund the entire premium to you and may charge no extra fees except a cost of not more than ¥10 yuan. (e) Rescind with caution an insurance contract after the cooling-off period77 If you rescind an insurance contract after the cooling-off period, you will suffer a certain loss. The insurance company shall, within 30 days upon receipt of the notice of rescission of contract, refund the cash value of the insurance policy to you as agreed upon in the contract (the cash value table is attached in the formal insurance contract, and if you have any question, you may request the insurance company to make explanation). (f) Fully understand the risks and characteristics of new types of life insurance products, such as participating insurance, investment-based insurance, and universal insurance78 (1) If you choose to purchase a participating insurance product, please pay attention to the following issues. The level of dividends depends primarily 75 76 77 78

Ibid., s.3. Ibid., s.4. Ibid., s.5. Ibid., s.6.

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on the actual business performance of the insurance company. Only when the actual business performance is better than the pricing assumption will the insurance company distribute some profits to you. If the actual business performance is worse than the pricing assumption, the insurance company may distribute no dividends to you.The forecast of future interests under an insurance contract in the product description or the document on measurement of insurance interests is based on the company’s actuarial assumption and cannot be regarded as expectation for the future, and the dividend distribution is uncertain. (2) If you choose to purchase an investment-based insurance product, please pay attention to the following issues. You should learn in detail the fees deducted for the investment-based insurance, including initial fees, bid/ ask spread, mortality risk premium, insurance policy management fee, asset management fee, commission charge, surrender charges, and so on. You should request the salesperson to explain the detailed calculation method for the account value of the investment-based insurance. The return on investment in an investment-based insurance product is uncertain, and you bear all investment risks. The forecast of future interests under an insurance contract in the product description or the document on measurement of insurance interests is based on the company’s actuarial assumption and cannot be regarded as expectation for the future, and the actual investment may result in profits or losses. If you choose flexible payment methods, you should request the salesperson to explain to you the possible risks and adverse effects of your stop of payment. (3) If you choose to purchase a universal insurance product, please pay attention to the following issues. There is usually a provision on minimum guaranteed interest rate for a universal insurance product, which is set only for the funds in investment accounts. You should learn in detail the fees deducted for the universal insurance, including initial fees, mortality risk premium, insurance policy management fee, commission charge, surrender charge, and so on. You should request the salesperson to explain to you the detailed calculation method for the account value of universal insurance. The return on investment in a universal insurance product is uncertain, and you have to bear some investment risks. The settlement interest rate published monthly by the insurance company only represents the investment status of one month rather than any expectation for the whole year, and the settlement interest rate is set only for the funds in investment accounts rather than the entire premium. The forecast of future interests under an insurance contract in the product description or the document on measurement of insurance interests is based on the company’s actuarial assumption, the return on investment at a rate higher than the minimum guaranteed interest rate is uncertain, and the forecast cannot be regarded as expectation for the future. If you choose flexible payment methods, you should request the salesperson to explain to you the possible risks and adverse effects of your stop of payment. 481

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(g) Correctly differentiate new types of life insurance products from other financial products The new types of life insurance products such as participating insurance, investmentbased insurance, and universal insurance have the functions of both insurance security and investment. Different insurance products focus on different security and investment functions, but they are, in nature, insurance products of insurance companies. You should neither make simple comparisons between new types of life insurance products and financial products such as bank deposit, treasury bonds and funds, nor take the new types of life insurance products as a substitute for bank deposits. (h) Pay attention to the product characteristics and specific contractual provisions when you are selecting health insurance products Health insurance products have a stronger function of risk protection, including products of the nature of fixed benefits and products of the nature of expense reimbursement. For health insurance of the nature of fixed benefits, the insurance benefits are paid as agreed on, without regard to whether the insured has obtained other medical expense reimbursement; for health insurance of the nature of expense reimbursement, the insurance company may deduct from the insurance benefits the corresponding medical expense reimbursement obtained by the insured by other means. Please pay attention to whether there are provisions on deductibles, compensation ratio, or observation period of a disease in the clauses. If the insurance company sells a health insurance product without a guaranteed renewal clause in the form of additional insurance, please note that the insurance period of the additional health insurance shall be no shorter than that of the main insurance. (I) SELECT PROPER INSURANCE AMOUNT WHEN YOU PURCHASE INSURANCE PRODUCTS FOR MINOR CHILDREN

If you purchase any insurance product for your minor child, the total insurance benefits paid due to the death of the insured shall conform to the relevant provisions of the CBIRC. It is mainly to protect the rights and interests of the minor and prevent moral risks; meanwhile, in view of the whole family, since parents are the main economic source and pillar of the family, purchasing insurance with parents as the insured may provide more comprehensive insurance protection for the whole family. (j) Truthfully fill out the insurance application materials, truthfully provide the relevant information, and sign the documents in person The Insurance Law specifies that a proposer shall provide true information. When you are applying for insurance, you should truthfully fill out the insurance application form and truthfully answer the salesperson’s questions about the insured; otherwise, the rights and interests of you and the insured may be affected. In order to effectively protect your rights and interests, please sign in person the notification of important information for insurance application, the insurance application form, and other relevant documents. 482

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(k) Cooperate with the insurance company in the return visits to clients All insurance companies shall make return visits to clients according to the relevant provisions, which shall be usually made by telephone, letter, door-to-door visit, and other means. In order to effectively protect your rights and interests, you should truthfully answer the questions during the return visit and may immediately raise any question and request the insurance company to make detailed explanation of the question. Please correctly and completely enter your personal information, such as home address, postal code, and phone number, when you apply for insurance so that the insurance company is able to make a return visit to you in a timely manner. (l) Pay attention to protecting your legitimate rights and interests If you find that any salesperson is misleading you during the sale of insurance or consider that your rights and interests are violated, please pay attention to keeping documentary evidence or other evidence; you may report such conduct to the insurance company (company’s complaint hotline); lodge a complaint with the local CBIRC office (or an insurance association) (complaint hotline of the local CBIRC office or the insurance association); or when necessary, even apply for arbitration or initiate a lawsuit in the court according to the contract. 10.5 Prohibition of misconduct of insurers and their employees Article 116 of the Insurance Law provides: “An insurance company and its employees shall not have any of the following acts in the course of conducting business: (1) Cheating the proposers, the insureds or the beneficiaries; (2) Concealing from the proposers material information relevant to the insurance contracts; (3) Preventing the proposers from fulfilling their obligation of making truthful disclosure provided under this Law or inducing them not to fulfil such an obligation; (4) Giving or promising premium rebates or other benefits other than those provided for in the contracts to the proposers, the insureds or the beneficiaries; (5) Refusing to fulfilling the obligation of paying indemnity or insurance benefits agreed upon in an insurance contract according to law; (6) Deliberately fabricating insured events that have never occurred, making up insurance contracts or deliberately exaggerating insured events that have occurred to make false indemnities and defrauding the company of insurance benefits or seeking other illegitimate gains; (7) Diverting, retaining or encroaching on premium; (8) Entrusting agencies or individuals that have not obtained lawful qualifications to engage in activities of insurance sales; (9) Seeking illegitimate gains for other organisations or individuals by taking advantage of the insurance business; (10) Using insurance agencies, insurance brokers or insurance adjusting firms to engage in illegal activities such as siphoning off commission by making up insurance agency business or fabricating surrender of policies; 483

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(11) Damaging the commercial reputation of its rivals by fabricating and disseminating false facts or other acts of unfair competition, disturbing the order of the insurance market by other acts of unfair competition; (12) Divulging the business secrets of the proposers or the insured that they become known in their business activities; (13) Other acts violating laws, administrative regulations and provisions of the insurance supervision and regulation authority of the State Council.” 10.6 Guidelines for the determination of misleading sales of personal insurance In order to regulate the determination of misleading sales of personal insurance, specify the standards for law enforcement, effectively punish misleading sales, and effectively protect the legitimate rights and interests of proposers, the insured, or the beneficiaries, the CIRC formulated and implemented the Notice of CIRC on Issuing the Guidelines for the Determination of Misleading Sales of Personal Insurance on 29 September 2012.79 10.6.1 The Notice In the investigation and punishment of misleading sales of personal insurance, if one of the activities listed in the Guidelines is held, the illegal behaviour is usually determined according to the following requirements:80 Where a personal insurance company, an insurance agency, or a person that handles the insurance sales business commits any conduct as prescribed in article 5 or 6 of the Guidelines, such conduct may be determined as a conduct of “deceiving a proposer, the insured or the beneficiary” as prescribed in article 116 or 131 of the Insurance Law, and the violator shall be punished in accordance with the Insurance Law. Where a personal insurance company, an insurance agency, or a person that handles the insurance sales business commits any conduct as prescribed in article 7 of the Guidelines, such conduct may be determined as conduct of “concealing any important information on an insurance contract” as prescribed in article 116 or 131 of the Insurance Law, and the violator shall be punished in accordance with the Insurance Law. Where a personal insurance company, an insurance agency, or a person that handles the insurance sales business commits any conduct as prescribed in article 8 of the Guidelines, such conduct may be determined as conduct of “obstructing any proposer from performing, or inducing any proposer not to perform, the obligation of telling the truth” as prescribed in article 116 or 131 of the Insurance Law, and the violator shall be punished in accordance with the Insurance Law. 79 Bao Jian Fa No. 87 [2012] (see accessed on 15 October 2020). 80 The Notice of CIRC on Issuing the Guidelines for the Determination of Misleading Sales of Personal Insurance 2012, s.1.

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Where a personal insurance company, an insurance agency, or a person that handles the insurance sales business commits any conduct as prescribed in article 9 of the Guidelines, the nature of the violation of law shall be specified and the violator shall be punished in accordance with law based on the specific circumstances of the case. Where a violation of law cannot be determined in accordance with the requirements as aforementioned, the nature of the violation of law and the application of law shall be specified in accordance with the actual circumstances of the case.81 In the investigation and punishment of misleading sales of personal insurance, the complexity and diversity of violations of law shall be taken into full consideration, and the discretion of administrative punishment shall be correctly exercised so as to guarantee both the legitimacy and reasonability of administrative law enforcement. Where the conduct as listed in the Guidelines cannot be determined in accordance with relevant requirements as mentioned earlier, punishments shall be given based on physical evidence, documentary evidence, investigation transcripts, on-site inspection confirmation, and other certification materials, by focusing on such factors as the forms of presentation, implementation purpose, and hazards of violations of law and by applying other provisions in accordance with law. The Guidelines are the guidance documents for regulating the discretion to exercise administrative punishments; the Guidelines are for the reference of all CBIRC offices and all departments of the CBIRC in determining illegal misleading sales of personal insurance. Where a punishment is given on a violation of law, the provisions of laws, administrative regulations, rules, or other regulatory documents shall be taken as the basis for law enforcement in accordance with law. 10.6.2 Guidelines for the determination of misleading sales of personal insurance For the purposes of these Guidelines, “misleading sales” refers to the conduct whereby a personal insurance company, an insurance agency, or a person that handles the insurance sales business makes misleading publicity or explanations on a relevant insurance product by such methods as cheating, concealment, and enticement in personal insurance business activities as in violation of the Insurance Law, or any other law, administrative regulation, or relevant provisions of the CBIRC.82 The “person that handles the insurance sales business” is a person that sells insurance in a personal insurance company or an insurance agency, or a person that is entrusted by a personal insurance company to sell insurance on its behalf. “Cheating” means that a personal insurance company, an insurance agency, or a person that handles the insurance sales business makes false statements on a relevant insurance product in personal insurance business activities as in violation of the Insurance Law, or any other law, administrative regulation, or relevant provisions of the CBIRC.83 81 Ibid., s.2. 82 The Guidelines for the Determination of Misleading Sales of Personal Insurance 2012, art.2. 83 Ibid., art.3.

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“Concealment” means that a personal insurance company, an insurance agency, or a person that handles the insurance sales business fails to notify or covers up any important information on an insurance contract in personal insurance business activities in violation of the Insurance Law, or any other law, administrative regulation, or relevant provisions of the CBIRC. The personal insurance business shall be handled under the principles of compliance with laws and regulations and good faith, and shall not injure any of the legitimate rights and interests of insurance applicants, the insured, or the beneficiaries.84 No personal insurance company, insurance agency, or person that handles the insurance sales business shall make false publicity on relevant insurance products in such areas as business outlets and public places, or by using product presentation, new media, the company’s websites, or any other media.85 A personal insurance company, an insurance agency, or a person that handles the insurance sales business shall not conduct any of the following fraudulent acts in personal insurance business activities:86 (1) Exaggerating insurance liabilities or the return on insurance products; (2) Making false publicity on any law, regulation, or policy on the insurance business; (3) Publicizing or selling any insurance product in the name of insurance donation without actually doing so; (4) Publicizing or selling an insurance product under the pretext that the sale of such product would be ceased but the sale of such product is in actual fact not stopped; (5) Making false publicity on the shareholders, business operation, or previous business performance of an insurance company; (6) Publicizing or selling any insurance product in the name of a bank wealth management product, bank deposit, shares of securities investment funds, or any other financial product; (7) Selling an insurance product of this Company as the product developed by any other insurance company or financial institution, or publicizing the salespersons of this Company as the salespersons of any other insurance company or financial institution; or (8) Committing any other fraudulent act. A personal insurance company, an insurance agency, or a person that handles the insurance sales business shall not conceal the following important information on an insurance contract in personal insurance business activities:87 (1) Clauses on the exemption of liabilities of the insurance applicant; (2) Possible losses incurred from the advance termination of a personal insurance contract;

84 85 86 87

Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.7.

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(3) The deduction of universal insurance and investment-linked insurance premiums; (4) The uncertainty of insurance policy benefits of a new-type personal insurance product; (5) The insurance duration and time limit for the payment of premiums of a personal insurance product, and the consequences of failing to pay premiums on schedule; (6) The time for calculating the observation period of a personal insurance contract and the impact on the insurance applicant’s rights and interests; (7) The starting time and duration of the cooling-off period of a personal insurance contract and the rights enjoyed by the insurance applicant during the cooling-off period; and (8) other important information. A personal insurance company, an insurance agency, or a person that handles the insurance sales business shall not obstruct any insurance applicant from performing the obligation of telling the truth as prescribed in the Insurance Law and shall not induce any insurance applicant not to perform the obligation of telling the truth as prescribed in the Insurance Law by such improper means as enticement and instigation in personal insurance business activities.88 A personal insurance company, an insurance agency, or a person that handles the insurance sales business shall not conduct any of the following misleading sales in personal insurance business activities:89 (1) Guaranteeing proceeds on uncertain benefits of an insurance product; (2) Inducing or instigating any insurance applicant to terminate an insurance contract so as to purchase a new insurance product, which impairs the legitimate rights and interests of any insurance applicant, the insured, or the beneficiary; (3) Using such ratio indicators as bonus rate and settlement interest rate of an insurance product to make simple comparison with bank deposit rate, the interest rate of treasury bonds, or the yield of any other financial product; (4) Obstructing the insurance applicant from accepting return visits, or inducing the insurance applicant not to accept return visits or truthfully answer questions in return visits; or (5) Conducting any other misleading sales. Where an insurance brokerage institution or any of its employees conducts any misleading sales of personal insurance as prescribed in these Guidelines in handling the insurance brokerage business, such violation of law shall be determined, investigated, and handled by reference to these Guidelines.90 These Guidelines shall apply to the determination, investigation, and handling of misleading sales of personal insurance by the CBIRC and its dispatched offices.

88 Ibid., art.8. 89 Ibid., art.9. 90 Ibid., art.10.

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The nature of misleading insurance sales and the application of law shall be determined in light of the specific circumstances of such violation of law and in accordance with the Insurance Law and other laws, administrative regulations, and relevant provisions of the CBIRC, and punishment shall be given in accordance with law.91 10.7 Guiding opinions on liability for misleading sales of personal insurance To further strengthen personal insurance companies’ inquiry into the liability for misleading sales practices, effectively curb misleading sales practices, and protect the lawful rights and interests of consumers, the CIRC issued the Notice of the CIRC on Issuing the Guiding Opinions on Personal Insurance Companies’ Inquiry into the Liability for Misleading Sales Practices on 23 October 2012, which came into force on 1 January 2013.92 Under the following circumstances, a personal insurance company shall inquire into the liability for misleading sales practices:93 (1) It has received any administrative penalties from the regulatory authorities for such misleading sales practices. (2) The regulatory authorities have taken any regulatory measures, such as a regulatory letter or a regulatory interview, for such misleading sales practices. (3) Such misleading sales practices have caused any serious mass incidents.94 (4) Such misleading sales practices have otherwise caused any serious losses or systemic risks to the company. Serious mass incidents are classified into three levels of response. Level-3 response includes radical acts such as a collective petition or a sit-in involving 50 or more but under 100 proposers caused by misleading sales practices, an incident of concurrent policy surrender by 30 or more but under 100 proposers suddenly appearing at a single business place of a personal insurance company or its agency, and an amount of unusual policy surrender exceeding ¥30 million yuan. Level-2 response includes radical acts such as a collective petition or a sit-in involving 100 or more but under 500 proposers caused by misleading sales practices, 91 Ibid., art.11. 92 Bao Jian Fa No. 99 [2012] (see accessed on 15 October 2020). “Misleading sales practices” means that personal insurance companies, insurance agencies, and insurance sales personnel make misleading publicity or statements regarding relevant insurance products by means such as deception, concealment, or inducement in their personal insurance business activities, in violation of the Insurance Law, other laws and administrative regulations, and the relevant provisions of the CBIRC. 93 The Notice of the CIRC on Issuing the Guiding Opinions on Personal Insurance Companies’ Inquiry into the Liability for Misleading Sales Practices 2012, art.3. 94 “Serious mass incidents” means radical acts such as a collective petition or a sit-in involving 50 or more policyholders caused by misleading sales practices, an incident of concurrent policy surrender by 30 or more proposers appearing at a single business place of a personal insurance company or its agency caused by misleading sales practices, and other emergencies for which the CBIRC deems it necessary to take emergency response measures.

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an incident of concurrent policy surrender by 100 or more but under 500 proposers suddenly appearing at a single business place of a personal insurance company or its agency, and an amount of unusual policy surrender exceeding ¥100 million yuan. Level-1 response includes radical acts such as a collective petition or a sit-in involving 500 or more proposers caused by misleading sales practices, an incident of concurrent policy surrender by 500 or more proposers suddenly appearing at a single business place of a personal insurance company or its agency, an amount of unusual policy surrender exceeding ¥500 million yuan, a payment difficulty of an insurance company caused by the huge amount of concurrent policy surrender, and other egregious emergencies for which the CBIRC deems it necessary to take emergency response measures. Persons subject to liability inquiry in accordance with these Guiding Opinions mean the employees of an insurance company who are liable for the occurrence of misleading sales practices at the time when such misleading sales practices occur, including directly liable persons and indirectly liable persons.95 During an inquiry into the liability for misleading sales practices, an insurance company shall, under the principle of “clear liability, lawful procedures, equality between powers and liability, and level-to-level inquiry”, determine the liability of relevant persons according to the nature and circumstances of misleading sales practices and the extent of losses and on the basis of comprehensively considering their social impacts and ascertaining facts.96 During an inquiry into the liability for misleading sales practices, an insurance company may, according to the actual circumstances of the company, impose multiple forms of punishment, including but not limited to disciplinary actions, actions taken by Party committee, and pecuniary penalties. In ascending order of severity, disciplinary actions include warning, recording a demerit, recording a serious demerit, degradation, or demotion, removal from office, probation, and expulsion.97 For directly liable persons who are employees of an insurance company, the company shall inquire into their liabilities for misleading sales practices under the prescribed procedures and standards; for those who are insurance agents but are 95 The Notice of the CIRC on Issuing the Guiding Opinions on Personal Insurance Companies’ Inquiry into the Liability for Misleading Sales Practices 2012, art.5. “Directly liable persons” means the relevant persons who direct, decide, organize, execute, or participate in executing misleading sales practices, who instigate, abet, assist, or directly or indirectly instruct others to execute misleading sales practices, or who, with a direct management responsibility, fail to adopt necessary measures to prevent or redress misleading sales practices and play a direct part in the occurrence of misleading sales practices, including employees of an insurance company and insurance agents. “Indirectly liable persons” means the relevant persons who do not perform or fail to correctly perform duties within their respective scopes of duties, thus failing to effectively stop or prevent the occurrence of misleading sales practices and playing an indirect part in the occurrence of misleading sales practices, including business management personnel and other indirectly liable persons. “Business management personnel” means senior executives and departmental chiefs who have a management responsibility for misleading sales practices subject to liability inquiry and directly liable persons. Other indirectly liable persons mean other senior executives and departmental chiefs who have an indirect management responsibility for misleading sales practices subject to liability inquiry in business management, process control, audit, and supervision, among others. 96 The Notice of the CIRC on Issuing the Guiding Opinions on Personal Insurance Companies’ Inquiry into the Liability for Misleading Sales Practices 2012, art.6. 97 Ibid., art.7.

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not employees of the company, the company shall inquire into their liabilities for misleading sales practices according to the provisions of contracts. The inquiry standards for directly liable persons shall not be lower than those for indirectly liable persons for the same misleading sales practice.98 The inquiry into the indirect liability of the business management personnel of the parent company of a personal insurance company shall be conducted by reference to the following standards:99 (1) Degradation, or demotion, or a more serious disciplinary action shall be taken against the relevant departmental chiefs of the parent company, recording a demerit or a more serious disciplinary action shall be taken against the specific person in charge of the parent company, and a warning or a more serious disciplinary action shall be taken against the primary person in charge of the parent company, under the following three circumstances: (i) where the parent company has received the administrative punishment of restricted scope of business in the whole country or in a certain province, municipality directly under the Central Government or municipality under separate planning, an order of ceasing acceptance of new business or forfeiture of business permit from the regulatory authorities for misleading sales practices, or (ii) where one or more serious mass incidents of level-1 response have been caused by misleading sales practices within its whole system during one year, or (iii) where three or more serious mass incidents of level-2 response have been caused by misleading. (2) Where regulatory measures such as a regulatory interview or a regulatory letter have been taken by the regulatory authorities against the patent company three or more times or the parent company has received the administrative punishment of warning or fine one or more times from the regulatory authorities during one year for misleading sales practices, degradation or demotion or a more serious disciplinary action shall be taken against the relevant departmental chiefs of the parent company, and recording a demerit or a more serious disciplinary action shall be taken against the specific person in charge of the parent company. (3) Where the administrative punishments imposed or regulatory measures such as a regulatory interview or a regulatory letter taken by the regulatory authorities within the whole system for misleading sales practices have reached a certain number during one year, the relevant departmental chiefs and the specific persons in charge of the parent company shall be held liable. The specific standards for inquiring into their liabilities shall be prescribed by the parent company of a personal insurance company. The inquiry into the indirect liability of the business management personnel of a branch company of a personal insurance company shall be conducted by reference to the following standards:100 98 Ibid., art.8. 99 Ibid., art.9. 100 Ibid., art.10.

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(1) Where the institutions governed by the branch company have received the administrative punishment of restricted scope of business, an order of ceasing acceptance of new business or forfeiture of business permit from the regulatory authorities for misleading sales practices during one year, where one or more serious mass incidents of level-2 response or higher have been caused by misleading sales practices during one year, or where three or more serious mass incidents of level-3 response have been caused by misleading sales practices during one year, degradation or demotion or a more serious disciplinary action shall be taken against the relevant departmental chiefs of the branch company, recording a demerit or a more serious disciplinary action shall be taken against the specific person in charge of the branch company, and a warning or a more serious disciplinary action shall be taken against the primary person in charge of the branch company. (2) Where regulatory measures such as a regulatory interview or a regulatory letter have been taken by the regulatory authorities against the branch company three or more times or the branch company has received the administrative punishment of a warning or fine one or more times from the regulatory authorities during one year for misleading sales practices, degradation or demotion or a more serious disciplinary action shall be taken against the relevant departmental chiefs of the branch company, and recording a demerit or a more serious disciplinary action shall be taken against the specific persons in charge of the branch company. (3) Where the administrative punishments imposed or regulatory measures such as a regulatory interview or a regulatory letter taken by the regulatory authorities against the institutions governed by the branch company for misleading sales practices have reached a certain number during one year, the relevant departmental chiefs and the specific persons in charge of the branch company shall be held liable. The specific standards for inquiring into their liabilities shall be prescribed by the parent company of a personal insurance company. The inquiry into the indirect liability of the business management personnel of a central sub-branch company or a lower institution of a personal insurance company shall be conducted by reference to the following standards:101 (1) Where, in the institutions governed by a central sub-branch company, one or more serious mass incidents of level-3 response or higher have been caused by misleading sales practices during one year, degradation or demotion or a more serious disciplinary action shall be taken against the relevant departmental chiefs of the central sub-branch company, recording a demerit or a more serious disciplinary action shall be taken against the specific persons in charge of the central sub-branch company, and a warning or a more serious disciplinary action shall be taken against the primary in charge of the central sub-branch company. 101 Ibid., art.11.

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(2) Where regulatory measures such as a regulatory interview or a regulatory letter have been taken by the regulatory authorities against the central sub-branch company twice or more or the central sub-branch company has received the administrative punishment of a warning or fine one or more times from the regulatory authorities during one year for misleading sales practices, degradation or demotion or a more serious disciplinary action shall be taken against the relevant departmental chiefs of the central sub-branch company and recording a demerit or a more serious disciplinary action shall be taken against the specific persons in charge of the central sub-branch company. (3) Where the administrative punishments imposed or regulatory measures, such as a regulatory interview or a regulatory letter taken by the regulatory authorities against the institutions governed by the central sub-branch company for misleading sales practices have reached a certain number during one year, the relevant departmental chiefs and the specific persons in charge of the central sub-branch company shall be held liable. The specific standards for inquiring into their liabilities shall be prescribed by the parent company of a personal insurance company. For the inquiry into the liability for any serious losses or systemic risks otherwise caused by misleading sales practices of a personal insurance company, the aforesaid standards shall apply comparatively according to the actual circumstances of the company as well as the severity of losses or damage.102 Insurance institutions which apply multi-divisional structure management, centralized management, or business line management shall, under the principle of equality between powers and liability, inquire into the indirect liability of the relevant business management personnel who have a business management responsibility in accordance with the aforesaid standards.103 Insurance companies shall, according to their respective actual circumstances, inquire into the liability of other indirectly liable persons who have an indirect management responsibility in business management, process control, audit, and supervision, among others, by reference to the aforesaid standards.104 Under the following circumstances, the relevant persons shall be punished according to the heavier standards.105 (1) After the regulatory authorities have taken any regulatory measures such as a regulatory interview or a regulatory letter or imposed any administrative punishment for misleading sales practices, no rectification has been made in a timely manner or no sufficient rectification has been made, causing reoccurrences of misleading sales practices. (2) The systemic risks or serious mass incidents caused by misleading sales practices have particularly egregious social impacts and particularly serious consequences. 102 103 104 105

Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15.

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Under any of the following circumstances, the relevant persons may be punished according to the lighter standards, receive a mitigated punishment, or be exempt from punishment:106 (1) The business management personnel who have an indirect management responsibility and other indirectly liable persons have discovered misleading sales practices and performed corresponding duties by taking measures to redress or stop violations of regulation, raising objections, or actively communicating or reporting violations of regulation to higher authorities or regulatory authorities. (2) After the occurrence of a serious mass incident caused by misleading sales practices, measures have been taken to actively calm the incident, actively resolve disputes, effectively control deterioration of the incident, and reduce or eliminate adverse impacts. (3) Other circumstances for a lighter or mitigated punishment or exemption from punishment. Any lighter or mitigated punishment or exemption from punishment of the relevant persons shall be subject to the decision of the institution at a higher level through discussion. Personal insurance companies shall set forth the specific standards and procedures for a lighter or mitigated punishment or exemption from punishment of the relevant persons. The parent company of a personal insurance company shall, on the basis of these Guiding Opinions and according to the actual circumstances of the company, develop measures for internal inquiry into the liability for misleading sales practices, designate the department primarily responsible for conducting inquiry into the liability for misleading sales practices, and clarify the standards, scope, subjects and procedures for inquiring into the liability for various misleading sales practices.107 Where a personal insurance company shall inquire into the liability for the occurrence of any misleading sales practice, the inquiry shall be completed within six months from the date of occurrence of a circumstance subject to liability inquiry.108 The parent company of a personal insurance company shall submit its annual reports on liability inquiry for misleading sales practices to the CBIRC before 1 April each year, summarizing the results of liability inquiry for misleading sales practices within its whole system during the previous year. Each branch company of a personal insurance company shall submit an annual report of the branch company on liability inquiry for misleading sales practices to the local CBIRC office before 1 April each year.109 The contents of such reports shall include the matters occurring in the previous year subject to liability inquiry and the specific information on the inquiry. For any lighter or mitigated punishments or exemptions from punishment of the relevant

106 107 108 109

Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19.

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persons, the reasons and handling processes for such punishments or exemptions shall be particularly noted in the reports, with relevant approval documents attached.110 10.8 The basic services of the personal insurance business In order to regulate the personal insurance services and protect the legitimate rights and interests of the proposers, the insureds and beneficiaries, the CIRC formulated the Provisions on the Basic Services of the Personal Insurance Business 2010. These Provisions were promulgated on 11 February 2010 and came into force on 1 May 2010.111 These Provisions apply to the sale of insurance products, underwriting, return visits, conservation, claim settlement, information disclosure and other activities of insurance companies, insurance agents, and their employees in the personal insurance business.112 10.8.1 Sales of insurance An insurance company shall set up conspicuous service signs at its business premises to publish the contents, flows, supervision hotlines, and so on of its services and place a box or book for customers’ complaints, suggestions, and opinions. The counter service personnel of an insurance company shall wear an identity card or place an identity card on the front of the counter and conduct themselves in compliance with the basic professional code.113 An insurance company shall publish its service hotline, and the hotline services shall at least include consultation, report of cases, and complaints. Insurance agents and their employees shall inform insurance applicants of the service hotlines of the relevant insurance companies.114 An insurance company shall provide 24-hour hotline services and arrange persons to manually answer phone calls for at least eight hours per workday and set up a system of recording and handling matters in the incoming calls via its service hotline.115 An insurance salesperson who sells insurance products face to face shall present his or her employee’s card or practice certificate. An insurance salesperson116 who 110 Ibid., art.20. 111 The CIRC Order NO. 4 [2010] (see accessed on 16 October 2020).The group personal insurance business shall not be governed by these Provisions. 112 The Basic Services of the Personal Insurance Business 2010, art.2. The term “conservation” refers to a series of services provided by an insurance company under a personal insurance contract or as requested by the proposer, insured, or beneficiary for maintaining the continual validity of the contract after it takes effect, including but not limited to the suspension and resumption of the validity of the insurance contract and the modification of the insurance contract. 113 The Basic Services of the Personal Insurance Business 2010, art.3. 114 Ibid., art.4. 115 Ibid., art.5. 116 Ibid., art.3. Insurance salespersons refer to the following persons engaged in the sale of insurance products: employees of insurance companies, employees of insurance agencies, and insurance sales agents.

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sells insurance products via telephone shall tell his or her name and employee number to an insurance applicant. An insurance company shall set up an information notification system for insurance application according to the provisions of the CBIRC. In the process of sale, an insurance salesperson shall inform an insurance applicant of the characteristics of and risks associated with the relevant insurance products so that the customer can choose insurance products based on his or her own risk preference and economic tolerance.117 To sell insurance products via telephone, an insurance salesperson shall inform an insurance applicant of the effective ways for checking insurance contract clauses.118 An insurance salesperson shall provide an insurance application form to a proposer along with the insurance contract clauses. An insurance salesperson shall remind the proposer to correctly enter his or her mailing address, contact phone number, and other relevant information in the insurance application form.119 If the insurance application form submitted by a proposer is wrongly filled out or the attached materials are incomplete, an insurance company shall, within five working days after receiving the insurance application materials, notify the proposer at one time of all necessary corrections or supplements.120 Where an insurance company deems it necessary to conduct a physical examination, a survival investigation, or any other procedure, it shall notify the proposer within five working days after receiving the insurance application materials. Where an insurance company deems it unnecessary to conduct a physical examination, a survival investigation, or any other procedure and agrees to underwrite, it shall make an insurance contract and serve it on the proposer within 15 working days after receiving the insurance application materials which meet the prescribed requirements.121 An insurance company shall, within 15 working days after receiving a physical examination report or survival investigation report about the insured, notify the insurance applicant of the underwriting result. If it agrees to underwrite, it shall make a contract and serve it on the proposer.122 To collect insurance premiums by bank transfer, an insurance company shall reach an agreement with the proposer on the account, amount, time, and so on of bank transfer.123 10.8.2 Return visits An insurance company shall set up a return visit system, designate a special department responsible for the return visit work, and arrange necessary personnel and equipment for it.124 117 118 119 120 121 122 123 124

Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14.

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An insurance company shall pay a return visit for a new personal insurance policy with a contract term of one year or more during the cooling-off period, and make a record in a timely manner of the return visit. The return visit shall cover:125 (1) Confirmation of whether the person to be visited is the proposer himself or herself; (2) Confirmation of whether the proposer has bought the insurance product in question and whether the proposer and the insured have signed the relevant documents as required; (3) Confirmation of whether the proposer has read and understands the product descriptions and the notification of insurance application information; (4) Confirmation of whether the proposer has been informed of the insurance liability, liability exemption, and insurance duration; (5) Confirmation of whether the proposer has been informed of the losses that he or she may suffer from surrender; (6) Confirmation of whether the proposer has been informed of the starting time and duration of the cooling-off period and his or her entitlements during that period; and (7) Confirmation of whether the proposer knows about the payment period and frequency, if the premium is to be paid in instalments. Where the CBIRC provides otherwise for the return visits for any new type of personal insurance products, those provisions shall prevail. Where the employment or authorization contract between an insurance company and an insurance salesperson is rescinded, and any personal insurance contract with a duration of one year or more signed by the said salesperson is still being performed, the insurance company shall notify the proposer of the status of his or her policy and channels for acquiring subsequent services.126 Where the proposer, insured, or beneficiary authorizes any other person to claim an amount of ¥1,000 yuan or more from an insurance company, the insurance company shall notify the proposer, insured, or beneficiary of the handling results.127 Where an insurance company finds any problem during a return visit, such as misleading sales, it shall assign persons other than salespersons to solve it within 15 working days from the date when the problem is found.128 10.8.3 Conservation An insurance company shall complete the formalities for accepting a conservation application within two working days from the date of receipt of the application which comprises all required materials and meets the conditions under the insurance contract. If the conservation application materials are incomplete, are not filled out as required, or fail to meet the conditions under the insurance contract, 125 126 127 128

Ibid., art.15. Ibid., art.17. Ibid., art.17. Ibid., art.18.

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the insurance company shall, within five working days from the date of receipt of the conservation application, notify the applicant at one time of all necessary supplements or corrections and provide necessary assistance for the applicant.129 Where the conservation does not involve any payment of insurance premium, an insurance company shall complete the handling formalities within five working days from the day when it approves the conservation application; if the conservation involves any payment of insurance premium, the insurance company shall complete the handling formalities within five working days from the day when the policyholder pays the insurance premium in full.130 Where the conservation requires a physical examination, the time needed for the physical examination shall not be counted in the time limit as mentioned in the preceding paragraph. Where an insurance company is unable to complete the relevant formalities within the prescribed time limit for special reasons, it shall make an explanation in a timely manner of the reasons to the conservation applicant and inform the conservation applicant of the handling progress. For an insurance contract under which the parties agree that the insurance premium shall be paid in instalments, an insurance company shall confirm whether the proposer needs a payment advice. If yes, the insurance company shall send a payment advice to the policyholder before the date of payment of the current instalment of the insurance premium.131 Where the validity of an insurance contract is suspended, an insurance company shall send a notice thereon to the proposer within ten working days from the date of suspension, notifying the latter of the consequences of the suspension and the ways for the contract to resume validity. 10.8.4 Claims handling An insurance company shall, after being notified by the proposer, insured, or beneficiary of an insurance accident, in a timely manner inform the party concerned of the important information on claim settlement and guide the party concerned in providing evidence and materials related with the determination of the nature and cause of the accident and loss caused by the accident.132 After receiving the insured’s or beneficiary’s claim for paying indemnity or insurance money, an insurance company shall assess the claim within five working days; if the circumstances are complex, within 30 days, unless it is otherwise agreed on in the contract.133 After making a decision that a claim does not fall within the insurance coverage upon assessment, an insurance company shall, within three working days from the

129 130 131 132 133

Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23.

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date of decision, send a notice of refusal to pay indemnity or insurance money to the insured or beneficiary, including an explanation of the reasons for the refusal.134 For a claim for indemnity or insurance money which involves any injury or disability identification, an insurance company shall remind the proposer, insured, or beneficiary to timely handle the authorization and identification formalities according to the insurance contract.135 An insurance company shall, within ten days after reaching an agreement on payment of indemnity or insurance money with the insured or beneficiary, perform the payment obligation. If the insurance contract provides otherwise for the time limit for payment of indemnity or insurance money, the insurance company shall perform the obligation of paying indemnity or insurance money as agreed on in the contract.136 An insurance company shall make a sound emergency response plan, initiate it in the event of any extraordinary traffic accident, serious natural disaster, or other accident, and improve the efficiency and quality of claim settlement by opening express channels for settling claims, paying indemnities in advance, providing doorstep services, and so on.137 10.8.5 Other matters An insurance company shall set up rules for protecting the personal privacies and trade secrets of the proposers, insureds, and beneficiaries. Without the consent of the proposers, insureds, and beneficiaries, no insurance company may disclose their personal privacies or trade secrets.138 An insurance company shall set up a sound complaint-handling mechanism. An insurance company shall, within ten working days after accepting a complaint, give a clear reply to the complainant. If it is unable to do so for any special reason, it shall inform the complainant of the progress of handling of the complaint.139 An insurance company shall, according to the requirements of these Provisions, make the service standards, a service quality control mechanism, and periodically inspect and assess its service quality every year.140 Where an insurance company, an insurance agent or any employee thereof violates these Provisions, the CBIRC and its dispatched office shall order it, him, or her to correct within a certain time limit, give it a warning if it, he, or she fails to do so, and impose a fine up to three times any illegal gains but to the maximum of ¥30,000 yuan or impose a fine up to ¥10,000 yuan if there are no illegal gains. The directly liable persons and the persons directly in charge may be subject to a warning and a fine up to ¥10,000 yuan.141 134 135 136 137 138 139 140 141

Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31.

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10.9 Telephone sales of insurance products Telephone sales of insurance products are an important channel for selling insurance policies. From 2007, when property insurance companies started to operate the telemarketing products, telemarketing as a new sales channel has achieved relatively good effects in improving the authenticity of business financial data, strengthening companies’ internal control, improving service levels, and other aspects. In order to regulate the market order for the telemarketing business of the property insurance sector and promote the scientific and healthy development of the telemarketing business, the CIRC issued the Notice of the CIRC on Issues concerning Regulating the Market Order for the Telemarketing Business of Property Insurance Companies and Prohibiting Disturbing Residents by Telemarketing on 14 January 2013.142 In addition, the CIRC issued the Notice of the CIRC on Issuing the Administrative Measures for Personal Insurance Telesales Business on 25 April 2013.143 The Measures are formulated in accordance with the Insurance Law, the Provisions on the Administration of Insurance Companies, the Provisions on the Basic Services of the Personal Insurance Business, and other laws and regulations in order to further regulate the personal insurance telesales business and effectively protect insurance consumers’ rights and interests. “Telesales” (or telemarketing) business means that insurance companies make telephone calls to clients or answer clients’ calls to sell insurance products through telesales centres or authorized insurance agencies.144 In this section, we consider telesales of personal and property insurance product, respectively. 10.9.1 Telesales of personal insurance (a) Market access Insurance companies shall establish telesales centres or authorize insurance agencies to carry out telesales business, and no other entity or individual may operate the telesales business or operate the business in disguise. Insurance salespersons may not call unfamiliar clients at random for sales of insurance or phone clients in the name of a telesales centre of their company.145 An insurance company shall meet the following conditions in order to carry out the telesales business:146 (1) Its solvency in the previous year and the two consecutive quarters before application is adequate; 142 Bao Jian Chan Xian No. 42 [2013] (see accessed on 16 October 2020).These Measures came into force on the date of issuance and replaced the Notice on Promoting the Standardized Development of the Telesales Business of Life Insurance Companies (Bao Jian Fa No. 38 [2008]) and the Notice on Further Regulating the Personal Insurance Telesales and Tele-interviews Behaviours (Bao Jian Fa No. 99 [2010]). 143 Bao Jian Fa No. 40 [2013] (see accessed on 16 October 2020). 144 The Notice of the CIRC on Issuing the Administrative Measures for Personal Insurance Telesales Business 2013, art.3. 145 Ibid., art.4. 146 Ibid., art.5.

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(2) It has not received any serious administrative penalty from the financial regulatory body in the last two years, and it is not under investigation by the CBIRC for being suspected of being involved in any serious violation of law or regulation; (3) It has fully demonstrated the feasibility of the establishment of the telesales centre, including business development plans and the construction plan for the telesales system, and has telesales business management rules; (4) It has an eligible person in charge of the preparation of the formation of the telesales centre; and (5) Other conditions as required by the CBIRC. The head office and provincial branches of an insurance company may file an application for the formation of telesales centres with the local offices of the CBIRC at the places where the telesales centres are to be formed. A telesales centre is an insurance company’s special-purpose institution which directly conducts the telesales business. A telesales centre formed under the application by a head office may carry out the telesales business within the business territory of the head office; a telesales centre formed under the application of a provincial branch may carry out the telesales business within the business territory of the provincial branch.147 To form a telesales centre, the applicant shall submit the following materials:148 (1) An application for formation, including the name and location of the telesales centre to be formed, sales territories, and so on; (2) An explanation on the fact that its solvency meets the relevant conditions; (3) A demonstration report on the feasibility of the formation of the telesales centre, including a three-year business development plan for the centre to be formed, a telesales system construction plan, the telesales business management and control system, and major rules, and so on; (4) An explanation on the records of being subject to administrative penalties or being under investigation; (5) The curriculum vitae and relevant certification materials of the person in charge of the preparation for the formation of the proposed telesales centre; and (6) Other materials required by the CBIRC. The name of a telesales centre to be formed under the application of an insurance company shall include at least two elements, namely, “name of the applicant” and the words “telesales centre”.149 The person in charge of a telesales centre of an insurance company belongs to the senior managers of the insurance company and shall obtain appropriate postholding qualifications ratified by the CBIRC before holding the post. The person

147 Ibid., art.6. 148 Ibid., art.7. 149 Ibid., art.8.

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in charge of a telesales centre of an insurance company shall meet the following conditions:150 (1) He or she has a university diploma at or above the undergraduate level or a Bachelor’s degree or above; (2) He or she has engaged in financial work for three years or more or engaged in economic work for five years or more; (3) He or she has one year or more of telesales management experience or two years or more of financial management experience; and (4) Other conditions as prescribed by the Administrative Provisions on the Post-holding Qualifications of Directors, Supervisors and Senior Managers of Insurance Companies. The CBIRC office at the place where the proposed telesales centre is located shall, within 30 working days upon receipt of complete application materials, examine the application for formation. If the application meets the requirements of article 5 herein, the CBIRC office shall issue a notice on formation preparation to the applicant; otherwise, the CBIRC office shall make a decision on disapproval, and give reasons in writing. The applicant shall, within six months upon receipt of the notice on formation preparation, complete the preparation for the formation of the telesales centre, and the formation preparation period may not be counted into the period of administrative licensing. If the applicant fails to complete the preparation work upon expiration of the preparation period, the applicant shall file a new application in accordance within these Measures. The institution under preparation may not engage in any insurance operations during the preparation period.151 A telesales centre of an insurance company shall meet the following standards for starting business:152 (1) There is no dispute over the ownership of the business premises, the safety, fire protection, and other facilities on the premises meet the relevant requirements, and the use area, period of use, and functional layout thereof satisfy the operational needs. The business premises shall generally be used continuously for not less than two years; (2) It has a professional and sound telesales system through which the functions such as call-out, call-in, audio recording quality inspection, real-time monitoring, client information management, sales activity management, and telephone number restriction management are realized; (3) The senior managers or the major persons in charge to be appointed meet the qualification requirements; (4) It does not carry out insurance business during the formation preparation period; and (5) Other conditions as provided for by the CBIRC.

150 Ibid., art.9. 151 Ibid., art.10. 152 Ibid., art.11.

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After the preparation for the formation of a telesales centre of an insurance company is accomplished, the applicant shall submit a business start-up check report and the following materials to the CBIRC office at the place where the centre is to be formed:153 (1) A report on the completion of the formation preparation, explaining whether the telesales centre to be formed meets the standards for starting business as set forth in article 11 herein; (2) The resume and relevant certificates of the would-be person-in-charge of the telesales centre; (3) A telesales system construction report, including computer configuration, application systems, network construction, and so on; (4) The certificate of the title or use right of the business premises of the institution to be formed; (5) Fire protection certificate or a written commitment that it has taken necessary measures to ensure fire safety; and (6) Other materials required by the CBIRC. The CBIRC office at the place where the telesales centre is located shall, within 30 working days upon receipt of a complete business start-up check report, conduct a business start-up check, and make a decision on approval or disapproval. If the telesales centre has passed the check and is approved for formation, the CBIRC office shall issue an insurance business operation permit for special-purpose institutions; and if the telesales centre fails the check and is disapproved for formation, the CBIRC office shall notify the applicant in writing and give the reasons.154 A telesales centre formed upon approval cannot operate until it has reported to the CBIRC office at the call-in place, has gone through the registration formalities with and obtained a business license from the administrative department for industry and commerce upon the strength of the approval documents and the insurance business operation permit.155 Where an insurance company authorizes any insurance agency to carry out the telesales business, it shall examine the qualification of the insurance agency. The insurance agency with which the insurance company intends to cooperate shall meet the following conditions:156 (1) It is equipped with a professional and full-fledged telesales system through which the functions such as auto-dial, call-out, audio recording quality inspection, real-time monitoring, client information management, sales activity management, and telephone number restriction management can be fully realized; (2) It has established a necessary organizational structure and sound telesales business management rules; 153 154 155 156

Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15.

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(3) It has legitimate business premises, and its security and fire protection facilities meet the requirements; and (4) Other conditions provided for by the CBIRC. Where an insurance company authorizes an insurance agency to carry out the telesales business, it shall file with the CBIRC office at the call-out place of the insurance agency in advance and inform the CBIRC office at the call-in place. The CBIRC office at the call-out place of the insurance agency shall, where applicable, inspect the filed project, and put forward opinions for rectifications in a timely manner in case of any failure to meet the relevant conditions.157 When applying for the filing of the telesales agency business, an insurance company shall submit the following materials:158 (1) A project proposal under which it authorizes the insurance agency to carry out the telesales business, including the name of the insurance agency to be authorized, terms of cooperation, management mode, sales territories, a three-year business development plan, market analysis, and so on; (2) An explanation of the fact that the solvency meets the relevant conditions; (3) An explanation of the records of administrative penalties or investigation; (4) A photocopy of the agency contract; (5) The qualification certificates of the insurance agency, including the insurance agency business permit, a report on the legality of the business premises, a report on the construction of the telesales system, telesales business operation management rules, and so on; and (6) Other materials required by the CBIRC. Where an insurance company carries out the telesales business, the sales territories shall correspond to its business territories. Where an insurance company authorizes an insurance agency to carry out the telesales business, the sales territories shall correspond to the business territories of both the insurance company and the insurance agency at the same time.159 The scope of products sold by an insurance company via telephone shall be limited to ordinary personal insurance products; however, an insurance company which has conducted the telesales business for two or more consecutive years and has not been given any major administrative penalty by any financial regulatory institution during the said period may sell participating personal insurance products via telephone. The products to be sold via telephone shall be selected in view of the peculiarities of the telesales business and be easy to understand and purchase.160 When establishing a telesales centre to carry out telesales business, an insurance company shall set up a unified national special number. Where an insurance company authorizes an insurance agency to carry out telesales business, it shall conduct telephone number review of the insurance agency so as to ensure that it uses the unified special number. Insurance companies and insurance agencies 157 158 159 160

Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19.

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carrying out telesales business shall maintain the stability of their telesales numbers, and a special number shall be used for at least one year.161 An insurance company carrying out the telesales business shall set up an information disclosure column at an eye-catching position on its official website and its insurance agency. The information to be disclosed shall include at least:162 (1) The unified special number used by the insurance company and its insurance agency to carry out the telesales business; (2) The information on the products sold via telephone, including the product name (publicized name), clauses, product brochures (if any), and so on; (3) The name of the insurance agency carrying out the telesales business upon authorization, the duration of cooperation, sales territories, and so on; and (4) Means for clients to make complaints and safeguard their rights. The change of the person in charge or business premises of the telesales centre of an insurance company shall be reported to the CBIRC office at the place where the telesales centre is located for approval, and the change of the name or telesales number of the telesales centre shall be filed with the CBIRC office where the telesales centre is located. Where an insurance company authorizes an insurance agency to carry out the telesales business, the change of the business premises or telephone number of the insurance agency shall be filed with the CBIRC office at the place where the cooperation project is conducted.163 The cancellation of telesales centres by insurance companies shall be handled by reference to the provisions on the cancellation of branches by insurance companies. Where an insurance company terminates the authorization for an insurance agency to carry out the telesales business, it shall file with the CBIRC office at the place where the telesales centre is located 15 workdays prior to the termination of cooperation, and submit an appropriate plan for handling followup business.164 (b) Sales behaviours Insurance companies carrying out the telesales business shall establish strict client information management rules, comply with the relevant laws and regulations on personal information protection, obtain client information by legal means, orderly develop and regulate the use of existing client resources, and ensure the safety and legality of the collection, processing, and use of client data and information.165 Insurance companies and insurance agencies shall establish and improve their telesales call restriction management rules.166 (1) They shall manage the sales time through the telesales system and set up call restriction time periods according to the living habits of different 161 162 163 164 165 166

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25.

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regions and different groups. No sales calls may be made between 21:00 and 9:00 of the next day unless it is made upon the request of a client. (2) They shall set up call restriction name lists through the telesales system. The clients explicitly refusing to receive telesales again shall be included into the call restriction name lists, and a time limit of no fewer than six months for call restriction shall be set. (3) They shall establish accountability mechanisms for disturbance caused to clients due to inappropriate call restriction management. An insurance company shall strengthen the training of telesales personnel:167 (1) It shall carry out pre-job and in-service training and education for telesales personnel in a unified manner, which shall include at least business knowledge, legal knowledge, professional ethics, and so on; (2) It shall, in accordance with the relevant provisions, provide specialized training for the telesales personnel selling participating personal insurance products; (3) The head office of the insurance company shall design and produce training materials for telesales personnel in a unified manner, and the insurance agency and telesales centre may not amend the contents of the training materials without authorization; and (4) It shall establish and improve telesales personnel’s sales qualification authentication system, sales quality assessment rules, and training file management rules. An insurance company shall strengthen the management of sales behaviours of telesales personnel, and may not allow the telesales personnel to sell insurance products to clients by circumventing the telesales system.168 It shall develop standard sales terms in light of different telesales modes and insurance products. Telesales personnel must properly use telesales terms when selling insurance products and are prohibited from improper elaboration. The telesales terms shall be developed in a unified manner by the head office of the insurance company and be archived for future reference, and the insurance agency or telesales centre may not modify such telesales terms without permission of the head office.169 The telesales terms shall include at least:170 (1) The employee number of the telesales person and the name of the insurance company or agency where he or she works; (2) Product name, the name of the underwriting company, product information disclosure manner, insurance liability, liability exemption, insured amount, insurance period, payment period, loss of surrender, uncertainty of the policy interest of new products, and so on;

167 168 169 170

Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29.

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(3) payment methods, time of effectiveness of the policy, methods for the confirmation of the insurance purchase will, form of the policy, service manner of the policy, and so on; and (4) the cooling-off period, client service hotlines, policy inquiry manner, and so on. Where an insurance company authorizes an agency to carry out the telesales business, the telesales terms shall also clearly indicate the nature of the insurance agency in addition to the above contents. An insurance company may confirm the intent of policyholders to purchase insurance in two ways, namely, signing the policy and making telephone recordings. Where an insurance company confirms the intent of a policyholder to purchase insurance through telephone recordings, the following conditions must be met at the same time:171 (1) The policyholder and the insured are the same person between the age of 18 and 60; (2) The product to be sold is an ordinary personal insurance product which does not require physical examination; and (3) The sales terms shall include “do you agree to confirm insurance purchase through telephone recordings”, and an affirmative answer shall be obtained from the policyholder. Insurance companies may, under the premise of controllable risks, use mobile payment devices, online banking, payment platforms, and other new technologies to enhance the receipt and payment efficiency. Where an insurance company charges premiums through bank transfer or any other electronic payment method, it shall obtain the client’s authorization in writing or through telephone recordings. Where an insurance company confirms a client’s authorization for account transfer through telephone recordings, the following conditions shall be met:172 (1) The client explicitly agrees to pay the premiums through his or her own account; (2) The sales terms clearly inform the payment time of the initial premiums, the payment time of the renewal premiums, frequency, and so on; and (3) The policyholder will be informed via telephone or text messages after the premiums are successfully deducted and transferred. When selling an insurance product via telephone, an insurance company may provide the policyholder with a paper policy or electronic policy. Where an insurance company provides the policyholder with an electronic policy, it shall meet the following conditions:173 (1) It confirms through effective means the receipt of the policy by the policyholder; 171 Ibid., art.30. 172 Ibid., art.31. 173 Ibid., art.32.

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(2) It sets a policy inquiry function on its official website; and (3) It provides a paper policy in a timely manner at the request of the policyholder during the insurance period. An insurance company shall establish and improve its telesales quality inspection system, which shall meet the following basic requirements:174 (1) It has sound quality inspection rules, including quality inspection procedures, quality inspection standards, rectification and handling of the transactions where problems are found through quality inspection, personnel accountability, and so on; (2) It is equipped with full-time quality inspection personnel who shall be independent from salespersons; (3) It shall conduct quality inspection through the information system and realize the separation between the quality inspection system and the sales system through authority division, module division, system separation, and so on; and (4) The quality inspection records shall be generated through the quality inspection system and be kept for a period not less than the period of insurance. Insurance companies are encouraged to realize systematic and informatization quality inspection through technical means, such as speech recognition, keywords, duration of tone and other new technologies, to conduct systematic quality inspection. Where an insurance company carries out the telesales business through different sales patterns, it shall conduct quality inspection under a uniform standard, and the quality inspection proportion may not be lower than the following standards:175 (1) Conducting quality inspection throughout the cooling-off period on the audio recordings of the transactions reached with the insurance period of more than one year at the proportion of not less than 30%; and (2) Conducting quality inspection throughout the policy term on the audio recordings of the transactions reached with the insurance period of one year or shorter at the proportion of not less than 20%. Insurance companies carrying out telesales business shall record the calls throughout the whole process and back up the recordings of transactions and archive them. The preservation period of the telephone recordings and other insurance documents shall be calculated from the termination date of the insurance contract, and the telephone recordings and other insurance documents shall be kept for at least five years if the insurance period is one year or less and be kept for at least ten years if the insurance period is more than one year. Insurance companies shall keep confidential the client information and contents of telephone recordings and may not use them for other commercial purposes.176

174 Ibid., art.33. 175 Ibid., art.34. 176 Ibid., art.35.

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Insurance companies shall strengthen their telesales information and data management so as to ensure the safety, integrity, accuracy, and timeliness of the information and data and do a good job in data backup. Where an insurance company sets up a telesales centre to carry out the telesales business, it shall realize seamless connection between the telesales system and its core business system. Where an insurance company authorizes an insurance agency to carry out the telesales business, it shall strengthen data transmission management so as to ensure the timeliness and safety of the transmission of such data as major business data, sales recordings, and client information.177 Where an insurance company directly offers or authorizes an insurance agency to offer complementary insurance via telephone, it shall be regulated and managed by reference to the provisions on telesales business. The persons offering complimentary insurance via telephone shall be telesales personnel, and the telephone number used to offer complimentary insurance shall be the telesales number. No insurance company may authorize any institution without an insurance agency business permit to offer complimentary insurance via telephone. Insurance companies shall conduct random quality inspections on the offering of complimentary insurance via telephone, and the proportion of quality inspection shall not be less than 1%.178 Where the telesales business of an insurance company involves the delivery of paper documents, such as policies, insurance contracts, power of attorney for account transfer, and so on, such documents shall be served within seven workdays from the date on which the policyholder agrees to purchase the insurance. If the documents cannot be served on time due to any objective reason, the insurance company shall inform the policyholder through telephone, text messages, or any other means.179 The cooling-off period of the telesales business of insurance companies shall start from the date on which it is confirmed that the policyholder has received the policy or the date on which the policy becomes effective, whichever is later.180 Insurance companies shall provide clients with two channels, namely, through telephone or over the counter, to accept applications for preservation and settlement of claims. Insurance companies are encouraged to explore efficient and convenient service channels. Where an insurance company accepts a client’s application for preservation and settlement of claims via telephone, it shall record the calls throughout the whole process and archive such recordings during the policy period for future reference.181 Insurance companies shall establish and improve complaint acceptance and handling rules, provide clients with at least two complaint channels, namely, through telephone or over the counter, and designate necessary personnel and equipment for that purpose. Where an insurance company authorizes an agency to carry out the telesales business, it shall develop unified and standardized complaint-handling

177 178 179 180 181

Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39. Ibid., art.40.

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procedures, clarify the duties, and cooperate on the basis of division of work so as to ensure the proper handling of complaint disputes.182 Upon receipt of a complaint from a client, an insurance company shall, within two working days, explain the handling procedures to the complainant, and feed back the handling results to the complainant within ten working days. The complaint-handling process shall be recorded in detail in writing, audio recording, or any other form and be archived for future reference. If any telesales behaviour is involved in a complaint, the insurance company shall listen to the telesales recordings during the process of handling the complaint. If the insurance company cannot provide effective telesales recordings due to its own reasons, it shall handle the client demands under the principle of being favourable to the policyholder.183 Insurance companies shall, in accordance with the telesales business process and characteristics, transform and improve the existing service supporting system so as to ensure that the policyholders enjoy services at the level not lower than that of services provided through other channels.184 (c) Supervision and administration The CBIRC shall authorize all its local offices to conduct supervision and administration on the telesales business. The CBIRC offices at the call-out places shall conduct examination and approval of the formation of telesales centres within their respective jurisdictions by insurance companies, complete filing formalities for the projects that insurance companies authorize agencies to carry out the telesales business, and perform the duties of daily supervision and administration. The CBIRC offices at the call-in places shall conduct territorial supervision and administration on the telesales business and investigate and handle the violations of laws and regulations in the telesales business in accordance with law.185 The local CBIRC offices shall, in accordance with the relevant provisions of the Provisions on the Administration of Insurance Companies and the Administrative Provisions on the Post-holding Qualifications of Directors, Supervisors and Senior Managers of Insurance Companies, conduct supervision and administration of the telesales centres of insurance companies and the persons-in-charge thereof.186 Insurance companies shall strengthen the administration of the sales behaviours of insurance agencies and their telesales personnel and assume the legal responsibilities of such agencies’ vicegerent acts within the scope of authorization.187 Where an insurance company or its insurance agency violates the relevant provisions of article 25 herein, which constitutes disturbance to clients, the CBIRC shall be entitled to take measures such as circulating a notice of criticism, conducting a regulatory interview, issuing a regulatory letter, or any other necessary regulatory measure in accordance with the regulatory needs.188 182 183 184 185 186 187 188

Ibid., art.41. Ibid., art.42. Ibid., art.43. Ibid., art.44. Ibid., art.45. Ibid., art.46. Ibid., art.47.

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10.9.2 Telemarketing of property insurance For property insurance, the Notice of the CIRC on Issues concerning Regulating the Market Order for the Telemarketing Business of Property Insurance Companies and Prohibiting Disturbing Residents by Telemarketing 2013189 provides rules for telemarketing. All companies shall further strengthen the internal control of the telemarketing business and adhere to centralized operation and centralized management. The companies shall independently operate the telemarketing business by means of direct selling at the approved telemarketing workplaces through unified telemarketing exclusive call-in and call-out service numbers; shall publish the unified telemarketing exclusive call-in and call-out service numbers at conspicuous positions on the home pages of the websites of the companies; shall not privately establish sub-workplaces or call centres; and shall not entrust or hire non-telemarketing agents or external agencies to operate the telemarketing business. The CBIRC shall publish the telemarketing business exclusive numbers of all companies on its official website.190 All companies shall strengthen the management of the call-out business and prohibit disturbing residents by phones.They shall strictly restrict the call durations and shall not call the clients renewing insurance earlier than 40 days before the expiry dates of insurance policies. They shall provide for reasonable call time to effectively avoid disturbing the normal work and life of the clients answering calls. If a complaint about any company’s disturbing residents received by the CBIRC is verified as a violation of law and regulations or regulatory provisions, the CBIRC shall order the company to make corrections. If two or more complaints are filed against any company within one year and verified as true, the CBIRC shall order restriction on the company’s calling new clients for three months. If the same problem occurs in the company for the third time in a year, the CBIRC shall order the company to stop the call-out business for new clients.191 All companies shall strengthen client information management and establish the client information confidentiality system. They shall obtain the materials on telemarketing clients through legal means and ensure that client information and data collected, used, and managed are in compliance with the requirements of relevant laws and regulations; shall strictly keep confidential the client information and data obtained in the course of operating the telemarketing business; and shall not divulge, sell, or illegally provide the said information and data to others.192 All companies shall improve the phone numbers shield systems and establish the sharing mechanism for the “list of numbers forbidden to be called” in the industry. If any client expressly shows his or her unwillingness to purchase any insurance or refuses to continue to answer any call, the company shall shield the relevant 189 Bao Jian Chan Xian No. 42 [2013]. 190 The Notice of the CIRC on Issues concerning Regulating the Market Order for the Telemarketing Business of Property Insurance Companies and Prohibiting Disturbing Residents by Telemarketing 2013, s.1. 191 Ibid., s.2. 192 Ibid., s.3.

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phone number through technical means. They shall share with the industry the database of the “list of numbers forbidden to be called”, and any phone numbers ascertained to be shielded by other companies shall not be dialled out once again by all companies during the shield periods.193 All companies shall improve the telemarketing client call-back systems and complaints supervision mechanisms. They shall call back their clients at a ratio of 100% within 72 hours and other clients at a certain ratio. If disturbing of residents is found in any call-back, the liable persons shall be severely punished. They should file and accept the cases on client complaints at a ratio of 100%, and timely feed back the handling of the cases to clients with the permission of the clients.194 All companies shall further strengthen the training and management of telemarketing agents and regulate the agents’ sales behaviour. All companies shall conduct unified management of telemarketing agents and improve the recruitment, training, post-holding, assessment, and other relevant systems. Telemarketing agents shall comply with the norms for telemarketing talking skills and the codes of conduct for sales. Hard-selling, harassing clients, bad attitude, and other circumstances are strictly prohibited. All companies should share with the industry the “blacklist” of telemarketing agents and shall not employ the telemarketing agents who have serious disciplinary violations such as abusing clients, divulging information, or maliciously harassing clients.195 All companies shall improve relevant systems of the companies in accordance with the aforesaid requirements, regulate the telemarketing business behaviour of the property insurance sector, and effectively prevent the occurrence of disturbing residents by telemarketing so as to jointly create a favourable environment for the development of the telemarketing business. If any insurance company, in the course of operating the telemarketing business, refuses to comply with government decrees, continues to conduct banned practices, disturbs the market order, or impairs the image of the industry, the CBIRC shall order the company to stop using telemarketing products according to law. 10.10 Retrospective administration of insurance sales practices “Retrospective insurance sales practices” means that insurance companies and insurance intermediaries, through collecting audiovisual materials and electronic data by making audio and video recordings and other technical means, record and store the key links of the insurance sales process and realize that sales practices are retrospective, important information may be inquired, and problems and liability may be confirmed. Through obtaining audiovisual materials and other statutory evidence through audio and video recordings, the key links of sales process can be recorded; this in turn can help to quickly find out the facts for dispute mediation, complaint handling, and legal proceedings, and can improve the efficiency of consumer protection. 193 Ibid., s.4. 194 Ibid., s.5. 195 Ibid., s.6.

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As mentioned earlier, the misleading conduct in the sales of insurance is one of the most serious problems in recent years. In the sales process, in order to improve sales performance, the salesperson sometimes promotes the sale of insurance products in the name of other financial products, exaggerates the income of insurance products, or conceals important information, and so on. When a dispute arises only at the time of claims, it is frequently found that the actual situation of the purchased insurance product is seriously inconsistent with the sales staff ’s original promotion content. Due to the lapse of time and changes in personnel, consumers have greater difficulties in protecting their rights. Through the recording of the key links of insurance product sales, the real record and preservation of the sales process have solidified (and can restore) the real information of key links of insurance product sales so that the sales behaviour can be played back, the problems can be identified, and the responsibility can be confirmed. It provides strong evidence support for consumer rights protection and supervision and investigation of misleading sales behaviours and plays a positive role in effectively combating fraudulent and misleading behaviours in the sales. For the purposes of regulating insurance sales practices, protecting the lawful rights and interests of insurance consumers, the CIRC developed the Interim Measures for the Retrospective Administration of Insurance Sales Practices (hereinafter, the Measures 2017), which was issued on 28 June 2017 and came into force on 1 November 2017.196 Insurance companies and insurance intermediaries shall conduct the retrospective administration of insurance sales practices when selling insurance products in regard to which the insured are natural persons as prescribed in the Measures 2017, excluding group insurance products.197 Insurance companies and insurance intermediaries that conduct the telephone sales business shall record the whole-process conversation during telephone calls and back up and archive it and shall not sell insurance products to insurance applicants by evading the telephone sales system. Insurance companies and insurance intermediaries that conduct the Internet insurance business shall conduct retrospective administration in accordance with the provisions of the CBIRC on the supervision and administration of the internet insurance business.198 Apart from the telephone sales business and internet insurance business, if a personal insurance company’s sale of insurance products falls under any of the following circumstances, it shall, after obtaining the consent of insurance applicants, record the key links of the sales process by making real-time on-site audio and video recordings: (1) Selling through sideline insurance agencies personal insurance products of which the insurance period exceeds one year, including selling via selfservice terminals and other equipment at the business premises of sideline 196 Bao Jian Fa No. 54 [2017] (see accessed on 15 2020). 197 The Interim Measures for the Retrospective Administration of Insurance Sales Practices 2017, art.4. 198 Ibid., art.5.

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insurance agencies, unless it is otherwise prescribed by the financial supervision and administration institution of the State Council. (2) Selling through the sales channels other than sideline insurance agencies investment-linked insurance products, or selling personal insurance products of which the insurance period exceeds one year to insurance applicants aged 60 years or above.199 In the process of making real-time on-site audio and video recordings, the content of the recordings shall at least cover the following key links of the sales process:200 (1) The insurance sales practitioner produces a valid identity certificate. (2) The insurance sales practitioner produces an insurance application notice and a written statement of the clauses on the product and clauses on the exemption of the insurer’s liability. (3) The insurance sales practitioner performs the obligation to explicitly explain to the insurance applicant, informing the insurance applicant of the fact that the product purchased by the insurance applicant is an insurance product and the name of the underwriting insurance institution, insurance liability, payment method, payment amount, payment period, the insurance period, and the risk of surrender losses after the cooling-off period, among others. When selling new-type personal insurance products, the insurance sales practitioner shall specify the uncertainty of benefits in an insurance policy. When selling health insurance products, the insurance sales practitioner shall specify the starting time of the observation period of the insurance contract and the impact on the rights and interests of the insurance applicant, the medical institution designated in the contract, renewal conditions, and the principles for the compensation of medical expenses, among others. (4) The insurance applicant gives a specific and positive reply with regard to the content specified and notified by the insurance sales practitioner. (5) The insurance applicant signs the application form, the insurance application notice, the written statement of the clause on the exemption of the insurer’s liability, and other relevant documents. Where the insurance sales practitioner sells the insurance product with death as the indemnification condition, the recordings shall include the insured’s agreement to the conclusion of an insurance contract by the insurance applicant and the insured’s recognition of the contract content. If the insurance sales practitioner sells a new-type personal insurance product, the recordings shall also include that the insurance sales practitioner produces product specifications and the insurance applicant copies the risk alert sentences in the application form, among others. The real-time on-site audio and video recordings for insurance sales practices shall comply with relevant business specifications. The audiovisual materials shall be authentic, complete, and continuous, and the facial features, conversations and 199 Ibid., art.6. 200 Ibid., art.7.

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related certificates, documents, and signatures are able to be clearly identified. The recording shall not be edited in any form.201 Specialized insurance intermediaries and non-banking sideline insurance agencies shall, after completing audio and video recordings, send the audiovisual materials recorded and other business archives to underwriting insurance companies. Banking sideline insurance agencies shall, after completing audio and video recordings, send the information successfully recorded and other business archives for new businesses to underwriting insurance companies.202 Insurance companies shall establish a quality inspection system for audiovisual materials, develop quality inspection rules, establish a quality inspection information system, and assign quality inspection personnel whose positions are separated from those of sales personnel to conduct the whole-process quality inspection of not less than 30% of the audiovisual materials for insurance policies sold during the coolingoff period. All the audiovisual materials for the insurance business as prescribed in item (2) of article 6 of the Measures 2017 shall be subject to quality inspection.203 Where an insurance company finds in quality inspection that any audiovisual materials fail to comply with the requirements of these Measures, it shall make rectification within 15 working days as of the date when such problem is found. Where a banking sideline insurance agency retains audiovisual materials by itself and fails to provide the materials to the insurance company, it shall, in accordance with the aforesaid requirements, establish a quality inspection system for audiovisual materials, conduct quality inspection by itself, and send the quality inspection result to the underwriting insurance company in a timely manner. Where the CIRC has different provisions on the quality inspection of the insurance telephone sales business, such provisions shall prevail. When an insurance company pays a return visit in respect of the insurance business prescribed in article 6 of the Measures 2017, the language used in the return visit shall include “whether the insurance applicant accepted the audio and video recording when purchasing insurance, and whether the statement in the audio and video recording is the declaration of his or her true will”.204 The institutions at or above the provincial level of insurance companies and banking sideline insurance agencies shall be responsible for the preservation of audiovisual materials, while other branches of insurance companies, specialized insurance intermediaries, non-banking sideline insurance agencies, and insurance sales practitioners shall not retain audiovisual materials without approval.205 Where an insurance company authorizes an insurance intermediary to conduct the telephone sales business, the insurance intermediary may retain the audio recordings of the telephone sales business, but it shall provide the insurance company with complete audio recordings for insurance policies sold.

201 202 203 204 205

Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12.

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Insurance companies and banking sideline insurance agencies shall formulate administrative measures for audiovisual materials to specify their administrative responsibilities and regulate the access procedures. The period for the retention of audiovisual materials shall be calculated from the date when an insurance contract is terminated and shall not be less than five years if the insurance period is not more than one year but shall not be less than ten years if the insurance period exceeds one year. If any complaint or legal action is filed by any customer, or any other dispute occurs, the aforesaid materials shall be retained for at least two years after the resolution of such dispute.206 Insurance companies and insurance intermediaries shall, in strict accordance with the relevant laws and regulations, strengthen the protection of the personal information of insurance applicants and the insured, strictly keep confidential the content of audiovisual materials, such as audio and video recordings and electronic data, shall not divulge or reproduce the aforesaid materials without approval, and shall not use the materials for any other commercial purpose.207 Insurance companies and insurance intermediaries shall establish and improve internal control rules. If any insurance company or insurance intermediary fails to conduct retrospective administration of sales practices in accordance with the Measures 2017, the directly responsible person in charge and other directly liable persons shall be held liable.208 The CBIRC and its local offices shall take regulatory measures in accordance with the law against any insurance company or insurance intermediary that fail to conduct the retrospective administration of sales practices in accordance with the Measures 2017.209 10.11 Electronic return visit of life insurance The electronic return visit for life insurance is a return visit by insurance companies during the policy cooling-off period, relying on the internet and other technologies to verify the authenticity of the customer’s identity and confirm that the proposer understands the main contents of the insurance contract and the relevant rights such as the cooling-off period. A return visit can be made by letter, telephone, face-to-face meeting, and the new method of electronic return visit. The wide application of mobile internet technology has provided good basis for the return visit through electronic means such as smart phone applications and WeChat service accounts. Insurance companies have a strong demand for innovation in return visits through electronic means. Insurance consumers are increasingly accepting electronic return visits. In May 2017, the former CIRC approved a pilot project for electronic return visit of life insurance policies longer than one year in Beijing, which achieved positive results. Compared with the traditional way, the electronic return visit is more convenient 206 207 208 209

Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16.

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and efficient. Initiated by the proposer, the electronic visit shortens the time of the return visit, while at the same time it also ensures that the customer fully understands the content of the return visit and the rights of the cooling-off period. New technologies such as face recognition improve the authentication effect of the customer’s identity. In order to promote the experiences from the pilot project nationwide and standardize the electronic return visits of life insurance companies, the CBIRC issued the Notice of the General Office of the CBIRC on Promoting Electronic Return Visit of life Insurance on 7 February 2020.210 The Notice specifies the conditions for insurance companies to carry out electronic return visits, requiring insurance companies to standardize the conduct of electronic return visits, strengthen the authenticity control of customer identities, and protect the legitimate rights and interests of consumers. The Notice mainly stipulates the electronic return visit from the aspects of application scope, system requirements, identity verification, quality control, and so on. The release of the Notice is of great significance to the promotion of life insurance companies to optimize return visit services by using new technologies. Especially in the current critical period of prevention and control of the new coronavirus infection, online return visits help to reduce meetings and face-to-face contacts and ensure people’s safety and health. In order to meet the needs of the application of information technology in insurance services, protect the legitimate rights and interests of insurance consumers, and improve the quality of life insurance return visits, according to the Insurance Law and relevant regulations on life insurance services, taking into consideration of the pilot experience in Beijing, relevant matters to promote the electronic return visit of the new life insurance business are formulated as follows: The electronic return visit for newly purchased life insurance is the return visit by the insurance company during the policy cooling-off period, relying on the internet and other technologies, to verify the authenticity of the proposer’s identity and to confirm that the proposer understands the main content of the contract and the relevant rights such as the cooling-off period.211 From the date of issuance of this Notice, insurance companies may carry out electronic return visits. Electronic return visits are applicable to all life insurance businesses to which insurance companies should carry out return visit in accordance with regulatory provisions. Carrying out electronic return visits shall abide by the relevant requirements on the return visits of the new life insurance business in the existing regulatory rules. Insurance companies conducting electronic return visits shall have appropriate management and technical support capabilities, fully consider the acceptance of the proposer’s electronic approach to ensure that risks are controllable, and protect the legitimate rights and interests of consumers.212

210 See Accessed on 16 October 2020. 211 The Notice of the General Office of the CBIRC on Promoting Electronic Return Visit of life Insurance 2020, s.1. 212 Ibid., s.2.

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Insurance companies conducting electronic return visits shall formulate management systems in a unified manner, including return visit procedures and interface management, electronic file management, return visit quality random inspection, problem-case handling, dispute handling, and internal accountability. The insurance company shall establish a unified electronic return visit information management system, properly store the return visit information data, and realize that the customer identity authenticity verification information, operation traces, important pages, and other electronic data can be queried and verified. It is not allowed to use third-party platforms for electronic return visits nor permit human intervention and manipulation of data. The storage period of the electronic return visit information data shall be calculated from the date of termination of the insurance contract and shall not be less than ten years. Insurance companies shall abide by the provisions of laws and administrative regulations on the protection of personal information and ensure the stable operation of return visit information systems in accordance with the requirements of information system security management, shall ensure the security of data information of policyholders, and prevent the leakage of customer information.213 The insurance company shall follow the principle of the proposer’s voluntariness to carry out electronic return visits to protect the right of the proposer to choose the return visit method within the scope of laws and regulations. On the electronic return visit page, the proposer shall be provided with a choice to suspend the return visit and choose to switch to other ways for return visit. Insurance companies shall verify the authenticity of customers who receive electronic return visits. They can use verification codes, electronic signatures, ID card information comparison, face recognition, and other effective technical means to ensure that the proposer himself or herself accepts return visits.214 Insurance companies shall conduct electronic return visits in accordance with the contents of the return visits as stipulated by regulations to ensure that the proposer read and understand the contents and confirm each question in the return visit. Insurance companies shall take effective measures to prevent sales personnel from interfering with the return visit process by misleading proposers.215 If the proposer chooses electronic return visit but the return visit is unsuccessful, the insurance company shall complete the return visit by telephone and make a recording within the cooling-off period; if the return visit by telephone is unsuccessful, the return visit shall be completed by letter or face to face, and the proposer’s signature for the return visit shall be obtained.216 When an insurance company conducts an electronic return visit, if it finds that the proposer has not signed the insurance contract, the signature is not the proposer’s own signature, the proposer has doubts about the contents of the return visit, or makes a negative answer, it shall accurately record the problem in the system and deal with it in time. If any misleading is found in the sales process, 213 214 215 216

Ibid., s.3. Ibid., s.4. Ibid., s.5. Ibid., s.6.

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it shall be corrected immediately, and effective measures shall be taken to resolve problems in accordance with the regulations. Insurance companies shall conduct follow-up inspections on the quality of electronic return visits, establish a random inspection system, conduct random checks on the completeness and compliance of the electronic return visits, and keep records of random inspection work.217 When conducting statistics and evaluation on the service quality of insurance companies, the CBIRC and its local offices shall regard insurance policies of insurance companies that have successfully return-visited through the electronic return visit system as having the same effect as successful telephone return visits during the cooling-off period.218 If the insurance company conducts the electronic return visit for the first time, the head office shall report in writing to the CBIRC within ten working days from the implementation date. The content of the report includes the construction of the management system and information management system, the platform, method, process, applicable channels and regional scope of the electronic return visit, and the means of identifying the authenticity of the customer’s identity.219 If the provincial branches of an insurance company carry out an electronic return visit, they shall report to the local banking and insurance supervision bureau within ten working days from the implementation date. The report materials shall include the written report submitted by the head office to the CBIRC and the work development plan of the provincial branch. If the pilot program of the electronic return visit has been carried out in accordance with the requirements of the local banking and insurance supervision bureau, no report is required to be submitted. The CBIRC and its local offices will strengthen supervision and inspection, and promote insurance companies to conduct electronic return visits in an orderly manner. Insurance companies that violate relevant laws, regulations, and regulatory provisions and damage the legitimate rights and interests of consumers during electronic return visits will be ordered to rectify and take regulatory measures in accordance with law. The Insurance Association of China may study and formulate the industry standards for electronic return visits based on the experience of electronic return visits of the personal insurance industry and insurance consumer experience.220 10.12 Regulation on the conduct of insurance claims We have just considered the regulation of the insurer’s conduct at the stage of sale of insurance and formation of insurance contracts; here, we will see the regulation of the insurer’s conduct at the stage of claims. The Insurance Law provides 217 218 219 220

Ibid., s.7. Ibid., s.8. Ibid., s.9. Ibid., s.10.

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statutory rules, and the insurance supervision and regulation authority provide regulatory rules to govern the insurer’s conduct in handling insurance claims. 10.12.1 Statutory requirements for handling claims Article 2 of the Insurance Law provides: [T]he term “insurance” shall refer to a commercial insurance act whereby a proposer pays a premium to an insurer in accordance with a contract while the insurer assumes liability for payment of insurance moneys for property losses as a result of the occurrence of an event specified in the contract, or when the insured dies, becomes injured or disabled, falls ill or reaches the age or time limit as specified in the contract.

It is clear that an insurer’s primary obligation is to pay the insured for his or her loss suffered, namely, to pay the insurance money where the insured event occurs and causes losses to the insured.221 The Insurance Law requires an insurer not only to pay valid claims but also to perform this obligation in a timely manner and sets out time limits for assessing a claim,222 for rejecting the claim,223 for paying the claim,224 and for making preliminary payment.225 After the occurrence of the insured event, the proposer, the insured, or the beneficiary, in making claims to the insurer for indemnity payments or insurance benefits, shall provide the insurer with evidence and information which is relevant in ascertaining the nature, cause, and extent of loss of the insured event and which he or she is able to provide. Where the insurer, based on the terms of the insurance contract, considers the relevant evidence or information insufficient, the insurer shall, in a timely manner, advise the proposer, the insured, or the beneficiary, once and for all, to provide additional evidence or information.226 The insurer shall, after receipt of a claim for indemnity or insurance benefits from the insured or the beneficiary, determine the matter in a timely manner; if the claim is complicated, the insurer shall make a determination within 30 days unless otherwise agreed on in the contract. The insurer shall inform the insured or the beneficiary of the result of the determination; where the claim is covered, the insurer shall fulfil its obligations to pay indemnity or insurance benefits within ten working days after reaching an agreement on the amount of indemnity payment or insurance benefits with the insured or the beneficiary. Where there are provisions in the insurance contract as to the period within which indemnity or

221 For more on insurance claims, see Zhen Jing “The Insurer’s Primary Obligation to Pay Valid Claims in a Timely Manner” (2015) Journal of Business Law, 37–67. 222 The Insurance Law, art.23. 223 Ibid., art. 24. 224 Ibid., art. 23. 225 Ibid. art. 25. 226 Ibid., art.22.

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the payment of the insurance benefits should be effected, the insurer shall fulfil its obligation accordingly.227 Where the insurer fails to fulfil its obligations as prescribed in the preceding paragraph in a timely manner, the insurer shall compensate the insured or the beneficiary for any damages incurred therefrom, in addition to payment of the amount insured. No entity or individual shall illegally interfere with the insurer’s performance of the obligation of paying indemnity or insurance benefits or shall restrict the insured’s or beneficiary’s right of obtaining insurance money. After making a determination according to the provisions in article 23 of the Insurance Law, where the claim is not covered, the insurer shall, within 3 working days from the date the determination is made, send to the insured or the beneficiary a notice rejecting indemnity or payment of insurance benefits and specifying reasons therefor.228 If the amount of indemnity payment or insurance benefits cannot be determined within six working days of receipt of the claim for indemnity payment or insurance benefits and the evidence and information relevant thereto, the insurer shall effect payment of the amount determinable with the evidence and information available; the insurer shall pay the difference accordingly after the final amount of indemnity payment or insurance benefits is determined.229 10.12.2 Regulatory requirements for handling claims As many consumer insurance claims, such as motor vehicle insurance claims or individual medical insurance claims, often involve small sums, to improve smallsum insurance claim settlement services is an important measure for resolving the difficulties in claim settlement. For the purpose of improving insurance claim settlement services, promoting simple, convenient, rapid, and transparent insurance claim settlement services and effectively protecting the lawful rights and interests of insurance consumers, the CIRC developed the Guidelines for Small-Sum Insurance Claim Settlement Services (for Trial Implementation), which were issued and became effective on 24 October 2015.230 The Guidelines contains 22 articles in relation to small claims handling and settlement. “Small-sum insurance claim settlement” means the claim settlement of motor vehicle insurance and individual medical insurance provided that consumers claim a relatively small amount of compensation, the facts are clear, and the responsibilities are definite. “Small-sum claim settlement of vehicle insurance” means the claim settlement of vehicle insurance provided that accidents only involve vehicle losses (not involving human and material losses), the facts are clear, the responsibilities are definite, and the claimed amount of compensation is less than ¥5,000 yuan.

227 Ibid., art.23. 228 Ibid., art.24. 229 Ibid., art.25. 230 Bao Jian Xiao Bao No.201 [2015] (see accessed on 16 October 2020).

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“Small-sum claim settlement of individual medical insurance” means the claim settlement of individual medical insurance of expense remedy type and quota payment type provided that the claimed amount of compensation is less than ¥3,000 yuan, the facts are clear, the responsibilities are definite, and no investigation is required.231 Insurance companies shall establish service rules for receiving claim reports on a “365 days × 24 hours” basis, announce to the public the uniform hotline for reporting claims at business outlets and on the Internet, and remind and direct consumers to report claims in a timely manner after the loss.232 For vehicle insurance claim settlement, an insurance company shall, when receiving a claim report, accurately record the information on the reported claim, remind the claim informant of the matters for attention, inform the informant of the claim acceptance result, dispatch personnel to conduct a survey in a timely manner, and inform the informant of the claim number, and contact information of the person responsible for claim settlement by such means as telephone, short message, and instant messaging tools. In the regions where the rapid traffic accident handling and compensation mechanism has been established, claim informants shall be directed to handle accidents according to the local rapid handling and compensation mode. The person of an insurance company responsible for claim survey shall, after receiving a dispatch order, contact the accident informant in a timely manner, inform the informant of his or her name and contact information, verify the information on the reported claim, confirm the survey site, and inform the informant of claim matters.233 For the claim settlement of individual medical insurance, an insurance company shall, within one working day after receiving a claim report, inform the consumer of claim matters by such means as telephone, short message, and instant messaging tools.234 For consumers that can hardly submit application materials for claim settlement at claim settlement service windows since they are disabled, sick abed, or have other special difficulties, insurance companies shall promote visiting acceptance and other convenient services.235 Insurance companies shall, under the premise of satisfying risk management and control and regulatory requirements, simplify the materials for small-sum insurance claim settlement as much as possible and shall generally not require consumers to provide other materials except claim applications, identity certificates, liability determination and amount determination certificates, and payment information materials.236

231 The Guidelines for Small-Sum Insurance Claim Settlement Services (for Trial Implementation) 2015, art.2. 232 Ibid., art.3. 233 Ibid., art.4. 234 Ibid., art.5. 235 Ibid., art.6. 236 Ibid., art.7.

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Insurance companies shall, under the premise of controllable risks, gradually promote electronic claim documents and reduce the use of paper documents.237 Claim documents for the small-sum claim settlement of vehicle insurance shall be simplified according to the following requirements:238 (1) Consolidating claim documents. Insurance companies shall integrate claim application, authorization, account transfer authorization, survey records, loss confirmation, claim notification, and other content into the application form for the small-sum claim settlement of motor vehicle insurance and promote “all-in-one” documents. (2) Simplifying credentials and certificates. For an accident caused by a single party, the consumer only needs to produce “three certificates and one card” (the vehicle license, the driver’s license, valid identity certificate of the insured, and the recipient’s bank card or account), and the insurance company shall, after verifying the originals, take photos and retain them; for an accident not caused by a single party, the consumer shall also provide the certification materials on the determination of liabilities and the amount. Insurance companies are encouraged to innovate on the means and methods for collecting credential and certificate information. (3) Maintenance invoice exemption. Where the amount of loss caused to a vehicle is less than ¥2,000 yuan, the insurance company may, based on the loss confirmed with the consumer, exempt the consumer from providing the automobile maintenance invoice and directly make compensation to the consumer (except the receipt of compensation on behalf of any other person). If the amount of loss is ¥2,000 yuan or more, the insurance company may require the consumer to provide the invoice or the photo of the original invoice. If a consumer repairs the vehicle at a maintenance enterprise which serves as a partner of an insurance company, the invoice may be directly handed over between the insurance company and the maintenance enterprise, and the consumer is no longer required to provide the invoice. (4) Meteorological certificate exemption. Where any meteorological disaster covering a large area occurs, the insurance company shall, when making compensation, take the meteorological report issued by the meteorological department as the basis and no longer require consumers to provide the meteorological certificate. For the small-sum claim settlement of individual medical insurance, claim documents shall be simplified according to the following requirements:239 (1) Consolidating claim documents. Insurance companies shall integrate claim application, authorization, account transfer authorization, and other content in the claim settlement application form and promote “all-in-one” documents.

237 Ibid., art.8. 238 Ibid., art.9. 239 Ibid., art.10.

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(2) Claim document exemption. Insurance companies shall not require consumers to repeatedly provide, when claiming compensation, the materials that have been retained and may be verified through consultation, including original insurance policies and insurance premium receipts, among others. (3) Accident certificate exemption. In the claim settlement of small-sum individual medical insurance, except the intervention of public security authorities and other third parties, insurance companies shall generally not require consumers to provide accident certificates. Insurance companies shall take multiple measures to shorten the period of time for claim settlement.The claim conclusion ratio of small-sum insurance claim settlement within five natural days as of the date when consumers submit claim applications, and all claim materials shall not be lower than 80%; the average compensation payment period of insurance companies shall not exceed five natural days.240 Insurance companies shall accurately record and retain the time when interactive consumer information services are provided and the service content, and by appropriate means actively inform consumers of the information on and result of claim settlement links such as receipt of claim reports, docketing, receipt of complete claim materials, claim conclusion, and payment.241 Insurance companies shall conduct transparent management of the entire process of claim settlement, establish and improve the channels for the convenient inquiry about claim settlement information, and ensure that consumers may inquire about key information such as claim settlement process, links, adjustment process, and claim settlement results through business outlets, telephone, the internet, and other channels.242 Insurance companies shall, according to the adjustment features of different insurance types, inform consumers of claim settlement results such as the amount of compensation, the deductible amount, and the compensation ratio.243 Insurance companies shall accelerate the promotion of intelligent construction of claim settlement systems and according to the degree of claim settlement risks gradually increase the ratio of automatic handling of small-sum insurance claim settlement, reduce manual handling links, and enhance the claim settlement handling efficiency.244 Insurance companies shall establish and improve diversified service channels such as business outlets, telephone, and Internet, and actively move forward service points so as to satisfy the service demand of different types of consumers.245 Insurance companies shall increase resource investment; strengthen service innovation; accelerate the application of new technologies; improve functions such as online claim reporting, acceptance, submission of documents, examination feedback;

240 241 242 243 244 245

Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16.

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strengthen online and offline cooperation; realize rapid services and response; and improve consumers’ service experience.246 Insurance companies shall establish the monitoring indicator system for smallsum insurance claim settlement services; the major indicators are claim conclusion ratio within five days of small-sum insurance claim settlement, average compensation payment period of small-sum insurance claim settlement, and compensation ratio of small-sum insurance claim settlement, among others. Insurance companies shall strengthen the dynamic monitoring of the aforesaid service indicators to promote the improvement of small-sum insurance claim settlement services.247 The CBIRC shall be responsible for preparing the rules for the submission of the relevant data, and at appropriate times, disclosing the monitoring indicators on small-sum insurance claim settlement services. Insurance companies shall submit the data on small-sum insurance claim settlement services as required.248 10.13 Evaluation of the service of insurance companies To evaluate the service quality of insurance companies, urge insurance companies to improve services, improve the social reputation of the insurance industry, increase the confidence of insurance consumers, and promote the sustainable and healthy development of the insurance industry, the CIRC issued the Notice of the CIRC on Issuing the Measures for Evaluating the Services of Insurance Companies (for Trial Implementation) on 31 July 2015.249 In evaluating the service of insurers, four principles must be followed: The first one is consumer-orientation. Service evaluation shall centre on the experience and feelings of customers and facilitate insurance companies in establishing the customer-first business philosophy. The second is whole-process coverage. Service evaluation shall cover every link of insurance service to evaluate the service level of insurance companies from various perspectives in an all round manner. The third is objectivity and impartiality. In service evaluation, efforts shall be made to ensure the scientificity and compliance of the evaluation process as well as the objectivity and impartiality of the evaluation results. The fourth is continuous improvement. The evaluation system shall be gradually improved by adapting to the changing situation. The evaluation system shall play the role of guidance for insurer’s service and lead insurers to continuously improve their service level. An “Insurance Company Service Evaluation Board” (the board) shall be formed. The leader in charge of consumers’ interests protection in the CBIRC shall be the director of the board, and the members of the board include relevant departments 246 Ibid., art.17. 247 Ibid., art.18. 248 Ibid., art.19. 249 Bao Jian Fa No. 75 [2015] (see accessed on 14 July 2020). The Measures came into force on the date of issuance and replaced the Measures for Evaluating the Services of Personal Insurance Companies (Bao Jian Fa No. 73 [2013]).

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of the CBIRC, some local offices of the CBIRC, the China Consumer Association, the Insurance Association of China, China Insurance Information Technology Management Co., Ltd.; (CIITM), China Insurance News Joint-Stock Company, relevant experts and scholars, news workers, and representatives of insurance consumers.250 The main function of the Board is to organize and conduct service evaluation, including making service evaluation work plans; determining the evaluation indicator system and the scoring rules; specifying the merit and demerit criteria for major service innovations and major negative events; and approving the service evaluation results. Service evaluation shall be conducted once every year. The evaluation result shall be issued by the insurance regulatory authority.251 10.13.1 Scope of evaluation Property insurance companies and personal insurance companies which have opened for business for one full fiscal year shall be subject to service evaluation. Endowment insurance companies, agriculture insurance companies, and policy insurance companies will be gradually included in service evaluation when conditions become ripe.252 Service evaluation covers two levels: head offices of insurance companies and branch offices at the level of provinces (including cities under separate state planning).253 Service evaluation covers all service links and channels (including channels of third parties authorized by insurance companies to provide sales and other services) of insurance companies, such as sales, underwriting, preservation, settlement, consultancy, return visit, and complaint.254 10.13.2 Evaluation system The service evaluation system has two sets of quantitative criteria which are respectively for property insurance and personal insurance, and points are added or deducted respectively for major service innovations and major negative events on the basis of the two sets of quantitative criteria.255 Quantitative indicators are used to, on the basis of the system data of the insurance regulatory authority, the CIITM, and insurance companies, objectively evaluate the service quality and efficiency of insurance companies at all customer contact points by certain specific standards and calculation formulas quantitatively. The centesimal system is adopted for evaluation with quantitative indicators.256

250 251 252 253 254 255 256

Ibid., art.3. Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9.

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Major service innovations are major innovation projects concerning insurance services through which insurance companies achieve actual application effects in terms of improving service quality, service efficiency, and consumer satisfaction. One to five points shall be added in view of the actual application effect.257 Major negative events are negative reports from major media about the serious problems in insurance services, major mass events, or other major problems in insurance services as determined by the Board. One to five points shall be deducted in view of the severity of the problem concerned.258 10.13.3 Evaluation methods A service evaluation system connecting to the regulatory authority, insurance companies, and the CIITM shall be established to receive and process service evaluation data.259 Insurance companies and relevant entities shall reform their business systems according to the requirements of the CBIRC, abstract data about relevant quantitative indicators, and upload them to the service evaluation system within the prescribed time. The service innovations of the branch companies of insurance companies shall also be reported to the local CBIRC offices.260 A CBIRC office shall, on the basis of the indicator data abstracted from the service evaluation system and relevant materials, calculate the scores of quantitative indicators, major service innovations, and major negative events for each branch company within its jurisdiction according to the scoring rules and upload the comprehensive evaluation result of each branch company to the service evaluation system.261 The Board shall, on the basis of the comprehensive evaluation result given by the local CBIRC office to each branch company, calculate the final score of the head office of the insurance company according to scientific weights.262 10.13.4 Service rating Based on their scores, the service ratings of the head offices of insurance companies are divided into four classes: A, B, C, and D, which are further divided into ten levels: AAA, AA, A; BBB, BB, B; CCC, CC, C; and D.263 (1) Class A means its overall service quality is excellent. In particular, its rating is AAA when the score is 95 points or more, AA when the score is 90–95 points, and A when the score is 85–90 points.

257 258 259 260 261 262 263

Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16.

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(2) Class B means its overall service quality is good. In particular, its rating is BBB when the score is 80–85 points, BB when the score is 75–80 points, and B when the score is 70–75 points. (3) Class C means its overall service quality is acceptable. In particular, its rating is CCC when the score is 65–70 points, CC when the score is 60–65 points, and C when the score is 55–60 points. (4) Class D means its overall service quality is poor. Its rating is D when the score is less than 55 points. In the service evaluation of the branch companies of insurance companies, only scores will be given, not ratings.264 10.13.5 Safeguards The CBIRC shall plan and organize the development of the service evaluation system for insurance companies, while the CIITM shall be responsible for the construction, operation, and maintenance of the system.265 Data about quantitative indicators shall be abstracted, checked, and uploaded by the head offices of insurance companies in a unified way.266 All data about indicators shall be automatically generated by the system, and insurance companies shall not have any artificial control but shall retain integrated logs to ensure the verifiability of the evaluation processes and results.267 The business data of insurance companies and the personal data of consumers shall not be divulged to others.268 Insurance companies and their agencies shall not use the evaluation results for misleading sales or defaming peers.269 10.14 Evaluation of the business operation of insurance companies A scientific evaluation system is an important means for guiding market development and strengthening insurance regulation. For purposes of comprehensively evaluating the operating condition of insurance companies, strengthening insurance regulation, and impelling insurance companies to improve business management and transform their modes of development, the CIRC issued and implemented the Notice of the CIRC on Issuing the Operation Evaluation Indicator System of Insurance Companies (for Trial Implementation) on 7 August 2015 (hereinafter, the Indicator System).270 Through comprehensive evaluation of insurance companies in terms of growth rate and scale, efficiency and quality, and social contributions, the Indicator System 264 Ibid., art.17. 265 Ibid., art.18. 266 Ibid., art.19. 267 Ibid., art.20. 268 Ibid., art.21. 269 Ibid., art.22. 270 Bao Jian Fa No. 80 [2015] (see accessed on 15 July 2020).

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guides insurance companies in improving their business management level and accelerating the transformation of development modes and is of great significance in promoting the sustainable and sound development of the industry and maximizing the insurance industry’s role of serving the national economy and society. 10.14.1 Subjects of evaluation271 (1) The operation evaluation indicator system is applicable to incorporated insurance companies and their branch offices. (2) An incorporated insurance company or any of its branch offices which has not operated for a full fiscal year shall not be included in the scope of evaluation. (3) This Indicator System is not applicable to reinsurance companies, endowment insurance companies not engaged in the insurance business, and policy-based insurance companies. 10.14.2 Evaluation classes Insurance companies and their branch offices are divided into four classes: A, B, C, and D, according to their operating conditions. (1) Companies of Class A are companies operating in good condition in terms of growth rate and scale, efficiency and quality, and social contributions, among others. (2) Companies of Class B are companies operating in normal condition in terms of growth rate and scale, efficiency and quality, and social contributions, among others. (3) Companies of Class C are companies with problems in growth rate and scale, efficiency and quality, or social contributions. (4) Companies of Class D are companies with serious problems in terms of growth rate and scale, efficiency and quality, and social contributions, among others. 10.14.3 Evaluation indicators Based on the operating conditions of insurance companies, operation evaluation indicators are set as follows: (1) The indicators consist of quantitative indicators rather than qualitative indicators. (2) The operation evaluation indicators for incorporated insurance companies consist of three categories of indicators: growth rate and scale, efficiency and quality, and social contributions. In particular, there are 12 evaluation indicators for property insurance companies and 14 evaluation indicators 271 The Notice of the CIRC on Issuing the Operation Evaluation Indicator System of Insurance Companies (for Trial Implementation) 2015, s.1.

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for life insurance companies.The specific indicators and the points allocated to each indicator are also included in the annex of this Indicator System. (3) The operation evaluation indicators for branch offices of incorporated insurance companies consist of three categories of indicators: growth rate and scale, efficiency and quality, and social contributions. In particular, there are ten evaluation indicators for branch offices of property insurance companies and 13 evaluation indicators for branch offices of life insurance companies. The specific indicators and the points allocated to each indicator are also included in the annex of this Indicator System. 10.14.4 Evaluation methods (1) The Insurance Association of China (IAC) shall take charge of the evaluation of operating conditions of incorporated insurance companies. The insurance associations of all provinces (autonomous regions, municipalities directly under the Central Government, and cities under separate state planning) (hereinafter, local insurance associations) shall take charge of the evaluation of operating conditions of branch offices of incorporated insurance companies. (2) A local insurance association shall evaluate all branch offices of an incorporated insurance company that fall within its jurisdiction as a whole, that is, this Indicator System is applicable to the evaluation of insurance companies’ branches at the level of a province (city under separate state planning) by local insurance associations. (3) A ten-point system shall be adopted in the operation evaluation, with the full score of ten points. There are specific scoring rules for each evaluation indicator. The IAC and local insurance associations shall, according to the scoring rules, assign a score for each evaluation indicator, and the score of an incorporated insurance company or its branch offices are the aggregate of scores for all evaluation indicators. (4) An incorporated insurance company or its branch office is of Class A if its score of operation evaluation indicators is equal to or greater than eight; is of Class B if its score is less than eight but equal to or greater than four; is of Class C if its score is less than four but equal to or greater than two; or is of Class D if its score is less than two. 10.14.5 Evaluation frequency The IAC and local insurance associations shall evaluate the operating conditions of incorporate insurance companies and their branch offices once each year. 10.14.6 Evaluation results (1) The IAC and local insurance associations shall, before the end of June each year, publish the evaluation classes of incorporated insurance companies 529

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and their branch offices for the prior year and the industry mean and median of evaluation indicators, for consultation by the public. (2) The IAC and local insurance associations may publish the aforesaid information on their official websites or by other means. 10.15 Conclusion It can be concluded that the CIRC/CBIRC has made good efforts to develop and implement regulatory rules for the purpose of fair treatment of insurance customers. The rules are in place and achieve the outcomes in the areas of developing, marketing, and selling products in a way that pays due regard to the interests and needs of customers; providing customers with information before, during, and after the point of sale that is accurate, clear, and not misleading; minimising the risk of sales which are not appropriate to customers’ interests and needs; ensuring that any advice given is of a high quality; dealing with customer claims, complaints, and disputes in a fair and timely manner; and protecting the privacy of information obtained from customers, and so on. However, the rules are there, and the problem lies in the implementation of the rules. The main problem in practice is still the misleading conduct of salespersons that do not follow the rules and sell the life policies in a non-professional manner and mislead the consumers into a contract which is not suitable to their needs. For example, on 2 July 2020, the CBIRC published the Notice on Recent Issues of Life Insurance Products and notified insurers of the typical problems found in the recent supervision of life insurance products, involving a total of 20 life insurers and 11 major issues for the insurance companies.272 The Notice specifically pointed out that the misleading issues in the sales of long-term dividend annuity insurance policies by Xinhua Life Insurance Company were exposed in a province, causing abnormal surrenders of the policies and the risk of mass incidents. After investigation, the following problems are found in sales promotion by the insurer and its salespersons: the first problem is to exaggerate policy returns, and some insurance policies have a misleading propaganda of “doubling in ten years” of the policy returns. The second is to conceal the insurance period. The insurance period of the product is from the effective date of the policy to the age of 80 of the insured, but the promotion materials mislead the customer to mistakenly believe that the insurance period is ten years. The third is to conceal the losses of surrendering the policies, without telling the insured that if he/she surrenders the policy pre-mature, he/she can only receive the cash value of the policy, the cash value after deduction may be lower than the premium paid by the insured. The aforementioned problems seriously violated regulatory requirements, and the regulatory authorities will seriously pursue the legal liability of the insurer in accordance with the law. It can be said the key issue in the conduct of insurers is the misleading conduct in the sales of insurance policies. The regulatory emphasis should be placed on 272 See accessed on 19 July 2020.

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the strict implementation of the regulations on marketing and selling life insurance policies. Insurers and their employees must act in good faith and must not mislead consumers. It is hoped that the strict implementation of the recent Notice of the General Office of CBIRC on the implementation of the Main Responsibility of Insurance Companies to Strengthen the Administration of Insurance Sales Personnel 2020273 may help to reduce cases of misconduct of the insurers and their salespersons.

273 Yin Bao Jian Ban Fa No. 41 [2020].

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CHAPTER 11

Regulation of solvency

11.1 Introduction At the core of modern insurance regulation is the regulation of solvency of an insurance company. To ensure that the insurer meets its obligation of paying insurance proceeds to its insureds is the ultimate purpose of insurance regulation. To this end, the regulatory authority requires an insurer to maintain adequate solvency capability, which is the precondition for the insurer to meet the promise to its insureds. In China, the concept of insurance regulation is gradually changing with the development of the insurance market. At the early stage of the development of China’s insurance market, the regulatory authority adhered to the concept of “strictly exercise the front-end control” of an insurance company, namely, the emphasis of regulation was placed on the strict control of the formation of an insurance company and its entrance to the insurance market, but less on the insurer’s market behaviour, solvency, and corporate governance. That concept is replaced by the concept of “relaxing front-end control and exercising strict back-end control”, which means that the strict regulatory requirements for the establishment of an insurance company and its entrance to the insurance market should be relaxed and the regulation and supervision on the insurer’s market behaviour, solvency, and corporate governance should be strengthened. Accordingly, the CBIRC is now paying increasingly more attention to the regulation of the insurer’s solvency. Similarly, the solvency regulation has also experienced the change from the firstgeneration solvency system to the second-generation system, that is, from scaleoriented solvency system to China Risk-Oriented Solvency System (C-ROSS).This second generation system introduces risk-based solvency regulation to the Chinese regulatory framework.1 The new C-ROSS has absorbed some characteristics from the European Solvency II system and at the same time developed new unique features to suit the Chinese situations. The aim of this chapter is, therefore, to discuss the solvency regulation system in China, with a particular focus on the examination of the C-ROSS. Other statutory and regulatory requirements in relation to the solvency of insurance companies are also examined. 1 Detailed examination on the first generation and second generation of solvency systems will be given shortly.

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DOI: 10.4324/9781351122863-11

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11.2 The legal framework of regulation of solvency The Insurance Law requires an insurer to maintain the minimum solvency commensurate with its scale of business and degree of risk. The difference between the admissible assets and the admissible liabilities of an insurance company shall not be less than the amount prescribed by the insurance supervision and regulatory authority of the State Council; otherwise, the insurance company shall take corresponding measures to reach the prescribed amount according to the requirements of the insurance supervision and regulatory authority.2 In accordance with the Insurance Law, the CIRC/CBIRC has formulated a series of regulations for the administration and supervision of solvency. Broadly speaking, these regulations can be classified as the first generation and the second generation of solvency regulatory systems. From 24 March 2003 to 1 January 2016, the CIRC built and practised the first generation of solvency regulation which is scale-oriented and based on premium and losses only, simple flat-risk factors, and no correlation consideration. The second generation is the C-ROSS, which is risk-oriented and based on various risk exposure, comprehensive risk factors, and multilevel correlation. For the first generation of solvency regulation, the CIRC developed three main pieces of regulations: (1) Provisions on the Administration of Insurance Company Solvency Margin and Regulatory Indices, came into force on 24 March 20033 and regulated insurance company solvency until 1 September 2008 (2) Provisions on the Administration of the Solvency of Insurance Companies, came into force on 1 September 20084 and repealed the 2003 Provisions. (3) Notice of CIRC on Implementing the Provisions on the Administration of the Solvency of Insurance Companies came into force on 21 October 2008.5 These aforesaid three pieces of regulation governed the first generation of the solvency regulation system in China from 24 March 2003 to 1 January 2016. For the development of the second generation of solvency regulation system, the CIRC released the Notice of the CIRC on Issuing the Plan for the Building of China’s Second Generation Solvency Supervision System on 29 March 2012,6 which marked the official launching of the construction of the China Risk-Oriented Solvency System. On 3 May 2013, the CIRC promulgated the Notice of the CIRC on Issuing the Overall Framework of the Second-Generation Solvency Supervision System of China.7 The conceptual framework, the components, the functions, and other features are formulated in this Notice, which will be considered in detail in section 11.4. 2 The Insurance Law, art.101. 3 The CIRC Order No. 1 [2003]. 4 The CIRC Order No. 1 [2008]. 5 Bao Jian Fa No. 89 [2008]. 6 Bao Jian Fa No.24 [2012]; accessed on 13 October 2020. 7 Bao Jian Fa No. 42 [2013] (see accessed on 13 October 2020).

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On 13 February 2015, the CIRC issued the Notice of the CIRC on Issuing the Solvency Regulatory Documents (No.1 to 17) for Insurance Companies,8 in which all the primary C-ROSS technical standards were published, including 17 regulatory documents. The publication of the 17 regulatory documents marks the entering of the transition period from the first generation to the second generation of the solvency regulation. During the transition period from 13 February 2015 to 1 January 2016, the CIRC issued two pieces of regulations to govern the matters regarding the solvency in the transition period. (1) Notice of the CIRC on Matters Related to the Transition Period of the Implementation of China’s Risk-Oriented Solvency System, issued on 13 February 2015.9 (2) Notice of the CIRC on Issues concerning the Pilot Evaluation of the Solvency Risk Management Capability of Insurance Companies during the Transition Period of China Risk-Oriented Solvency System, issued on 15 July 2015.10 During the transition period, insurance companies were required to prepare two sets of solvency reports in accordance with the first generation solvency supervision system and second generation standards, with the first generation as the basis for supervision. According to the trial operation of the 17 regulatory documents during the transition period, the CIRC would then determine the switching time between the first and second generations. In order to clarify the requirements for the second generation trial operation during the transition period, the relevant matters were hereby notified by the two Notices. The formal implementation of the C-ROSS began on 1 January 2016 by the issuance of the Notice of the CIRC on Matters concerning the Formal Implementation of the China Risk Oriented Solvency System, which was issued on 25 January 2016.11 According to the trial implementation of the system during the transition period (13 February 2015 to 1 January 2016) and with the consent of the State Council, the CIRC decided to formally implement the C-ROSS and to implement the 17 Solvency Regulatory Documents for Insurance Companies from 1 January 2016. Since the implementation of the C-ROSS, it has made remarkable achievements in advancing the modernization of insurance supervision, enhancing industry risk prevention and control capabilities, promoting industry transformation and upgrading, and enhancing China’s insurance supervision and international influence in the insurance market. In order to further improve the scientificity, effectiveness, and 8 Bao Jian Fa No.22 [2015] (see accessed on 13 October 2020). 9 Bao Jian Cai Hui No. 15 [2015] (see accessed on 13 October 2020). 10 Bao Jian Cai Hui No. 125 [2015] (see accessed on 13 October 2020). 11 See accessed on 12 October 2020.

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pertinence of solvency supervision and better meet the requirements of China’s insurance industry development and reform, risk prevention and control, and financial security, the CIRC decided to start the second phase of the development of the C-ROSS and therefore released the Notice of the CIRC on Issuing the Plan for Construction of the Second Phase of the C-ROSS on 18 September 2017.12 Further, the CBIRC released the road map and timetable for the construction of the second phase of the C-ROSS on 23 May 2018.13 In addition to the requirement for an insurance company to maintain a minimum solvency margin by art.101 of the Insurance Law, the Insurance Law sets out four further requirements which are closely related to the solvency of an insurance company. First, an insurance company is required to set aside 20% of its registered capital as the guarantee fund and deposit it with the banks designated by the insurance supervision and regulatory authority. This fund cannot be used for any purposes other than to pay off debts at the time of liquidation of the company.14 The CIRC formulated a specific set of rules for the regulation of capital guarantee funds, that is, the Administration of Capital Guarantee Funds of Insurance Companies on 3 April 2015,15 which will be considered later in section 11.8. Second, an insurance company is required to set aside various kinds of reserves in accordance with the principles of safeguarding interest of the insureds and maintaining solvency. The insurance supervision and regulatory authority is authorized to formulate specific rules for setting aside and carrying over reserves by an insurance company.16 For example, the CIRC issued the Measures for the Management of Reserves for Non-life Insurance Businesses of Insurance Companies on 15 December 2004,17 which became effective on 15 January 2005, and also the Notice of CIRC on Issuing the Detailed Rules for the Implementation of the Measures for the Administration of the Reserves of Non-life Insurance Business of Insurance Companies (for Trial Implementation) on 2 February 2005.18 The Measures 2004 and the Detailed Implementation Rules 2005 are currently under revisions. These two pieces are considered in detail later in section 11.9. Third, an insurance company is required to set aside statutory surplus reserve.19 Fourth, an insurance company is obliged to make contributions to an insurance security fund, which is managed as a pool by the Insurance Security Fund Company,20 and applied through overall planning in the following circumstances:

12 Bao Jian Fa No. 67 [2017] (see accessed on 13 October 2020). 13 See accessed on 5 July 2020. 14 The Insurance Law, art.97. 15 Bao Jian Fa No. 37 [2015] (see accessed on 13 October 2020). 16 The Insurance Law, art.98. 17 CIRC Order No. 13 [2004]. 18 Bao Jian Fa No. 10 [2005]. 19 The Insurance Law, art.99. 20 China Insurance Security Fund Co., Ltd. is wholly state-owned and responsible for the fundraising, management, and use of the Insurance Security Fund according to the law. Insurance Security Fund

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(1) providing relief to the proposers, the insureds, or the beneficiaries where an insurance company is revoked or declared bankrupt; (2) providing relief to the insurance companies that take over the life insurance contracts from the insurance company which has been revoked or declared bankrupt; or (3) other circumstances as provided for by the State Council.21 The specific management rules for raising, managing, and using the insurance security fund, namely, the Measures for the Administration of Insurance Security Fund22 were formulated jointly by the CIRC, the Ministry of Finance, and the People’s Bank of China in 2008.23 These Measures will be discussed in detail in chapter 23. For insurance companies with inadequate solvency, the insurance supervision and regulatory authority lists them as key targets for regulation and may take the following steps according to the specific circumstances:24 (1) (2) (3) (4) (5) (6) (7)

Order them to increase capital and arrange reinsurance; Restrict their scope of business; Restrict their dividends distribution to shareholders; Restrict their purchase of fixed assets or scale of operating expenses; Restrict their category and proportion of fund investments; Restrict their establishment of additional branches; Order them to auction off bad assets or to transfer their insurance business; (8) Restrict the remuneration level of their directors, supervisors, and senior officers; (9) Restrict business advertising; or (10) Order them to stop accepting new business. 11.3 The first generation of solvency regulation system In accordance with the requirement of the Insurance Law, the CIRC formulated the Provisions on the Administration of Insurance Company Solvency Margin and Regulatory Indices on 24 March 2003,25 which regulated insurance company solvency until 1 September 2008, when the Provisions on the Administration of the Solvency of Insurance Companies was formulated on 1 September 2008,26 which repealed the 2003 Provisions. The 2008 Provisions consisted of 46 articles in six chapters: the general provisions, solvency assessment, solvency reports, solvency management, solvency supervision, and supplemental provisions. On 21 October

Company operates independently according to the law, and its board of directors is responsible for the lawful use and safety of the Insurance Security Fund. 21 The Insurance Law, art.100. 22 The CIRC Order No.2 [2008]; assessed on 13 October 2020. 23 Ibid. 24 The Insurance Law, art.138. 25 The CIRC Order No. 1 [2003]. 26 The CIRC Order No. 1 [2008].

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2008, the CIRC further issued the Notice of CIRC on Implementing the Provisions on the Administration of the Solvency of Insurance Companies.27 These aforesaid three pieces of regulation governed the first generation of the solvency regulation in China from 24 March 2003 to 1 January 2016. For understanding of the development of the solvency regulation system in China, it is appropriate to take a brief look at these three pieces. 11.3.1 A brief account of the Provisions on the Administration of Insurance Company Solvency Margin and Regulatory Indices 2003 According to the 2003 Provisions, the minimum capital requirements were set based on the three-year average of net written premium and three-year average of net reported losses. The minimum solvency margin of a property insurance company was the greater of the following two figures: (i) in the most recent accounting year, 18% of the portion under ¥100 million yuan plus 16% of the portion in excess of ¥100 million yuan of the self-retained premiums less business tax and its surtax; or (ii) 26% of the portion under ¥70 million yuan plus 23% of the portion over ¥70 million yuan of the average comprehensive compensation for the most recent three years. The standard in the first figure was applied to the insurers which had been in business for fewer than three years.28 The minimum solvency margin for a life insurance company was the sum of the minimum solvency margin for long-term personal insurance (with the insurance period of more than one year) and the minimum solvency margin for a short-term personal insurance (with the insurance period of one year or less).29 The minimum solvency margin for long-term personal insurance company was the sum of the following two items: (i) 1% of the closing liability reserve fund (the statutory minimum reserve fund stipulated by the CIRC) for investment linked life insurance product plus 4% of the closing liability reserve fund for other life insurance products; and (ii) 0.1% of the amount of insured risk for fixed-term death insurance having an insurance term of less than three years, plus 0.15% of the amount of insured risk for fixed-term death insurance having an insurance term of between three to five years, plus 0.3% of the amount of insured risk for fixed-term death insurance having an insurance term of more than five years, and other life insurance.30 The minimum solvency margin for short-term personal insurance was calculated as that for a property insurance company.31

27 Bao Jian Fa No. 89 [2008]. 28 The Provisions on the Administration of Insurance Company Solvency Margin and Regulatory Indices 2003, art.4 29 Ibid., art.5. 30 Ibid. 31 Ibid.

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The 2003 Provisions also set out detailed regulatory indices for property or life insurance companies.32 The minimum solvency margin for a reinsurance company is the sum of the minimum solvency margin for property insurance and personal insurance calculated according to the aforementioned stipulations, respectively.33 11.3.2 A brief account of the Provisions on the Administration of Solvency of Insurance Company 2008 The Provisions on the Administration of Solvency of Insurance Company 2008 is currently under revision. On 30 July 2020, the CBIRC released the draft of the amended version of the Provisions on the Administration of Solvency of Insurance Company for public consultation.34 In the next sub-section, a brief account of 2008 version of the Provisions on the Administration of Solvency of Insurance Company is given. According to 2008 Provisions, an insurance company is required to have capital commensurate with its risks and business size and to ensure that its solvency ratio was not less than 100%. The solvency ratio, also known as the capital adequacy ratio, is the ratio between an insurance company’s actual capital and the minimum capital requirement.35 The minimum capital requirement for an insurance company is the amount of capital that an insurance company has according to the provisions issued by the CIRC for responding to the adverse impacts of asset risks, underwriting risks, and other risks on the solvency of the company.36 The actual capital of an insurance company is the difference between admitted assets and admitted liabilities.37 An insurance company shall establish solvency management rules, intensify capital restraint, and ensure adequate solvency.38 The CIRC established risk-based dynamic solvency supervision criteria and supervision mechanisms to comprehensively evaluate and conduct supervisory inspection on the solvency of insurance companies and take regulatory measures according to the law.39 On the basis of the solvency status of insurance companies, insurance companies may be classified into the following three categories to implement categorized supervision:40

32 Ibid., arts.11 and 12. 33 Ibid., art.6. 34 See accessed on 13 October 2020. 35 The Provisions on the Administration of Solvency of Insurance Company 2008, art.3. 36 Ibid., art.7. 37 Ibid., art.8. “Admitted assets” means the assets that an insurance company recognized according to the provisions issued by the CIRC during its solvency assessment.The enumeration approach shall apply to the admitted assets. “Admitted liabilities” means the liabilities that an insurance company recognized according to the provisions issued by the CIRC during its solvency assessment. (art.8 of 2008 Provisions) 38 The Provisions on the Administration of Solvency of Insurance Company 2008, art.4. 39 Ibid., art.5. 40 Ibid., art.37.

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(1) Companies in the category of inadequate solvency: insurance companies with a solvency adequacy ratio of less than 100%. (2) Companies in the category of adequate solvency I: insurance companies with a solvency adequacy ratio between 100% and 150%. (3) Companies in the category of adequate solvency II: insurance companies with a solvency adequacy ratio of 150% or more. The results of dynamic solvency testing of insurance companies may be used as a basis for taking regulatory measures. Under different circumstances, one or more of the following regulatory measures against a company may be taken in the category of inadequate solvency:41 (1) Ordering it to increase its capital or restricting the distribution of dividends to its shareholders. (2) Restricting the salaries and remuneration and the in-service consumption of its directors and senior executives. (3) Restricting its commercial advertisements. (4) Restricting its formation of additional branch offices, restricting its business scope, ordering it to cease developing new business, ordering it to transfer insurance business, or ordering it to cede business. (5) Ordering it to auction its assets or restricting its purchase of fixed assets. (6) Restricting its channels for utilization of funds. (7) Adjusting its person in charge and relevant executives. (8) Receiving the company. (9) Taking other regulatory measures as necessary. A company in the category of adequate solvency I may be required to submit and implement a plan for prevention of inadequate solvency.42 Where there is any significant solvency risk in a company in the category of adequate solvency I or in the category of adequate solvency II, the company may be required to conduct rectification or to take necessary regulatory measures against it.43 Where an insurance company failed to establish and implement solvency management rules as required by these Provisions, the insurance supervision and regulation authority may require it to conduct rectification, and if the circumstances are serious, may take corresponding regulatory measures against it and impose administrative punishment on it according to the law.44 11.3.3 The Notice of CIRC on Implementing the Provisions on the Administration of the Solvency of Insurance Companies 2008 In the Notice 2008, the CIRC set out the minimum capital assessment standards for property, life, and reinsurance companies, respectively.

41 42 43 44

Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid., art.41.

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(a) For property insurance companies45 The minimum capital of a property insurance company is the sum of the minimum capital for the non-life insurance business of the guarantee type and that for the non-life insurance business of the investment type. (1) The minimum capital for the non-life insurance business of the guarantee type is the larger of the following two numbers: (i) of the net premiums of the company in the last accounting year after deducting the business tax and surtaxes, 18% of the amount below ¥100 million yuan, and 16% of the amount above ¥100 million yuan; or (ii) of the average amount of comprehensive indemnity in the last three years, 26% of the amount below ¥70 million yuan, and 23% of the amount above ¥70 million yuan. The amount of comprehensive indemnity is the balance after deducting reinsurance recoverables and recovery income from the summation of indemnity expenses, the balance between the outstanding loss reserves drawn in the current period, and those carried back from the last period as well as the reinsurance indemnity expenses. An insurance company with an operation life of less than three full accounting years should adopt the standards as described in method (i). (2) The minimum capital for the non-life insurance business of the investment type is the summation of the minimum capital for risk-based insurance premiums and the minimum capital for investment capital. In particular, the assessment standards for the minimum capital of the non-life insurance business of the guarantee type were applicable to the calculation of the minimum capital for risk-based insurance premiums, while the minimum capital for investment capital is the summation of the following two: (i) 4% of the term-end liability reserves of the investment capital of non-life investment insurance products with assumed earnings; and (ii) 1% of the term-end liability reserves of the investment capital of other non-life investment insurance products than those with assumed earnings. (b) For life insurance companies46 The minimum capital of a life insurance company is the summation of the minimum capital for its long-term personal insurance business and that for its shortterm personal insurance business. Long-term personal insurance business refers to the personal insurance business with a duration of more than one year; while short-term personal insurance business refers to the personal insurance business with a duration of one year or less.

45 The Notice of CIRC on Implementing the Provisions on the Administration of the Solvency of Insurance Companies 2008, s.1(1). 46 Ibid., s.1(2).

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(1) The minimum capital for long-term personal insurance business is the summation of the following two: (i) 1% of the term-end liability reserves of investment-linked life insurance products or 4% of the term-end liability reserves of other life insurance products. The liability reserves of investment-linked insurance products are unit reserves of the investment-linked insurance products determined according to the CIRC provisions, while the liability reserves of other life insurance products are the legal minimum liability reserves after reinsurance as determined according to the CIRC provisions, including the non-unit reserves of investment-linked life insurance products. (ii) 0.1% of the risk-based insurance premiums of term death insurance with a duration of fewer than three years, 0.15% of the riskbased insurance premiums of term death insurance with a duration of three to five years, or 0.3% of the risk-based insurance premiums of term death insurance with a duration of more than five years and other insurance categories. If fixed-term death insurance is not distinguished by duration in statistics, the calculation is uniformly based on 0.3% of the risk-based insurance premiums. The risk-based insurance premiums are the valid insured amount less the termend liability reserves. In particular, the valid insured amount refers to the maximum amount to be paid by an insurance company in case an insurance accident entitled to the maximum amount of compensation as stipulated in the insurance contract had occurred, while the term-end liability reserves refers to the legal minimum liability reserves as provided by the CIRC. (2) The assessment standards for the minimum capital for the non-life insurance business of the guarantee type are applicable to the calculation of the minimum capital for short-term personal insurance business. (c) For reinsurance companies47 The minimum capital of a reinsurance company is the summation of the minimum capital for its property insurance business and that for its personal insurance business as calculated according to the previously mentioned standards. 11.4 The conceptual framework of the second generation of solvency regulation system For the development of the second generation of the solvency regulation system, the CIRC promulgated the Notice of the CIRC on Issuing the Overall Framework of the Second-Generation Solvency Supervision System of China on 3 May 2013.48 This Overall Framework is developed for the purpose of further enhancing the 47 Ibid., s.1(3). 48 Bao Jian Fa No. 42 [2013]

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solvency supervision and building the top-level regime design, which ultimately leads to the establishment of a robust second generation of the solvency supervision system in China. The Framework shows the essential features of the C-ROSS and therefore deserves detailed consideration here. 11.4.1 Name of the system49 China’s second generation of the solvency supervision system is known as China Risk Oriented Solvency System (C-ROSS). 11.4.2 Overall objectives50 (1) To measure the risks of insurance companies, scientifically and comprehensively, in order to calculate a capital requirement that aligns with the specific risks within the insurance companies’ risk profiles. (2) To mitigate undesirable or unintended risk exposures and determine appropriate capital requirements to strengthen the competitiveness of China’s insurance industry; to establish an effective incentive mechanism to encourage insurance companies to improve the management and control of risks; and to promote the robust development of the insurance industry in China. (3) To actively explore an appropriate model for solvency supervision in emerging markets and to contribute to the development of international solvency supervision. 11.4.3 Composition of the conceptual framework51 The conceptual framework for C-ROSS consists of three components: characteristics of the system, supervisory pillars, and the basis of supervision. (a) Characteristics of the system52 In developing the requirements of C-ROSS, in-depth consideration is given to insurance market conditions and the maturity of China’s insurance market. These characteristics, which are embodied in the principles, methods, and standards of C-ROSS, represent the starting point for the development of solvency supervision. (I) CENTRALIZED SUPERVISION53 The CBIRC is authorized by the State Council to perform administrative functions and to execute a unified supervisory approach and regulation for the national insurance market in accordance with the applicable laws and regulations. Its duties 49 The CIRC on Issuing the Overall Framework of the Second-Generation Solvency Supervision System of China 2013, s.1. 50 Ibid., s.2. 51 Ibid., s.3. 52 Ibid., s.3(1). 53 Ibid., s.3(1)(i).

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include executing a unified supervision and formulating practical regulations to support the ongoing solvency of insurance companies in China. Unified supervision fully embodies the unique features of solvency supervision in China. C-ROSS is intended to fully leverage the advantages of a unified supervision approach, including high efficiency, strong enforceability, and low costs. However, due to China’s vast geography and regional differences, the different supervisory needs should be adequately taken into account in the formulation of a unified set of supervisory policies. The proposed quantitative supervisory approach primarily focuses on the capital adequacy of insurance companies at the “headquarters level”. Therefore, regulations and related standards should be as unified as possible. With regard to qualitative supervision and market discipline, a degree of variance is permissible in the supervision of risk related to insurers’ branches so as to reflect regional differences. The CBIRC’s central and regional offices should appropriately collaborate to implement solvency supervision requirements. (II) EMERGING MARKETS54 Being at an early development stage, China’s insurance market is an emerging insurance market. There are a number of differences between China’s insurance market and developed insurance markets with respect to market size, growth, product features, risk management capabilities, talent pool, internationalization, and so on. As compared with the solvency supervision systems in developed markets, C-ROSS gives additional emphasis to the insurance companies’ cost of capital and capital efficiency; the qualitative aspects of the supervisory approach so as to make full use of the synergies between the qualitative supervisory approach and the quantitative supervisory approach; the adaptability of the market and the dynamic features needed to support rapid market development; enforceability and the binding power of regulatory policies to identify and respond to risks on a timely basis; and lastly, the practicality of the policies so that implementation effectiveness can be achieved. (III) RISK-ORIENTED SOLVENCY REGULATION AND ECONOMIC VALUES ASSESSMENT55

Risk prevention is an everlasting theme of solvency supervision and a fundamental duty in insurance regulation. With C-ROSS, the liability-asset assessment shall be able to appropriately reflect the actual risk status and changes of insurance companies in a timely manner; the capital requirements shall be able to reflect more comprehensively and accurately all sorts of risks insurance companies are facing; and the regulatory measures shall be more risk-oriented. Bottom-line thinking is critical to risk prevention.The bottom line is that regional risk and systematic risk must be prevented. The potential risk of losses and minimum regulatory capital requirements should be measured scientifically, such that capital consumption can be reduced and capital efficiency can be improved. The 54 Ibid., s.3(1)(ii) 55 Ibid., s.3(1)(iii)

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effectiveness of risk management can help to enhance the value of both individual insurance companies and the overall insurance industry. From a technical perspective, C-ROSS should neither be as simple as a “pass line” or as a single risk warning line for insurance companies, nor be as complicated as a perfect textbook economic valuation of insurance companies. C-ROSS has been developed for an emerging market and should aim to achieve a balance between risk warning and value assessment purposes. (b) The basis for supervision56 As part of the enterprise’s internal management, the company’s own solvency management plays an important role in solvency supervision.This is mainly reflected in two ways: First, internal solvency management is a prerequisite and the foundation of solvency supervision. The external solvency supervision must adapt to the level of industry maturity of internal solvency management capabilities at a particular stage. Solvency supervision and internal solvency management are interdependent, mutually constrained, and mutually stimulated. A sound solvency supervision system should motivate insurance companies to continuously strengthen their internal solvency management capabilities. Second, internal solvency management is the “immune system” and the “response system” of insurance companies. A set of robust internal solvency management policies and mechanisms can help to proactively identify and mitigate different types of risk and respond to related changes in a timely manner. (c) Supervisory pillars57 The essential part of solvency supervision consists of three pillars. The solvency of insurance companies is supervised and managed through the three pillars approach. The three pillars focus on the contents, principles, methods, and standards of solvency supervision from three aspects: quantitative capital requirements, qualitative supervisory requirements, and market discipline mechanism. (I) PILLAR 1 − QUANTITATIVE CAPITAL REQUIREMENTS58 Pillar 1 (quantitative capital requirements) is primarily intended to address and mitigate quantifiable risks. It requires insurance companies to hold adequate capital for the risks by proactively identifying and quantifying different types of risks appropriately. Under Pillar 1, quantifiable risks should have three characteristics: (1) the risks should be continuously evident in the operation of insurance companies; (2) the risks can be quantitatively measured using currently available techniques; (3) the measurement methods and outcomes are competent and reliable. Pillar 1 consists of five parts: The first part of Pillar 1 is quantitative capital requirements, including: (1) insurance risk capital requirements; (2) market risk capital requirements; (3) credit 56 Ibid., s.3(2). 57 Ibid., s.3(3). 58 Ibid., s.3(3)(i).

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risk capital requirements; (4) macro-prudential capital requirements, that is, capital requirements for procyclical risk and systemic risk in systematically important institutions; and (5) supervisory capital requirement adjustments, that is, adjustments applied to certain insurance business or certain insurance companies for a given period based on the needs of industry development, market environments, and risk management capabilities of insurance companies. The second part of Pillar 1 is valuation standards for available capital, that is, the valuation and admissibility standards of insurance companies’ assets and liabilities. The third part of Pillar 1 is capital classification, that is, classifying the available capital of insurance companies into different tiers, clarifying the characteristics and setting out the standards for the different tiers of capital. The fourth part of Pillar 1 is dynamic solvency testing, that is, the projection and evaluation of insurance companies’ solvency position for a given period of time under a base scenario and various adverse scenarios. The fifth part of Pillar 1 is supervisory measures, that is, supervisory intervention actions which may be undertaken by supervisors and imposed on insurance companies that do not meet the quantitative regulatory capital requirements. (II) PILLAR 2 − QUALITATIVE SUPERVISORY REQUIREMENTS59 Pillar 2 (qualitative supervisory requirements) is built on Pillar 1 to further mitigate risks that are difficult to quantify, such as operational risk, strategic risk, reputational risk, liquidity risk, and so on. Insurance companies face some material risks which cannot be quantified or cannot be easily quantified. Further to this, China’s insurance market is an emerging one, and as a result, it is difficult at this stage to use a quantitative supervisory approach to measure these risks.Therefore, a qualitative supervisory approach under Pillar 2 is deemed to be more appropriate for risk assessment and mitigation purposes. For example, operational risk is difficult to quantify and there is no historical loss event data in China for this risk. Hence it is difficult to assess operational risk through a quantitative supervisory approach at present. As a result, risks that are difficult to quantify, such as operational risk, strategic risk, and reputational risk would be qualitatively supervised through Pillar 2. Pillar 2 includes four parts: The first part of Pillar 2 is integrated risk rating, that is, the supervisor conducts a comprehensive evaluation of the overall solvency of insurance companies by integrating the quantitative evaluation of the risks that can be quantified under Pillar 1 and the qualitative evaluation of the risks that are difficult to quantify (including operational risk, strategic risk, reputational risk, and liquidity risk) under Pillar 2. The second part of Pillar 2 is the insurance companies’ risk management requirements and assessment framework, that is, the supervisor sets out specific supervisory requirements for the risk management practice of insurance companies including risk governance structure, internal control, the management structure,

59 Ibid., s.3(3)(ii),

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risk assessment processes, and so on, and assesses insurance companies’ risk management capabilities and risk profiles. The third part of Pillar 2 is supervisory inspection and analysis, that is, conducting on-site inspections and off-site analysis of the solvency of insurance companies. The fourth part of Pillar 2 is supervisory intervention actions, that is, undertaking various supervisory interventions in insurance companies that do not meet the qualitative supervisory requirements. (III) PILLAR 3− MARKET DISCIPLINE MECHANISM60 Pillar 3 is intended to guide, facilitate, and utilize the power of stakeholders in the market; to leverage market disciplinary power by means of public disclosures, and so on, such that the solvency supervision of insurance companies is strengthened and risks further mitigated. Market stakeholders include the general public, consumers, rating agencies, industry analysts in securities markets, and so on. Pillar 3 includes two parts: the first part is to discipline insurance companies through external information disclosure and fully relying on market forces other than regulatory authorities, and the second part is that the regulatory authorities adopt various means to improve the market discipline mechanism, optimize the market environment, and urge the market forces to fully play their disciplining effect on the risk management and valuation of insurance companies. The market discipline mechanism under Pillar 3 is an objective requirement for the development of an emerging insurance market and an integral part of the solvency supervision system of China. First, market forces are an efficient means and integral part of the supervision over insurance companies, may effectively constrain the business operations of insurance companies, and therefore shall be fully utilized. Second, as China has limited supervision resources at the current stage, the disciplining effect of market forces as a powerful supplement to the regulatory authorities shall be fully promoted and utilized. Third, at the current stage, the disciplining forces in the market have not been fully utilized in the supervision of insurance companies, and it is urgent for the regulatory authorities to further improve the market discipline mechanism and optimize the market environment. (IV) INTERRELATIONSHIP OF THREE PILLARS61 Unlike insurance companies’ internal solvency management, all three pillars form part of the solvency supervision process for insurance companies. The three pillars have different focuses on risk prevention: Pillar 1 is intended to mitigate the solvency-related risks that can be quantified through quantitative supervision; Pillar 2 is intended to mitigate solvency-related risks that are difficult to quantify through qualitative supervision; Pillar 3 is intended to utilize the disciplinary power of markets through public disclosure in order to further strengthen the impact of Pillar 1 and Pillar 2. In this way, all types of solvency-related risk in insurance companies can be mitigated with a broader perspective in mind. The three pillars

60 Ibid., s.3(3)(iii). 61 Ibid., s.3(3)(iv).

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are interrelated and complementary to each other, resulting in a comprehensive risk identification, classification, and control system. (V) SUPERVISION OF INSURANCE GROUPS62 The three pillars will also apply to insurance groups. The content and requirements of group supervision are reflected in the three pillars. For example, Pillar 1 includes quantitative capital requirements applicable to both solo legal entities and groups. Pillar 2 includes qualitative supervisory requirements applicable to both solo legal entities and groups. Pillar 3 includes market discipline mechanisms applicable to both solo legal entities and groups. Compared with a solo insurance legal entity, insurance groups can potentially benefit more from risk diversification. At the same time, insurance groups also have some special risks that are different from a solo insurance legal entity, such as the risk of double counting capital, the risk of an opaque organizational structure, the risk of conflicts of interest, and internal systemic risk. In developing specific supervisory standards for the three pillars, these special risks should be taken into account and reflected accordingly. 11.4.4 Technical Principles63 (a) Solvency adequacy indicators64 There are three indicators to evaluate the solvency position of insurance companies: core solvency adequacy ratio, aggregated solvency adequacy ratio, and integrated risk rating. (1) Core solvency adequacy ratio: the ratio of core capital to minimum capital, which reflects the adequacy of core capital of insurance companies. (2) Aggregated solvency adequacy ratio: the ratio of the sum of core capital and supplementary capital to minimum capital, which reflects the overall capital adequacy of insurance companies. (3) Integrated risk rating: taking into account the quantitative evaluation of the risks that can be quantified in Pillar 1, and the qualitative assessment of risks that are difficult to quantify in Pillar 2, a comprehensive evaluation of the overall solvency risk of the insurance companies is conducted to derive the integrated risk rating.The rating results should reflect the overall solvency risk of insurance companies. The core solvency adequacy ratio and aggregated adequacy solvency ratio reflect the capital adequacy position of quantifiable risk of insurance companies. The integrated risk rating reflects the profile of all risks associated with the solvency of insurance companies.

62 Ibid., s.3(3)(v). 63 Ibid., s.4. 64 Ibid., s.4(1).

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(b) Actual capital65 (1) “Actual capital” means the economic resources that can absorb losses in insurance companies on a going-concern basis or upon liquidation. Actual capital is equal to admitted assets minus admitted liabilities of insurance companies. (2) “Admitted assets” are assets recognized and measured by insurance companies for solvency supervision purposes according to relevant CBIRC regulations. Admitted assets for solvency supervision purposes are different from the assets for financial reporting purposes.There needs to be further consideration of differences in recognition and measurement for solvency supervision purposes. The value of assets needs to be adjusted appropriately. For example, assets that cannot be disposed of at maturity by insurance companies or where their disposal is restricted (e.g. assets frozen by law, overseas assets that cannot be disposed of due to war and other reasons) cannot be recognized as admitted assets under the solvency supervision system. The recognition and measurement principles should be different from those for financial reporting purposes. (3) Admitted liabilities are liabilities which are recognized and measured by insurance undertakings for solvency supervision purpose according to relevant CBIRC regulations. Admitted liabilities for solvency supervision purposes are different from the liabilities for financial reporting purposes. There needs to be further consideration of differences in the recognition and measurement for solvency supervision purposes.The amount of liabilities needs to be adjusted appropriately. For example, the recognition and measurement principles for the subordinated debt of insurance companies for solvency supervision purposes may be different from those used for financial reporting purposes. (4) The actual capital should meet the following criteria: (i) availability, that is, the capital of insurance companies should be actually paid in full or fully committed; (ii) permanence, that is, the capital of insurance companies should have no maturity date or meet minimum maturity requirement; (iii) subordination, that is, the repayment of the insurance companies’ capital should only be made after policy liabilities and general debts; (iv) constraints on principal and interest, that is, there are specific constraints on the payment of principal and dividend/interest from an insurance company’s capital. (5) Based on the loss absorption capability, actual capital can be divided into core capital and supplementary capital. There should be a reasonable structure of both core capital and supplementary capital to ensure the quality of total capital.

65 Ibid., s.4(2).

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(c) Minimum capital66 (1) Minimum capital is the amount of capital required according to the regulations to cover the adverse impact on the companies’ solvency capability arising from market risk, credit risk, insurance risk, and so on. (2) When determining the minimum capital requirement, the relationship between risk prevention and value growth should be dealt with properly. An appropriate minimum capital standard should not only defend against risks effectively but also avoid capital redundancy. The minimum capital under C-ROSS should be a balanced and fair capital requirement which takes into account the needs of different parties and balances their differing self-interests. (d) Risk classification67 (1) The risks of insurance undertakings can be classified into two groups: quantifiable risks and risks that are difficult to quantify. Quantifiable risks include market risk, credit risk, and insurance risk, which are reflected in Pillar 1; risks that are difficult to quantify include operational risk, strategic risk, reputational risk, and liquidity risk, which are reflected in Pillar 2. (2) The definition of the different types of risks are as follows: (i) Market risk is the risk of unexpected losses arising from adverse movements in interest rates, exchange rates, equity prices, or commodity prices. (ii) Credit risk is the risk of losses arising from counterparties failing to fulfil contractual obligations or failing to fulfil the contractual obligations on time or from adverse movements in credit conditions. (iii) Insurance risk is the risk of losses caused by adverse deviation from expected experience of mortality, morbidity, loss ratio, lapse, and so on. (iv) Operational risk is the risk of direct or indirect losses due to inadequate internal processes, personnel, and systems, or from external events, including legal and supervisory compliance risk (but excluding strategic risk and reputational risk). (v) Strategic risk is the risk arising from incompatibility between strategy and the market environment or the company’s capacity, due to ineffective strategy formulation and execution processes or the changing business environment. (vi) Reputational risk is the risk of losses due to negative evaluation of insurance companies by relevant stakeholders resulting from the insurance companies’ operation or external events. (vii) Liquidity risk is the risk that an insurance company is unable to obtain sufficient funds in a timely manner or is unable to obtain

66 Ibid., s.4(3). 67 Ibid., s.4(4).

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sufficient funds at a reasonable cost in a timely manner in order to meet the liabilities when they fall due. (viii) Off-balance sheet risks need special attention. Off-balance sheet items mainly include commitments, guarantees, and/or derivatives that are not reflected in the balance sheet. The main risks are market risks (such as currency risk, interest rate risk), credit risk, liquidity risk, and so on. Off-balance sheet items are not reflected in the insurance companies’ balance sheet; hence these risks can easily be overlooked. As the scale of insurance companies’ offbalance sheet activities expands gradually, this may have a material impact on the solvency position of insurance companies.Therefore, special attention needs to be paid to these risks in the solvency supervision system. (e) Assets and liabilities assessment principles under Pillar 168 (1) The assessment principles for assets and liabilities of non-life insurance companies and life insurance companies should be as consistent as possible. (2) The same insurance business should adopt the same assessment principles for assets and liabilities, regardless of whether it is carried out by life or non-life insurance companies, direct insurers, or reinsurers. (3) The assessment principles of assets and liabilities should be consistent as much as possible in order to minimize the mismatch between assets and liabilities caused by the inconsistencies in the valuation principles. (4) The assessment principles for assets and liabilities should in a timely and appropriate manner reflect the actual risk profiles of the assets and liabilities of insurance companies in the market environment and their changes. (5) The assessment principles for assets and liabilities for solvency purposes should fully utilize the existing insurance companies’ financial accounting system. In order to effectively reduce the implementation costs of solvency assessment and management, underlying data, measurement principles and methods and reporting systems should be shared to the extent practical. (6) The assessment principles for assets and liabilities used to calculate the minimum capital requirements under Pillar 1 should be consistent with those used for the calculation of actual capital. (7) The assessment principles for assets and liabilities should objectively reflect the actual situation in China and fully consider the impact on the entire insurance industry. The standards should be appropriate and practical. (f) Basic principles of quantitative capital requirements under Pillar 169 (1) The quantitative capital requirements under Pillar 1 use the Value at Risk (VaR) method over a one-year time horizon. The confidence level will be 68 Ibid., s.4(5). 69 Ibid., s.4(6).

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(2)

(3) (4) (5) (6)

set based on China’s current circumstances, with reference to industry quantitative impact study (e.g. 99.5%, or other level). The measurement of quantitative capital requirements under Pillar 1 is based on net assets, that is, considering the combined effects from a variety of risk factors on the insurance companies’ admitted assets and liabilities in the capital requirements calculation. In principle, a standard formula approach should be used to calculate the quantitative capital requirements under Pillar 1. However, internal models could be gradually introduced in the future when appropriate. While calculating capital requirements for asset related risks, the risk exposure should not include non-admitted assets, as these are already deducted from the actual capital. In principle, the measurement of quantitative capital requirements under Pillar 1 should not allow for future new business. The measurement of quantitative capital requirements under Pillar 1 should allow for the effect of risk diversification using a correlation coefficient matrix approach.

(g) Measurement of quantitative capital requirements under Pillar 170 (1) The measurement of the quantitative capital requirements in Pillar 1 follows a bottom-up approach. The capital requirement for each risk module is calculated using a “bottom-up” approach according to the prescribed method; it is then aggregated using a prescribed aggregation method. The effect of risk diversification should be allowed for in the aggregation. The minimum capital requirement for the entire company is derived by aggregating the results of each risk module using correlation matrices. (2) The capital requirement for each risk module in Pillar 1 can be calculated via the scenario method or the risk factor method. Different methods can be applied to different risk modules. (h) Liquidity regulation in Pillar 271 (1) Liquidity risk is highly correlated with other risks. A lack of liquidity in insurance companies can result from credit risk, market risk, insurance risk, operational risk, and other risks. Therefore, liquidity risk is often considered as a composite risk. Liquidity risk management requires sound liquidity planning as well as effective management of the other major risks. (2) For liquidity risk, the requirement to hold additional capital is not the most appropriate supervisory approach. Liquidity risk should be mitigated mainly through qualitative supervisory methods. (3) Insurance companies should establish a sound governance structure, strategies, and policies and procedures for liquidity risk management. 70 Ibid., s.4(7). 71 Ibid., s.4(8).

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Comprehensive liquidity risk identification, measurement, monitoring, and controlling system should be established to improve liquidity risk management. (4) Liquidity regulation should consider liquidity risk for both solo legal entities and groups concurrently. Current and future liquidity risks should both be monitored. Both the liquidity risks under a base scenario (i.e. normal operating conditions) and extremely adverse scenarios should be considered. (i) Integrated risk rating in Pillar 272 (1) Solvency supervision should reflect all the solvency-related risks of insurance companies, including the quantifiable risks and those risks that are difficult to quantify. Quantifiable risks, such as market risk, insurance risk, and credit risk are reflected under Pillar 1; risks that are difficult to quantify, such as operational risk, strategic risk, reputational risk, liquidity risk are reflected in Pillar 2. Meanwhile, all solvency-related risks of insurance companies under Pillar 2 should be evaluated comprehensively. (2) Integrated risk rating includes three parts: assessment of quantifiable risks (reflected under Pillar 1), evaluation of risks that are difficult to quantify (reflected under Pillar 2), and a comprehensive evaluation of all risks (reflected under Pillar 2). (3) Integrated risk rating includes ratings at both the company level and the branch level of the insurance undertakings. (j) Risk management requirements and evaluation under Pillar 273 (1) The risk management requirements and assessment under Pillar 2 include all solvency-related risk management and evaluation of the risk management of insurance companies. They cover both quantifiable and nonquantifiable risks. (2) Insurance companies should regularly self-assess and report to the supervisor details of their own risk management capabilities, specific risks, and the overall risk profiles of the company. The self-assessment would be an important consideration in determining their integrated risk rating. (3) The supervisor can adjust the minimum capital requirements according to the capabilities and effectiveness of insurance companies’ risk management policies and procedures. (4) The risk management requirements under Pillar 2 are the minimum requirements for insurance companies. Insurance companies can establish their own internal risk management policies at a level higher than the supervisory requirements.

72 Ibid., s.4(9). 73 Ibid., s.4(10).

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(k) Public disclosure under Pillar 374 (1) Public disclosure of solvency information should follow the principle of adequacy. Insurance companies should adequately disclose all material information to help users understand the risk profiles of the insurance companies. (2) Public disclosure of solvency information should follow the principle of timeliness. Insurance companies should regularly disclose all relevant solvency information on a timely basis. (3) Public disclosure of solvency information should follow the principle of faithfulness. Insurance companies should ensure that the information disclosed is true, accurate, and complete, without fictitious and misleading statements or with material omissions. (4) Public disclosure of solvency information should follow the principle of fairness. Insurance companies should ensure that the general public is fairly informed of the solvency-related information. Insurance companies should also ensure that the information disclosure is accessible, centralized, and convenient for the potential users. (5) Public disclosure of solvency information should follow the cost-benefit principle. 11.5 The documentary framework of C-ROSS The CIRC issued the Notice of the CIRC on Issuing the Solvency Regulatory Documents (No. 1–17) for Insurance Companies75 on 13 February 2015, in which all the primary C-ROSS technical standards were published, including 17 regulatory documents. All insurance companies in China are now following requirements of the 17 regulations, as follows: No. 1, actual capital (the difference between the actual assets and the actual liabilities); No. 2, minimum capital; No. 3, assessment of liabilities for life insurance contracts; No. 4, minimum capital for non-life insurance risks; No. 5, minimum capital for life insurance risks; No. 6, minimum capital for reinsurance; No. 7, minimum capital for market risk; No. 8, minimum capital for credit risk; No. 9, assessment of solvency pressure (dynamic solvency test); No. 10, integrated risk rating; No. 11, solvency aligned risk management requirement and assessment; No. 12, liquidity risks (the risks for which an insurance company is unable to obtain sufficient funds in a timely manner or not been able to obtain

74 Ibid., s.4(11). 75 Bao Jian Fa No. 22 [2013]

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No. No. No. No. No.

sufficient funds at a reasonable cost to cover maturing debt payment obligations or to perform other payment obligations); 13, solvency public information disclosure; 14, solvency information communication; 15, insurance company credit rating; 16, solvency report; and 17, insurance group regulation.

The three pillars represent the core part of the framework of the C-ROSS. The first pillar of the quantitative capital requirement is corresponding to the solvency regulations No. 1–9, mainly to prevent quantifiable risks. By scientifically identifying and quantifying various types of risks, insurance companies are required to have capital suitable for their risks. The second pillar of qualitative regulatory requirements is corresponding to solvency regulations No. 10–12, on the basis of the first pillar, to further prevent risks that are difficult to quantify. The third pillar of the market discipline mechanism is corresponding to regulations No. 13–15 of solvency supervision, which is to guide, promote, and give play to the power of market-related stakeholders. Through external information disclosure and other means, the solvency regulation of insurance companies is further strengthened through the market discipline mechanism. 11.6 The impact of the C-ROSS The design and implementation of the C-ROSS is an important milestone in the history of China’s insurance industry development and regulatory reform. C-ROSS accelerates the modernization of China’s insurance regulatory system, supports the sustainable, fast, and healthy development of the insurance industry, and has farreaching impacts on the global insurance paradigm.76 First, it can facilitate the transformation of development mode. The C-ROSS comprehensively measures all risks of insurers’ business activities, strengthens solvency regulation on insurers, and guides insurers to balance risks and cost of capital in the pursuit of growth so they will abandon the extensive growth pattern for more efficient growth. Second, it can promote risk management competence of the industry. The C-ROSS established an incentive mechanism for risk management, regularly assessing risk management competence of insurers, taking risk management competence into the capital requirements, and urging insurers to constantly improve their risk management to enhance the core competitiveness of their business. Third, it could make the industry more attractive to capital.The C-ROSS releases capital, making capital use more efficient and thus increasing the insurance industry’s attractiveness to social capital. Fourth, it can promote greater participation in international insurance cooperation and exchanges. The C-ROSS is comparable to international mainstream 76 The Annual Report of the Chinese Insurance Market 2015, p54, accessed on 4 August 2020.

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regulatory regimes both in terms of the “three pillars” regulatory framework and with regard to the specific aspects of regulatory standards and requirements, facilitating international exchanges and cooperation. 11.7 The second phase of the construction of the C-ROSS The construction of the C-ROSS can be divided into two phases. The first phase ran from May 2013, when the Notice of the CIRC on Issuing the Overall Framework of the Second-Generation Solvency Supervision System77 was released, to September 2017, when the Notice of the CIRC on Issuing the Plan for Construction of the Second Phase of the C-ROSS78 was issued. In order to further improve the scientificity, effectiveness, and pertinence of solvency supervision and better meet the requirements of China’s insurance industry development and reform, risk prevention and control, and financial security, the CIRC decided to start the second phase of the development of the C-ROSS and therefore released the Notice of the CIRC on Issuing the Plan for Construction of the Second Phase of the C-ROSS on 18 September 2017.79 Further, the CBIRC released the road map and timetable for the construction of the second phase of the C-ROSS on 23 May 2018. 11.7.1 The overall goals for the construction of the second phase of the C-ROSS The 2017 Plan for Construction of the Second Phase of the C-ROSS sets out four goals:80 (1) Risk orientation shall be adhered to, the solvency regulation institutional system shall be made more risk-specific, risk coverage shall be further expanded, risk assessment shall be made more scientific, and risk management shall be more effective, in order to reflect solvency conditions and risk changes in the insurance industry in a more timely and appropriate manner. (2) Problem orientation shall be adhered to, chaotic conditions shall be tackled, leverage shall be lowered, capital restraints shall be strengthened more strictly and practically, and the transmission of regulatory policies shall be enhanced so as to lift the level of risk management and improve the capability of risk resistance in the insurance industry. (3) Openness orientation shall be adhered to, international prudential regulation rules and financial governance systems shall be vigorously provided with China’s experience and plans, and domestic and international regulatory cooperation shall be constantly strengthened to prevent cross-market, cross-field, and trans-regional overlapped financial risks.

77 78 79 80

Bao Jian Fa No. 42 [2013]. Bao Jian Fa No. 67 [2017]. Ibid. Ibid., s.2.

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(4) Prospect orientation shall be adhered to, new development trends in financial science and technology shall be closely followed, the level of regulatory science and technology shall be constantly raised, and new concepts, methods, and tools of prudential regulation of the insurance industry under the condition of new science and technology shall be researched and explored. 11.7.2 The three specific tasks and 26 projects The second phase of the C-ROSS includes 26 projects in three specific tasks.81 (a) Task 1: improve the supervision rules82 Task 1 has 15 projects (projects No. 1 to 15), as follows: (1) Revise and improve the Regulations on the Administration of the Solvency of Insurance Companies, further improve the solvency supervision framework, refine the supervision measures, and strengthen the solvency supervision constraints. (2) Formulate implementation rules for prudential supervision of insurance groups; improve insurance group capital measurement; clarify insurance group liquidity supervision indicators, solvency risk management evaluation standards, and risk comprehensive rating standards, and so on, and strengthen supervision of insurance groups. (3) Study and formulate the solvency supervision regulations of mutual insurance organizations and self-insured companies, and establish prudential supervision rules and mechanisms that adapt to the nature and characteristics of new insurance organizations. (4) Explore the introduction of regulatory characteristic factors in capital measurement to better reflect regulatory and policy guidance, guide the insurance industry to return to its origin, play its long-term and stable risk management and protection function, and improve its service capacity to the real economy. (5) Adjust the evaluation basis and scope of actual capital, coordinate the on- and off-balance sheet assets and liabilities; implement a penetrating assessment of eligible long-term equity investments and other assets; implement strict capital deductions for capital reuse; adjust and improve recognition standards and evaluation standards of related assets; revise and improve the evaluation standards for insurance contract liability to ensure the stability of liability evaluation; in core capital, prudently determine the remaining margin of effective insurance policies; revise and improve the definition of capital, raise capital standards, and strengthen the authenticity and compliance of capital.

81 The Notice of the CIRC on Issuing the Overall Framework of the Second Generation Solvency Supervision System 2017, s.3. 82 Ibid., s.3(1).

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(6) Study and perfect the principles and standards of penetrating method in market risk and credit risk and strengthen the penetrating identification and supervision of risks. (7) Carry out a comprehensive review, calibration, and improvement of the minimum capital standard for market risk. Study and revise the minimum capital standard for interest rate risk, revise the risk factors for stocks and long-term equity investments, revise the minimum capital standard for real estate price risk, clarify the minimum capital standard for new investment products such as Hong Kong stock connect and interbank certificates of deposit, and calibrate and update various types of market risks correlation coefficient, additional capital requirements for concentration risk, and so on. (8) Improve the minimum capital standard for credit risk, calibrate the risk factor, calibrate and update the correlation coefficient between various types of credit risk, and add capital requirements for concentration risk. (9) Improve the minimum capital standard for insurance risk. According to the latest market data in recent years, focus on the calibration and update of the minimum capital requirements for health insurance, motor vehicle insurance, agriculture insurance, credit guarantee insurance, and other types of insurance. (10) Study and formulate the solvency supervision rules of reinsurance business and standardize the solvency measurement and evaluation of reinsurance, especially financial reinsurance. (11) Improve the stress test supervision rules, refine the stress test implementation guidelines, further clarify the relevant methods and rules, and enhance the scientific, practical and targeted stress test. (12) Improve the liquidity risk supervision rules; adjust and design the liquidity risk supervision index system according to the particularity of property insurance, life insurance, and reinsurance; and improve the scientificity, accuracy, and timeliness of the liquidity risk indicators. (13) Improve the comprehensive risk rating (IRR) system. Subdivide evaluation levels, optimize evaluation standards and evaluation indicators, and improve evaluation mechanisms and processes; formulate comprehensive risk evaluation standards for insurance branches; explore comprehensive use of off-site evaluations and on-site evaluations, and so on, to improve the objectivity and reliability of scoring; expand comprehensive risk rating scope and gradually include in the evaluation scope insurance groups, pension insurance companies, and insurance asset management companies, and so on; and improve the feedback mechanism for insurance company rating results, standardize the scope and procedures of feedback, and improve the relevance and effectiveness of feedback. (14) Improve the solvency risk management requirements and evaluation (SARMRA) system.83 Further refine the evaluation criteria, prepare an

83 Solvency Aligned Risk Management Requirement & Assessment (SARMRA).

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evaluation manual, improve the evaluation mechanism, and enhance the scientificity and effectiveness of the evaluation. Improve and standardize the working mechanism for feedback of SARMRA evaluation results to insurance companies and improve the relevance and effectiveness of feedback. (15) Improve the supervision rules of the third pillar of the C-ROSS, further enhance transparency, and cultivate and strengthen market restraint mechanisms. (b) Task 2: improve the implementation mechanism84 Task 2 has six projects (projects No. 16 to 21), as follows: (16) Track the development trend of financial technologies such as cloud computing, big data, artificial intelligence, and blockchain; carry out research on the application of regulatory technologies; and actively explore new types of prudential supervision of the insurance industry under the conditions of new technologies. (17) Gradually establish a multidimensional, three-dimensional, and open solvency risk analysis and monitoring system and form a mechanism in which the CBIRC system, scientific research institutions, intermediaries, and industry organizations participate together to enhance the risk early warning and decision support capabilities of solvency information. (18) Establish a normalized and diversified solvency data authenticity check system. Place emphasis on investigating and focusing on issues that erode solvency databases, such as false capital, false assets, false reserve assessment, false basic risk assessment data, and false information disclosure and lay a solid foundation for solvency supervision. (19) Establish an evaluation and supervision mechanism for third-party intermediaries related to prudential supervision of the insurance industry, such as accounting firms, actuarial consulting agencies, asset evaluation agencies, and credit rating agencies. (20) Optimize the second-generation supervision information system, give full play to its data automatic inspection, off-site analysis and other functions, and improve the second-generation supervision informatization level. (21) Establish and improve the working mechanism of the solvency supervision expert advisory committee and improve the working mechanism of the solvency supervision committee. (c) Task 3: strengthen supervision cooperation85 Task 3 has five projects (projects No. 22 to 26) as follows: (22) Promote the establishment and active participation in financial prudential supervision cooperation mechanisms. Under the unified deployment of the 84 The Notice of the CIRC on Issuing the Overall Framework of the Second-Generation Solvency Supervision System 2017, s.3(2). 85 Ibid., s.3(3).

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(23) (24) (25)

(26)

Party Central Committee and the State Council’s financial stability development and regulatory coordination mechanism, strengthen prudential supervision and coordination with relevant departments such as the People’s Bank of China, the CBIRC, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange to effectively prevent and control cross-market, cross-industry, and various types of cross-domain cross-cutting financial risks. Establish the second-generation equivalent evaluation system; strengthen the solvency supervision cooperation with other countries (regions), especially the countries (regions) along the Belt and Road Initiative. On the basis of practice in recent years, further explore and improve the standards and mechanisms for applying Chinese accounting standards and the C-ROSS to overseas insurance institutions. Study and evaluate the potential impact of changes in international and domestic accounting standards on prudential regulation in the insurance industry and determine the applicability and feasibility of the new accounting standards for prudential regulation. Actively participate in the formulation of international regulatory rules, provide China’s effective practices and useful experience for international regulatory rules and global insurance industry governance, and promote the establishment of reasonable, fair, and inclusive international insurance regulatory rules.

11.7.3 Time schedule86 According to the working idea of “construction and implementation” for the construction of the second phase of C-ROSS, where one project, as mentioned previously, becomes completed, it will be released and implemented. It is planned to complete the construction and implementation of the second phase of the C-ROSS in about three years. 11.7.4 Working mechanism87 (a) Strengthen leadership and participate widely The construction of the second phase of C-ROSS is under the unified leadership of the Party Committee of the CBIRC. The Financial Supervision Department of the CBIRC (Solvency Supervision Department) takes the lead in organizing the implementation, and the relevant departments of the CBIRC, various insurance regulatory bureaus, other regulatory commissions, various insurance institutions, insurance industry organizations and relevant units outside the industry participate in the joint participation in the construction of the second phase of the C-ROSS.

86 Ibid., s.4. 87 Ibid., s.5.

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(b) Implement the project responsibility system The specific tasks of the second phase of the project are subject to a project responsibility system. The relevant departments of the CBIRC, the China Insurance Regulatory Bureau, the solvency supervision expert advisory committee, consulting institutions, insurance institutions, intermediary institutions and other relevant units undertake specific projects. The members of the project team shall be based on the personnel who take the lead in the undertaking institution, and at the same time widely absorb the participation of various stakeholders to ensure the representativeness and wide participation of the members of the project team. (c) Establish an expert consultation mechanism An advisory committee for solvency supervision experts shall be set up to provide technical consultation and demonstration on professional issues in the second phase construction and to conduct professional review of the research results of each project team to ensure the technical reliability of the second phase project construction results. (d) Strictly regulate the working procedures and be open and transparent The construction of the second phase of the C-ROSS shall follow strict work procedures, and the construction of each project shall be carried out in four steps: project establishment, drafting, public consultation, and implementation. After the project team drafts the proposal drafts for each project, the Financial Accounting Department (Solvency Supervision Department) of the CBIRC shall extensively and fully solicit the opinions of all parties or organized industry tests to maximize the consensus of all parties. After passing the internal review process of the CBIRC, the completed project shall be officially released for implementation. The CBIRC will promptly disclose the construction of the second-phase project and protect the right of the community to know and participate in the second-phase projects. 11.8 Capital guarantee funds According to art.97 of the Insurance Law, an insurance company is required to set aside 20% of its registered capital as the guarantee fund and deposit it with the banks designated by the insurance supervision and regulatory authority. This fund cannot be used for any purposes other than to pay off debts at the time of liquidation of the company. These requirements serve as a safety net to protect the interest of the insureds. In accordance with the Insurance Law, the CIRC formulated the Notice on Issuing the Measures for the Administration of Capital Guarantee Funds of Insurance Companies88 in 2011. In order to further strengthen the supervision of insurance companies’ capital guarantee funds, protect the lawful rights and interests of policyholders, and maintain the stable and sound development of the insurance

88 Bao Jian Fa No. 39 [2011].

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market, the CIRC amended the 2011 version of the Measures and issued the new version of the Measures for the Administration of Capital Guarantee Funds of Insurance Companies89 on 3 April 2015. We consider the 2015 version of the Measures in this section. “Capital guarantee funds” means the funds that are deposited after the establishment of an insurance company on the basis of 20% of the total registered capital and that cannot be used except for debt repayment in the liquidation of insurance companies.90 The CBIRC supervises and administers the capital guarantee funds of insurance companies according to the law. Insurance companies must deposit and dispose of capital guarantee funds in compliance with the provisions of these Measures.91 Insurance companies must deposit capital guarantee funds under the principles of “full amount, safety, and stability.”92 11.8.1 Deposit An insurance company shall select two or more commercial banks in which to deposit capital guarantee funds. To be eligible for accepting deposits, a bank shall:93 (1) Be a state-owned commercial bank, joint-stock commercial bank, postal savings bank, or urban commercial bank; (2) Have net assets by the end of last year of no less than ¥20 billion yuan; (3) have complied with the relevant provisions of the banking regulatory authorities in respect of the capital adequacy ratio and non-performing loan ratio by the end of last year; (4) Have an excellent corporate governance structure, internal auditing and monitoring system, and risk control system; (5) Be an associated party with the company; and (6) Have no record of major violations of any law or regulation in the most recent two years. An insurance company shall deposit its capital guarantee funds in a designated bank at the place of residence of the incorporated insurance company, a municipality directly under the Central Government, a city under separate state planning, or a provincial capital.94 An insurance company shall open an independent bank account to deposit its capital guarantee funds.95 During the period of depositing capital guarantee funds, if the bank where the funds are deposited fails to comply with the provisions of these Measures or has 89 Bao Jian Fa No. 37 [2015]. 90 The Notice of the CIRC on Issuing the Measures for the Administration of Capital Guarantee Funds of Insurance Companies 2015, art.3. 91 Ibid., art.4. 92 Ibid., art.5. 93 Ibid., art.6. 94 Ibid., art.7. 95 Ibid., art.8.

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anything which may have a significant adverse impact on the safe deposit of capital guarantee funds,96 an insurance company shall report to the CBIRC in a timely manner and transfer the deposited capital guarantee funds to a compliant bank.97 An insurance company shall, within 30 working days after the CBIRC approves the opening of business or within 30 working days after its application for increasing its registered capital (working capital), deposit its capital guarantee funds in a bank that meets the provisions of the CBIRC in full amount and on time.98 An insurance company may deposit capital guarantee funds in the following forms:99 (1) Fixed-term deposit; (2) Large-amount agreement-based deposits; or (3) Other forms approved by the CBIRC. The deposit term of capital guarantee funds shall not be shorter than one year.100 Each sum of capital guarantee funds shall not be less than ¥10 million yuan (or its equivalent in any foreign currency). If an insurance company increases its registered capital (working capital) by less than ¥50 million yuan (or its equivalent in any foreign currency), it shall deposit 20% of the actual amount of increased capital as capital guarantee funds.101 An insurance company shall pay close attention to the exchange rate fluctuations of the capital guarantee funds deposited in foreign currencies. An insurance company whose total amount of capital guarantee funds remains less than the statutory requirement for 20 consecutive working days (or its RMB equivalent) due to exchange rate fluctuations shall, within five working days as of the next working day, deposit a sum of capital guarantee funds in the amount of the actual difference and undergo relevant post facto recordation formalities.102 An insurance company shall, when depositing capital guarantee funds, enter into an agreement on the deposit of capital guarantee funds with the head office or the tier-one branch of the bank in which the insurance company intends to deposit the capital guarantee funds. Within the term of validity of the contract, neither party may revoke the agreement without authorization.103 An insurance company shall request the deposit bank to endorse the deposit receipt of capital guarantee funds: The deposit, as deposit of capital guarantee funds, shall not be used for pledge financing. During the term of deposit, the deposit bank shall not agree with the depositor’s change in the nature of deposit, transfer of the principal from the deposit bank, or

96 For example, subject to penalties by the regulatory departments due to significant violations of laws and regulations, insufficient capital adequacy ratio, and so on. 97 The Notice of the CIRC on Issuing the Measures for the Administration of Capital Guarantee Funds of Insurance Companies 2015, art.9. 98 Ibid., art.10. 99 Ibid., art.11. 100 Ibid., art.12. 101 Ibid., art.13. 102 Ibid., art.14. 103 Ibid., art.15.

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other disposal requirements on the deposit. A deposit bank failing to fulfil the review obligations shall be held jointly and severally liable for the insurance company’s debt within the extent of the amount of capital guarantee funds.104

11.8.2 Recordation An insurance company shall undergo the recordation formalities with the CBIRC within ten working days after the capital guarantee funds are properly deposited for the following purposes:105 (1) Starting business or depositing additional capital guarantee funds; (2) Renewing deposit in the original deposit bank upon maturity; (3) Transferring the deposit to another bank upon maturity, including deposit transfer between the branches of a same bank; (4) Changing the nature of the deposit upon maturity; (5) Withdrawing in advance for the exclusive purpose of repaying debts in liquidation with capital guarantee funds or withdrawing some of the capital guarantee funds to reduce the registered capital (working capital); or (6) Other acts of using and disposing of capital guarantee funds. An insurance company which deposits capital guarantee funds for purposes of starting its business operations or increasing its registered capital or renewing its deposit in the original deposit bank upon maturity shall submit the following recordation materials to the CBIRC:106 (1) The recordation documents for deposit of capital guarantee funds; (2) The recordation form for capital guarantee funds of an insurance company (in duplicate); (3) An original of the agreement on the deposit of capital guarantee funds; (4) Photocopies of the deposit receipts of capital guarantee funds and the endorsements for the deposit receipts; and (5) Other materials as requested to be submitted by the CBIRC. An insurance company which transfers its deposit of capital guarantee funds to another bank upon maturity or changes the nature of deposit upon maturity shall provide the following materials, apart from the recordation materials, to the CBIRC as prescribed in article 18:107 (1) The form for disposal of capital guarantee funds of an insurance company; (2) The photocopy of the original agreement on the deposit of capital guarantee funds; (3) Photocopies of the original deposit receipts of capital guarantee funds and endorsements for the deposit receipts; and (4) Other materials as requested to be submitted by the CBIRC. 104 105 106 107

Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19.

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An insurance company withdrawing capital guarantee funds in advance for the purpose of repaying debts in liquidation with capital guarantee funds or withdrawing some of the capital guarantee funds to reduce its registered capital (working capital) shall also provide the documents on liquidation or decrease registered capital of the insurance company as approved by the CBIRC, besides the recordation materials to be submitted to the CBIRC as prescribed in article 19.108 If the recordation materials are unsatisfactory, the insurance company shall, within ten working days from the date of receiving the notice of the CBIRC, resubmit the recordation materials.109 Without post facto recordation with the CBIRC, it shall not be recognized as capital guarantee funds.110 11.8.3 Supervision No insurance company may use capital guarantee funds except for the purpose of repaying debts in liquidation or because the deposit bank of capital guarantee funds fails to comply with relevant provisions.111 No insurance company may change the nature of the deposited capital guarantee funds within the term of the deposit.112 Deposited capital guarantee funds shall not be used for pledge financing purposes.113 An insurance company failing to deposit or dispose of capital guarantee funds shall be subject to penalties by the CBIRC according to the law.114 The administration of the capital guarantee funds of insurance holding companies and insurance group companies engaging in insurance business shall be governed by these Measures.115 11.9 The management of reserves for non-life insurance businesses of insurance companies The Insurance Law requires an insurer to set aside various liability reserve funds according to the principles of safeguarding the interest of the insureds and maintaining solvency.116 In accordance with the Insurance Law and in order to strengthen the supervision over the reserves for non-life insurance businesses of insurance companies, ensure the sound and stable business operations as well as the adequate solvency of insurance companies and protect the interests of the insureds, the

108 109 110 111 112 113 114 115 116

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. The Insurance Law, art.98.

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CIRC formulated the Measures for the Management of Reserves for Non-life Insurance Businesses of Insurance Companies in 2004 (for Trial Implementation).117 An insurance company engaging in the non-life insurance businesses must evaluate the various reserves by following the non-life actuarial theory, approaches, and principles of prudence, and accurately draw and complete the carry-over procedures according to the evaluation results.118 11.9.1 Types of reserves The reserves for non-life insurance businesses of insurance companies include undue liability reserves, reserves for outstanding losses, and other liability reserves as provided for by the CBIRC.119 The “unexpired liability reserve” refers to the reserve that is drawn for the unexpired insurance liabilities that have not been terminated on the reserve evaluation date, including the reserve that is drawn by an insurance company for the unexpired insurance liabilities under the insurance contracts with a term of one year or less, and the reserve that is drawn for the unexpired insurance liabilities under the insurance contracts with a term of more than one year.120 The “reserve for outstanding losses” refers to the reserve that is drawn by an insurance company for the pending cases, including the reserve for the pending cases that already occurred and have been reported to the insurance company, the reserve for the pending cases that already occurred but haven’t been reported to the insurance company yet, as well as the reserve for the expenses of settlement of claims.121 The reserve for the pending cases that already occurred and have been reported to the insurance company refers to the reserve that is drawn by the insurance company for the cases that insurance accidents already occurred and claims that have been filed with the insurance company but that are still unsettled.122 The reserve for the pending cases that already occurred but haven’t been reported to the insurance company yet refers to the reserve for the insurance accidents that already occurred but for which no claim has yet been filed with the insurance company.123

117 The CIRC Order No. 13 [2004]. According to art.2 of the Measures 2004, the term “non-life insurance businesses” refers to the insurance businesses except for the life insurance businesses, including the businesses of property loss insurance, liability insurance, credit insurance, short-term health insurance and accident insurance as well as the reinsurance businesses of the aforesaid businesses. The term “insurance companies” as mentioned in art.3 of the Measures 2004 refers to the property insurance companies and reinsurance companies lawfully established within the China, including Chinese-funded insurance companies, Sino-foreign insurance joint companies, wholly foreign-funded insurance companies, and branches of foreign insurance companies. 118 The Measures for the Management of Reserves for Non-life Insurance Businesses of Insurance Companies in 2004, art.4. 119 Ibid., art.5. 120 Ibid., art.6. 121 Ibid., art.7. 122 Ibid., art.8. 123 Ibid., art.9.

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The reserve for the expenses of settlement of claims refers to the reserve that is drawn for the possible expenses of settlement of outstanding claims, of which the part drawn for the expertise fee, attorney’s fee, and loss inspection fee directly incurred in the concrete claim cases shall be the reserve for the direct expenses of settlement of claims; the other part drawn for the fees not directly incurred in the concrete claim cases shall be the reserve for the indirect expenses of settlement of claims.124 11.9.2 Methods for drawing reserves The unexpired liability reserve shall be drawn through any of the following methods:125 (1) The 1/24 Method (on a monthly basis); (2) The 1/365 (on a daily basis); (3) As to some special types of insurance products, the unexpired liability reserve may be drawn through any other more prudent and reasonable method. Once a method for drawing the unexpired liability reserve is decided, it may not be changed randomly. When an insurance company draws the unexpired liability reserve, it shall test its adequacy. If the unexpired reserve is insufficient, it shall draw premiums to replenish it.126 The reserve for the pending cases that already occurred and have been reported to the insurance company shall be prudently drawn through the case-by-case estimation method, the average compensation method, and other methods acknowledged by the CBIRC.127 The reserve for the pending cases that already occurred but haven’t been reported to the insurance company shall, upon prudent estimation, be drawn through at least any two of the following methods by considering the factors such as the nature of the risks, distribution, experienced data of the insurance products, and so on.:128 (1) (2) (3) (4)

The The The The

chain ladder method;129 average compensation method; method of progression of reserve; B-F method and other proper methods.130

124 Ibid., art.10. 125 Ibid., art.11. 126 Ibid., art.12. 127 Ibid., art.13. 128 Ibid., art.14. 129 The Chain Ladder Method (CLM) is a method for computing the claims reserve requirement in an insurance company’s financial statement. The chain ladder method is used by insurers to forecast the amount of reserves that must be established in order to cover projected future claims by projecting past claims experience into the future. CLM, therefore, only works when prior patterns of losses are assumed to persist in the future. When an insurer’s current claims experience changes for some reason, the chain ladder method will not produce an accurate estimate without proper adjustments. 130 Bornhuetter-Ferguson method (B-F method): A method of assessing outstanding claims reserves based on expected actual progress and expected progress that have occurred to modify the IBNR reserve.

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The reserve for the direct expenses of settlement of claims shall be drawn through the case-by-case estimation method. The reserve for the indirect expenses of settlement of claims shall be drawn through the more reasonable ratio apportionment method.131 As to an insurance product with investment or deposit, an unexpired liability reserve and a reserve for pending claim cases shall be drawn for the risk protection thereof through the previously mentioned methods.132 No reserve of an insurance company may be discounted.133 11.9 3 Reserve report An insurance company shall establish an actuarial system. It shall designate a responsible actuary to take charge of the drawing of reserves.134 An insurance company shall regularly submit a reserves evaluation report signed by the responsible actuary to the CBIRC. A report shall contain the following:135 (1) The purposes of the report; (2) The statement that the methods adopted in the report meet the provisions of the supervisory department; (3) The actuarial evaluation opinions about the drawing of reserves; (4) The detailed descriptions of the evaluation of reserves; and (5) The definite interpretations of the special terms and concepts that likely have different meanings in the report. The descriptions of evaluation of reserves shall contain the following:136 (1) The explicit standards and names for dividing the types and categories of insurance products; (2) The completeness and exactness of the data of types or categories of insurance products, and the problems in the data; (3) The actuarial methods and models of evaluation; if the actuarial methods and models are not the same as those adopted in the past, the reasons for the change and the effects on the results of the reserves shall be given; (4) The important assumptions and reasons adopted for the actuarial methods and models; (5) The disparities between the actuarial results of the reserves drawn last time and the actual situation; (6) The adequacy of the reserves; (7) The drawing of unexpired liability reserve shall be accompanied by the descriptions of the variation of the periodicity, benchmark rates of

131 The Measures for the Management of Reserves for Non-life Insurance Businesses of Insurance Companies in 2004, art.15. 132 Ibid., art.16. 133 Ibid., art.17. 134 Ibid., art.18. 135 Ibid., art.19. 136 Ibid., art.20.

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insurance premiums, risk adjustment coefficient, loss ratio, expense ratio, premium refund ratio, and other factors; and (8) The drawing of reserves for outstanding losses shall be accompanied by the descriptions about the variations of the rule of number of occurrence of claims cases, rule of settlement of cases, rule of average compensation, practices of undertaking insurance, practices of settlement of claims, reinsurance arrangements, increase of extra costs, and other factors. An insurance company shall draw the reserves according to the types and categories of the insurance products, and shall report the results of the drawing of reserves prior to reinsurance and after reinsurance, respectively.137 An insurance company shall submit the report about the evaluation of the reserves within the time limit as required by the CBIRC.138 11.9.4 Detailed rules for implementing the Measures 2004 In accordance with the Measures 2004, the CIRC formulated the Detailed Rules for the Implementation of the Measures for the Administration of the Reserves of Non-life Insurance Business of Insurance Companies (for Trial Implementation)”139 on 2 February 2005. Non-life insurance business includes the following insurance businesses and the reinsurance business:140 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18)

Enterprise property insurance; Family property insurance; Engineering insurance; Liability insurance; Credit insurance; Guaranty insurance; Statutory third-party liability insurance for motor vehicles; Commercial third-party liability insurance for motor vehicles; Motor vehicle body loss insurance; Other motor vehicle insurance; Vessel insurance; Freight insurance; Special risk insurance; Agricultural insurance; Short-term health insurance; Accident injury insurance; Investment-based non-life insurance; and Other types of insurance.

137 Ibid., art.21. 138 Ibid., art.22. 139 Bao Jian Fa No. 10 [2005]. 140 The Detailed Rules for the Implementation of the Measures for the Administration of the Reserves of Non-life Insurance Business of Insurance Companies (for Trial Implementation) 2005, art.2.

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“Any property insurance company or reinsurance company that runs the non-life insurance business” must comply with the non-life insurance actuarial elements and methods to fully predict the possible future losses and expenses and to prudentially evaluate all items of reserves.141 The reserves other than those unearned premium reserves and outstanding loss reserves, which are required by CBIRC provisions to be provided, such as catastrophe risk reserve, and so on, shall be separately prescribed by CBIRC.142 An insurance company shall adopt the 1/24 method, the 1/365 method or other more prudential or reasonable methods to evaluate the unearned premium reserves of the non-life insurance business. With respect to statutory third-party liability insurance for motor vehicles, it shall adopt the 1/365 to evaluate the unearned premium reserves.143 An insurance company shall, when evaluating an unearned premium reserve, test the adequacy thereof. The amount of provision of the unearned premium reserve shall not be lower than the following amount, whichever is larger:144 (1) The balance after deducting the relevant investment income from the anticipated future indemnities and expenses; or (2) The value of assumed surrender of all policies on the reserve evaluation date. When the unearned premium reserve is inadequate, the insurance company shall provide insurance premium inadequacy reserve, which shall be able to make up the margin between the unearned premium reserve and the larger amount as mentioned in the preceding paragraph. An insurance company shall not, when evaluating an outstanding loss reserve which has occurred and has been reported, deduct the prepaid indemnities for the corresponding claim case.145 An insurance company, when adopting the chain ladder method, average indemnity method, reserve progression method, or B-F method, and so on, to provide an outstanding loss reserve which has occurred but has not been reported, shall adopt at least two methods to make prudential evaluation and shall determine the optimal evaluation value according to the maximum value of the evaluation results.146 An insurance company shall disclose in detail the contents contained in the direct loss adjustment expense reserve and indirect loss adjustment expense reserve, the method of apportioning indirect loss adjustment expense reserves, the apportionment ratio, and so on, in the notes of its non-life insurance business reserve statements.147 An insurance company shall prudentially evaluate the outstanding loss reserves. With respect to any insurance company which has run its business in China 141 142 143 144 145 146 147

Ibid., art.3. Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9.

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(excluding Hong Kong, Macao, and Taiwan) for fewer than three years or whose growth rate of insurance premium income in the current year exceeds 50%, its loss ratio of the current accident year, which is calculated on the basis of the evaluated outstanding loss reserve, shall not be lower than the average loss ratio of the whole industry in the last accident year.148 An insurance company shall, when submitting the annual repayment capacity report, submit to CBIRC the reserve evaluation report signed by its actuarial person-in-charge. An “insurance company’s non-life insurance business reserve statement”, as prescribed in the present Detailed Implementation Rules, shall be an important part of the reserve evaluation report, and the insurance company concerned shall carefully work out the non-life insurance business reserve statements, and shall, when submitting the reserve evaluation report, also submit the relevant statements to the insurance regulatory department.149 An insurance company’s non-life insurance business reserve statement shall be mainly classified into two categories, namely, the statements manifesting the evaluation of the unearned premium reserves and the statements manifesting the evaluation of outstanding loss reserves.150 11.10 Conclusion The build and the application of the C-ROSS in China’s insurance regulation represent an important step forward to the modernization of China’s insurance regulatory system. When the ambitious on-going second phase of the construction of the C-ROSS will have been completed, China not only will provide an appropriate model for solvency supervision in emerging markets but also contribute to the development of international solvency supervision system.

148 Ibid., art.10. 149 Ibid., art.11. 150 Ibid., art.12.

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CHAPTER 12

Regulation of the use of insurance funds

12.1 Introduction Insurance funds come from the policyholders in the form of premiums and from the shareholders. The management of the pool of the insurance funds is an important business of insurance companies and is subject to a strict regulation by the China Banking and Insurance Regulatory Commission (the CBIRC).The Insurance Law, the CBIRC, and the former China Insurance Regulatory Commission (the CIRC) have so far formulated a diversity of provisions in respect of insurance funds utilization. The insurers’ activities in relation to insurance funds utilization must strictly follow these statutory and regulatory rules. Insurance funds refer to the capital, additional paid-in capital, undistributed profits, all kinds of reserves, and other funds denominated in Chinese currency (Renminbi) and foreign currencies of insurance group (holding) companies, and insurance companies.1 Insurance funds are invested for the purpose of achieving added value in the form of capital gains or income, and in a general sense not only insurance companies but all investors share this objective. Where the investors are corporate rather than individual these general requirements have specific limitations placed on them. It is generally the case that the appropriate investments for an investor can only be determined by reference to the source of the money available for investment and its intended end use. For insurance companies, the sources of their funds are either their policyholders or their shareholders, and their ultimate use is to pay claims to policyholders or dividends to their shareholders. Mutual insurance institutions have of course only their policyholders’ funds available, but the policyholders’ surplus which will be retained by the institution for the foreseeable future can be regarded as analogous to shareholders’ funds in a proprietary company. The nature of the insurance business necessitates the establishment of technical provisions and loss-absorbing capital.This, in turn necessitates the investment in and holding of assets sufficient to cover technical provisions and capital requirements. The quality and characteristics of an insurer’s asset portfolio and the interdependence between the insurer’s assets and its liabilities are central to an assessment of

1 The Measures for the Administration of the Utilization of Insurance Funds (the CIRC Order No. 1 [2018]), art.2 (see accessed on 16 October 2020).

DOI: 10.4324/9781351122863-12

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an insurer’s solvency position, and therefore, are important aspects to be addressed by the CBIRC and for an insurer to manage. Accordingly, the major regulatory objective in respect of insurance funds utilization is for the CBIRC to establish requirements for solvency purpose on the investment activities of insurers in order to address the risks faced by the insurers. There are various reasons for insurers to make investments (e.g. capital appreciation, hedging or cash flow expectation) and there is a wide variety of assets that insurers may invest in, with the risk profiles of different investments varying widely. Some assets, such as equities and property are subject to unpredictable short-term price movements. Other assets such as corporate and government bonds have fixed or defined income, with uncertainty related to the price at which these assets can be sold before maturity and the extent to which the counterparty is able to make fixed income payments and repay the principal. Insurance funds utilization is a complex subject with multiple facets of economics, finance, business operation, and regulatory requirements; this chapter is not concerned with the economic and financial aspects of investments of insurance funds, and the aim is not to make readers into investment experts. Instead, the chapter is concerned with the regulatory requirements for the utilization of insurance funds, and it is designed to help readers to understand, when looking at the investment portfolio of an insurance company, why it is structured the way it is and what major constituents exist that meet the regulatory requirements set by the CBIRC. 12.2 The current state of insurance funds utilization Insurance funds are invested in various channels. Let us take an example of the year 2017 to show the diversity of the investment vehicles and the relative importance of each investment vehicle. Then we’ll take a look at the investment portfolios in the following years. At the end of 2017, the balance of fund utilization was ¥14.92 trillion yuan, an increase of 11.42% over the beginning of the year: (1) bank deposits ¥1.93 trillion yuan, accounting for 12.92% of the investment portfolio; (2) bonds ¥5.16 trillion yuan, accounting for 34.59%; (3) stocks ¥1.08 trillion yuan, accounting for 7.26%; (4) securities investment funds ¥0.75 trillion yuan, accounting for 5.04%; (5) long-term equity investments ¥1.48 trillion yuan, accounting for 9.90%; (6) insurance asset management products ¥0.86 trillion yuan, accounting for 5.74%; (7) infrastructure investment ¥1.27 trillion yuan, accounting for 8.51%; (8) collective trust investment plans ¥1.14 trillion yuan, accounting for 7.63%; (9) commercial bank wealth management products ¥0.23 trillion yuan, accounting for 1.55%; and (10) real estate investment and others ¥0.65 trillion yuan, accounting for 4.36%.2 It can be seen from these figures that bank deposits, bonds, and stocks and securities investments funds account for about 60%, and other investments account for 40%. This kind of investment pattern can also be seen in 2018, 2019, and 2020. 2 Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Science Press, Beijing, China) p. 148–49.

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At the end of 2018, The balance of fund utilization was ¥16.41 trillion yuan, an increase of 9.97% over the beginning of the year, of which bank deposits amounted to ¥2.43 trillion yuan, accounting for 14.85%; bonds ¥5.64 trillion yuan, accounting for 34.36%; stock and securities investment funds ¥1.92 trillion yuan, accounting for 11.71%; other investments ¥6.41 trillion yuan, accounting for 39.08%.3 In 2019, the balance of fund utilization was ¥18.53 trillion yuan, an increase of 9.97% over the beginning of the year, of which bank deposits were ¥2.52 trillion yuan, accounting for 13.61%; bonds were ¥6.40 trillion yuan, accounting for 34.56%; stocks and securities investment funds were ¥2.44 trillion yuan, accounting for 13.15%; and other investments were ¥7.14 trillion yuan, accounting for 38.71%.4 At the end of April 2020, the balance of fund utilization was ¥19.61 trillion yuan, an increase of 5.82% over the beginning of the year, of which bank deposits were ¥2.80 trillion yuan, accounting for 14.28%; bonds were ¥6.71 trillion yuan, accounting for 34.22%; stocks and securities investment funds were ¥2.66 trillion yuan, accounting for 13.56%; and other investments were ¥7.44 trillion yuan, accounting for 37.94%.5 In the last three years and four months, the average percentages for bank deposits, bonds, stocks and securities, and all other investments are 14%, 34%, 12.7%, and 39.3% of the investment portfolio, respectively. 12.3 Regulatory principles for insurance funds utilization The most fundamental reason for the use of insurance funds is determined by the nature of the funds (capital). Capital can only increase in value during movement. Insurance companies use temporarily idle funds to increase profits, which is an inherent requirement of capital itself. The use of insurance funds is determined by the nature of the insurance business. Insurance funds are mainly in the form of premium income which is for future compensation and payments. Under the conditions of a commodity economy, there is a problem of inflation. If the insurance funds cannot be used normally, not only will it not be possible to obtain income but it is difficult to guarantee even the value preservation, which will inevitably affect the implementation of the insurer’s economic compensation function. The use of insurance funds is an inevitable result of market competition. The insurance market is fiercely competitive, often with excess underwriting capacity and marginal underwriting profits. The insurers turn to paying attention to gaining profits from the use of insurance funds and making every effort for investment earnings. As a result of the use of insurance funds, the insurers can obtain an average profit, and the insureds can also enjoy the benefits of the investment of insurance funds in the form of lower premium rates. 3 The statistical report from the CBIRC (see accessed on 16 October 2020). 4 The statistical report from the CBIRC (see accessed on 16 October 2020). 5 The statistical report from the CBIRC (see accessed on 16 October 2020).

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12.3.1 The principles for the utilization of insurance funds In the process of investing insurance funds, four major principles must be followed. The first is security. The principle of security is the primary principle of the use of insurance funds. The insurance fund is the liability of the insurers to all insureds. It is a kind of debt. In terms of quantity, the total amount of insurance funds should be, at minimum, consistent with the total amount of future damages and insurance payments. If it cannot be returned safely, it will definitely undermine the economic compensation capacity of insurance companies. In order to ensure the safety of the use of insurance funds, the insurer must make a good investment prediction, choose high-security investment projects, diversify risks with small amounts in the short term, and diversify forms to increase the safety of investment. The second is profitability. The main purpose of using insurance funds is to make profits. Profitability can bring benefits to insurers and enhance the solvency of insurance companies. This requires the selection of high-efficiency investment projects for the use of insurance funds to maximize returns within certain risk limits. The third is liquidity. Insurance has the function of economic compensation, and the occurrence of insurance accidents has the characteristics of uncertainty and fortuity. This requires the use of insurance funds to maintain sufficient liquidity to meet the needs of insurance compensation and payment at any time when due. The insurer should choose the appropriate investment project according to the different requirements of different businesses for the liquidity of capital utilization. The fourth is diversification. Diversification and pooling of risks is central to the functioning of the insurance business.To mitigate the risk of adverse financial events, it is important that the insurer’s overall investment portfolio is adequately diversified and that its asset and counterparty exposures are kept to prudent levels. With respect to its investment portfolio, the insurer should ensure that it is diversified within and between risk categories, taking into account the nature of the liabilities. Diversification between investment risk categories could, for example, be achieved through spreading the investments across different classes of assets and different markets. For diversification within a risk category, the investments are sufficiently uncorrelated so that – through pooling of individual assets – there is a sufficient degree of diversification of the portfolio as a whole. 12.3.2 The common vehicles for insurance funds utilization There are many forms of use of insurance funds; the particular forms used and the weight of each form in the investment portfolio vary from one jurisdiction to the next, but the commonly adopted investment vehicles for insurance funds utilization take the following forms: (1) Bank deposits. Bank deposits are funds deposited by insurance companies in banks to obtain interest income. Bank deposits use banks as an investment intermediary for insurance funds. Insurance companies bear less risk and have higher security but relatively low returns. (2) Bonds. As written promise to repay a debt at an agreed time, which often includes an agreement to pay an agreed rate of interest on that debt, bonds 574

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(3)

(4)

(5)

(6) (7)

(8)

(9)

are a form of national or corporate credit. According to the issuer, it is divided into public debt and corporate debt. Insurance companies can invest in long-term bonds and short-term bonds according to the characteristics of different businesses. Stocks. Stocks are generally divided into ordinary shares and preferred shares. Preferred stocks have the characteristics of both bonds and common stocks, have a fixed rate of return, and have less risk than common stocks and are more suitable for insurance investment. Equity investments. An equity investment is an investment by individuals or firms. The investment is usually in the form of stocks whereby profits are in the form of capital gains or dividends. The investor considers equity investment as a long-term strategy of maximizing his or her wealth. The investor recovers his or her money only when he or she sells his or her shares to others. The equity investment can also be funds for acquiring ownership in a private company or as venture capital in infant companies. The investor gains his or her income only when the company decides to distribute the proceeds after liquidating the assets or when they sell their shareholdings to other investors. In the latter scenario, the firm has to meet its obligations as priority. Real estate. Real estate investment is very common in the insurance industry of various countries. The advantage is that it is easy to manage and control asset projects and has good profitability and safety but poor liquidity, so it is strictly restricted by insurance laws of various countries. Loans. Loans issued by insurers are generally mortgage loans, that is, loans secured by real estate, marketable securities, or life insurance policies, and have better security. Investment funds. Investment funds refers to a collective investment method that pools the funds of investors with an unspecified majority and has a common investment purpose and entrusts professional financial investment institutions to carry out portfolio investment in order to achieve risk diversification and reduction and share the benefits together. Fund borrowing. Fund borrowing refers to short-term financial communication between financial institutions with legal personality or between financial institutions with legal personality and unincorporated financial institutions authorized by legal persons. Financial derivatives. Financial derivatives are new products that have emerged with the development of the financial market, mainly including futures, options, swaps, and so on. Futures and options can be used to offset the risks of existing asset portfolios and to lock in future premium income and the current rate of return on investments.

12.3.3 The regulatory principles for insurance funds utilization According to Insurance Core Principles (ICP) formulated by the International Association of Insurance Supervisors (IAIS), the key regulatory aim is that the 575

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insurance supervisor (or regulator) should establish regulatory investment requirements for solvency purposes in order for insurers to make appropriate investments taking account of the risks they face.6 For achieving this goal of regulation of insurance funds utilization, a number of standards must be adhered to:7 First, the supervisor should establish requirements that are applicable to the investment activities of the insurer. Financial requirements are not sufficient by themselves to ensure solvency and should be complemented with appropriate quantitative and qualitative requirements limiting/regulating the investment risks that are taken by the insurer. Having both kinds of requirements helps to guard against the possibility that the regulatory capital requirements do not fully cover the risks inherent in those investment activities. In establishing regulatory investment requirements, the following factors may be considered:8 (1) The overall quality of risk management practices and corporate governance frameworks of insurers; (2) The comprehensiveness and transparency of disclosure frameworks in the jurisdiction and the ability for third parties to exercise sufficient scrutiny and market discipline; (3) The development of relevant investment and capital markets locally and internationally and the range of available financial instruments; (4) The cost of compliance, the impact on innovation, and the effect on the efficiency of industry practices; and (5) The level of prudence and risk-sensitivity of the regulatory solvency requirements and the risks that they cover. Openness and transparency of the regulatory investment requirements may help facilitate their effectiveness. The supervisor should be explicit as to the objectives of setting regulatory investment requirements. Second, the regulatory investment requirements should address, at a minimum, the security, liquidity, and diversification of an insurer’s portfolio of investments as a whole. The supervisor should require the insurer to invest assets in such a manner that assets are sufficiently secure and are held in the appropriate location for their availability; payments to policyholders or creditors can be made as they fall due, and assets are adequately diversified. Security is essential in ensuring obligations to policyholders can be met. Regulatory investment requirements may restrict the insurer’s selection of, or exposure to, investments that have low security or whose security is difficult to assess reliably. There should be appropriate measures in place to recognize and mitigate aggregations of exposure across the insurer’s portfolio, having particular regard to concentrations of low security assets or those whose security is difficult to assess reliably. 6 The ICP updated in 2019, ICP 15 Statement. 7 Ibid., ICP 15.1 to 15.5. 8 Ibid., ICP 15.1.3.

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The insurer is required to pay benefits to the policyholder when the benefits become due. In order to do so, the insurer should have assets that generate sufficient cash flows to pay policyholder claims when due, as well as all other obligations. The cash generated from investments includes disposals, maturity, and coupon or dividend payments. The ability to realize or liquidate a sufficient amount of investments to meet policyholder claims, as well as all other obligations, at any point in time is important. To ensure that its investment portfolio is adequately diversified, the insurer should avoid overreliance on, for example, any specific asset type, issuer, counterparty, group, or market and any excessive concentration or accumulation of risk in the portfolio as a whole. The insurer may also consider its asset concentration by type of investment product, by geographical dispersion, or by credit rating. Additionally the insurer may consider its aggregate exposure to related entities (such as joint ventures) and different types of exposure to the same entity or group (such as equity investment in a reinsurer which is also providing its reinsurance cover). Third, the supervisor should require the insurer to invest in a manner that is appropriate to the nature and duration of its liabilities. Assets that are held to cover policyholder liabilities and those covering regulatory capital requirements should be invested in a manner which is appropriate to the nature of the liabilities, as the insurer needs to use the proceeds of its investments to make payments to policyholders and other creditors when due. The insurer’s investment strategies should take into account the extent to which the cash flows from investments match the liability cash flows in terms of timing, amount, and currency and how this changes in varying conditions. In this context, the insurer should specifically consider investment guarantees and embedded options that are contained in its insurance policies. Fourth, the supervisor should require the insurer to invest only in assets where it can properly assess and manage the risks. The insurer should have sufficient information about its investments, including those in collective investment funds, to ensure that its asset risks can be properly managed. The insurer should understand the risks involved and determine how material the risk from a proposed investment is before undertaking any investments. Assessment of risks should take into account the maximum possible loss, including losses that may occur in situations where assets such as derivatives become liabilities for the insurer. Fifth, the supervisor should establish quantitative and qualitative requirements, where appropriate, on the use of more complex and less transparent classes of assets and on the investments in markets or instruments that are subject to less governance or regulation. Complex investments may have a higher risk of large, sudden, or unexpected losses due to the nature of the underlying risks and volatilities. Similarly, there are some assets in which investment is permitted by the regulatory investment regime (because the risk is generally sufficiently assessable) but are less transparent compared to other investments. Other assets could be less well governed in terms of the systems and controls in place for managing them or the market regulation that applies to them. Such assets may present operational risks, particularly in adverse conditions that are difficult to assess reliably. The supervisor should therefore establish quantitative or qualitative requirements or restrictions on such investments, as necessary. For example, regulatory 577

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investment requirements may include the pre-approval of an insurer’s derivative use plan, whereby the insurer has to describe its controls over and testing of the derivative investment process before it is used in a live environment. Regulatory investment requirements may take many forms and may influence the investment strategies of the insurer. Requirements may be rules-based, setting out specific rules or restrictions on the investment activities of the insurer, or principles-based, where there is no specific restriction on the asset strategy taken by the insurer as long as defined principles are met. Regulatory investment requirements may also be a combination of rules-based and principles-based, setting out some specific rules or restrictions and some principles with which the insurer’s investment strategy should comply. All countries in the world have strict regulations of the use of funds. In China, the Insurance Law has corresponding legal provisions on the use of insurance funds, and the CBIRC has enacted a large variety of regulations to govern the use of insurance funds. This chapter examines the regulatory rules for insurance funds utilization in China and also uses the Insurance Core Principles as benchmarks to assess the regulatory practice in China. To begin with, it is appropriate to present an overview of the regulatory framework for the use of insurance funds in China. 12.4 An overview of the regulatory framework regarding the use of insurance funds The 1995 version of the Insurance Law limits the channels for the use of insurance funds to bank deposits, trading of government bonds and financial bonds, and other ways specified by the State Council. The funds of insurance companies may not be used for the establishment of securities houses or investment in enterprises.9 The 2002 version of the Insurance Law is the same as that in the 1995 version in respect of the channels for the use of insurance funds but differs in that the insurance funds can be used for the establishment of insurance companies.10 With the rapid accumulation in the total assets of the insurance companies, it became increasingly important for diversifying the channels for the use of insurance funds. The 2009 version of the Insurance Law has thus expanded the channels by providing that the fund utilization portfolios of an insurance company shall be limited to the following forms: (i) bank deposit; (ii) trading negotiable securities including bonds, stocks, shares of securities, investment funds, and so on; (iii) investing in real estate; and (iv) other fund utilization forms as prescribed by the State Council.11 The CIRC/CBIRC has formulated a large variety of rules and measures by which the insurance law is implemented and new investment vehicles for insurance funds have been effected. The Interim Measures for the Administration of Utilization of Insurance Funds were promulgated by the CIRC on 30 July 2010, came into force on 31 August 9 The Insurance Law 1995, art.104. 10 The Insurance Law 2002, art.105. 11 The Insurance Law 2009, art 106.

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2010,12 and were amended on 4 April 2014.13 On the basis of the Interim Measures, the CIRC developed and enacted the Measures for the Administration of Utilization of Insurance Funds (hereinafter, the Measures 2018) on 24 January 2018, which came into force on 1 April 2018.14 The Measures 2018 is the major piece of regulation for insurance funds utilization in China.These Measures were developed in accordance with the Insurance Law and other laws and administrative regulations for the purposes of regulating the utilization of insurance funds, preventing risks in the utilization of insurance funds, protecting the lawful rights and interests of the parties to insurance, and maintaining the insurance market order. The Measures 2018 applies to the utilization of insurance funds by insurance group (holding) companies and insurance companies legally formed within China.15 The Measures 2018 also applies, mutatis mutandis, to the management and utilization of insurance funds by insurance asset management institutions and other investment managers.16 Where any rules of the CBIRC provide otherwise for the utilization of funds of insurance group (holding) companies, captive insurance companies, and other types of insurance institutions, such rules shall prevail.17 Article 4 of the Measures 2018 sets out the principles for insurance funds utilization. The utilization of insurance funds must primarily aim at serving the insurance industry, adhere to the principles of stability, prudence, and safety; conform to the regulatory requirements for solvency; be included in the asset and liability management and comprehensive risk management according to the nature of insurance funds; and be intensive, specialized, standardized, and market-oriented. Insurance funds shall be utilized independently. No shareholder of any insurance group (holding) company or insurance company shall intervene in the utilization of insurance funds in violation of laws or regulations.18 The detailed rules of the Measures 2018 will be considered in relevant parts of this chapter. The CIRC/CBIRC has also formulated regulations specific for each investment vehicle. Here, only the general regulations for each investment channel are mentioned. For bank deposits, the CIRC issued the Notice on Regulating the Bank Deposit Business for Insurance Funds on 28 February 2014, which came into force on the same day.19 For bonds investment, the CIRC issued the Interim Measures for the Investment of Insurance Funds in Bonds on 16 July 2012, which became effective on the same day.20 12 The CIRC Order No. 9 [2010]. 13 The CIRC Order No. 3 [2014]. 14 The CIRC Order No. 1 [2018]. The Measures 2018 came into force on 1 April 2018. The Interim Measures for the Administration of the Utilization of Insurance Funds (the CIRC Order No. 9 [2010],) and the Decision of the CIRC on Amending the Interim Measures for the Administration of the Utilization of Insurance Funds (the CIRC Order No. 3 [2014]) were repealed. 15 The Measures for the Administration of Utilization of Insurance Funds 2018, art.2. 16 Ibid., art.75. 17 Ibid., art.76. 18 Ibid., art.4. 19 Bao Jian Fa No. 18 [2014] (see accessed on 16 October 2020). 20 Bao Jian Fa No. 58 [2012] (see accessed on 16 October 2020).

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For stocks investment, the CIRC and the China Securities Regulatory Commission jointly issued the Interim Measures for the Administration of Stock Investments of Insurance Institutional Investors on 24 October 2004, which became effective on the same day.21 For investment in real estate, the CIRC promulgated and implemented the Interim Measures for the Investment of Insurance Funds in Real Estate on 31 July 2010.22 For infrastructure investment, the CIRC promulgated and implemented the Interim Provisions on the Administration of Infrastructure Debt Investment Plans on 12 October 2012.23 For investment in equity, the CIRC issued the Interim Measures for Equity Investment with Insurance Funds on 31 July 2010, which came into force on the same day.24 For overseas investment of insurance funds, the CIRC, the People’s Bank of China, and the State Administration of Foreign Exchange jointly enacted the Interim Measures for the Administration of Overseas Investment with Insurance Funds on 26 July 2007, which came into force on the same day.25 The CIRC also issued the Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds on 12 October 2012, which came into force on the date of issuance.26 For the proportional regulation of the utilization of insurance funds, the CIRC formed a multilevel proportional regulation framework in the Notice of the CIRC on Strengthening and Improving the Proportional Regulation of the Utilization of Insurance Funds which was issued and implemented on 23 January 2014.27 For the disclosure of information as to the capital use, the CIRC developed four pieces of regulations: the Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies. (1) No. 1: Affiliated Transactions on 19 May 2014;28 (2) No. 2: the Persons Responsible for the Risks on 10 April 2015;29 (3) No. 3: Acquisition of Shares of a Listed Company Subject to Notification and Announcement Requirements on 23 December 2015;30 21 The CIRC and the CSRC No. 12 [2004] (see accessed on 16 October 2020). 22 Bao Jian Fa No. 80 [2010] (see accessed on 16 October 2020). 23 Bao Jian Fa No. 92 [2012] (see accessed on 16 October 2020). 24 Bao Jian Fa No. 79 [2010] (see accessed on 16 October 2020). 25 The CIRC Order No. 2 [2007] (see accessed in 16 October 2020). 26 Bao Jian Fa No. 93 [2012] (see accessed on 16 October 2020). 27 Bao Jian Fa No. 13 [2014] (see accessed on 16 October 2020). 28 Bao Jian Fa No. 44 [2014] (see accessed on 16 October 2020). 29 Bao Jian Fa No. 42 [2015] (see accessed on 16 October 2020). 30 Bao Jian Fa No. 121 [2015] (see accessed on 16 October 2020).

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(4) No.4: Investment in Large-amount Unlisted Equities and Large-amount Real Estate on 4 May 2016.31 In addition to those aforementioned, many more pieces of regulations have been in place for the regulation of the use of insurance funds and will be considered in relevant parts of this chapter. 12.5 Channels for the use of insurance funds The channels for insurance funds investment are set out in article 6 to 20 of the Measures for the Administration of the Utilization of Insurance Funds 2018.32 The utilization of insurance funds shall be limited to the following forms:33 (1) Bank deposits; (2) Trading in negotiable securities such as bonds, stocks, and shares of securities investment funds; (3) Investment in real estate; (4) Investment in equity; and (5) Other forms of fund utilization as prescribed by the State Council. Overseas investments with insurance funds shall conform to the relevant provisions issued by the CBIRC, the People’s Bank of China, and the State Administration of Foreign Exchange. Where insurance funds are invested in bank deposits, a commercial bank meeting the following conditions shall be selected for such deposits:34 (1) The bank’s capital adequacy ratio, net assets, and provision coverage, among others, conform to the regulatory requirements. (2) The bank has a standard governance structure, a sound internal control system, and good business performance. (3) The bank has no records of gross violation of laws and regulations in the last three years. (4) The bank’s credit rating reaches the standard as prescribed by the CBIRC. The bonds in which insurance funds are invested shall reach the credit levels that are assigned by credit rating institutions recognized by the CBIRC and meet the prescribed requirements, mainly including government bonds, financial bonds, enterprise (corporate) bonds, non-financial corporate debt financing instruments, and other bonds meeting the relevant provisions.35 The stocks in which insurance funds are invested shall mainly include the stocks which are publicly offered, listed, and traded and the stocks which are non-publicly offered by listed companies to specific investors.36 Investment in stocks with insurance funds is divided into general stock investment, major stock investment and acquisition of listed companies. The CBIRC shall implement differential supervision in light of the different circumstances. Investment in stocks of companies listed on the National Equities Exchange and 31 Bao Jian Fa No. 36 [2016] (see accessed on 16 October 2020). 32 The CIRC order No. 1 [2018]. 33 The Measures for the Administration of the Utilization of Insurance Funds 2018, art.6. 34 Ibid., art.7. 35 Ibid., art.8. 36 Ibid., art.9.

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Quotations and stocks to be subscribed for and traded in foreign currencies shall be separately prescribed by the CBIRC.37 Where insurance funds are invested in a securities investment fund, the fund management institution for the securities investment fund shall meet the following conditions:38 (1) It has good corporate governance and a sound risk control mechanism. (2) It performs contracts according to the law and protects the lawful rights and interests of investors. (3) It has been formed for not less than one year. (4) It has no records of any gross violation of laws and regulations in the last three years, and it has no records of any gross violation of laws and regulations since the date of its formation, where three years have not elapsed since its formation. (5) It has established an effective firewall mechanism between its securities investment fund business and asset management business for specific customers. (6) It has a stable investment team, good historical investment performance, and a relatively stable size of assets or fund shares under its management. The real estate in which insurance funds are invested means land, buildings, and other fixtures on land, and the specific measures shall be developed by the CBIRC.39 The equities in which insurance funds are invested shall be the equities of joint stock companies and limited liability companies that are legally formed and registered within China and are not publicly listed on any stock exchange.40 An insurance group (holding) company or an insurance company shall use its own funds to purchase self-use real estate, conduct acquisition of listed companies, or make equity investment to achieve control over other enterprises.41 The equity investment made by an insurance group (holding) company or an insurance company to achieve control over other enterprises shall meet the relevant regulatory provisions on solvency. If the insurance subsidiary of an insurance group (holding) company does not meet the regulatory requirements for solvency of the CBIRC, the insurance group (holding) company shall not invest in non-insurance financial enterprises.42 The equity investment made to achieve control shall be limited to the equity investment in the following enterprises:43 (1) Insurance enterprises, including insurance companies, insurance asset management institutions, full-time insurance agencies, insurance brokerages, and insurance adjustment institutions.

37 38 39 40 41 42 43

Ibid. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid.

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(2) Non-insurance financial enterprises. (3) Insurance-related enterprises. Insurance funds may be invested in asset securitization products. “Asset securitization products” means the financial products that are issued by financial institutions on the basis of credit enhancement through structuring and other means and backed by cash flow generated from underlying assets capable of being specialized.44 Insurance funds may be invested in venture capital funds and other privately offered funds.45 “Venture capital funds” means private equity funds established according to the law, managed by qualified funds management institutions, and mainly investing in common shares or preferred shares that can be converted into common shares according to the law, convertible bonds, and other equities of venture companies.46 Insurance funds may invest in the establishment of specialized insurance asset management institutions in such areas as real estate, infrastructure, and pension, and specialized insurance asset management institutions may set up qualified insurance privately offered funds, and the specific measures shall be developed by the CBIRC.47 Except as otherwise prescribed by the CBIRC, an insurance group (holding) company or an insurance company shall not commit the following conduct in the utilization of insurance funds:48 (1) Depositing insurance funds with non-banking financial institutions. (2) Buying stocks under “special treatment” (ST) or “special treatment with delisting risk warning” (*ST) imposed by stock exchanges. (3) Investing in the equities of an enterprise or real estate not in conformity with the national industrial policies. (4) Directly engaging in the development and construction of real estate. (5) Using the investment assets formed from the utilization of insurance funds to provide guarantee or grant loans, except for granting personal policypledged loans. (6) Other investments prohibited by the CBIRC. In the utilization of insurance funds, an insurance group (or holding) company or an insurance company shall satisfy the ratio regulatory requirements of the CBIRC, and the specific provisions shall be separately developed by the CBIRC.49 The CBIRC may, in light of the actual circumstances of utilization of insurance funds, adjust the classification, varieties, and relevant proportions, among others, of insurance assets.50 44 Ibid., art.15. “Insurance asset management institutions” means financial institutions that are registered according to the law with the approval of the CBIRC and are authorized to manage insurance funds and other funds, including insurance asset management companies and their subsidiaries, and other specialized insurance asset management institutions. 45 Ibid., art.16. 46 Ibid. 47 Ibid., art.17. 48 Ibid., art.18. 49 Ibid., art.19. 50 Ibid.

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The utilization of funds of unit-linked insurance products and non-life investment insurance products with variable return shall be independent of the funds of other insurance products in terms of asset segregation, asset allocation, and investment management, among others, and the specific measures shall be developed by the CBIRC.51 12.6 Insurance funds in bank deposits Bank deposit is the safest way for utilization of insurance funds with high liquidity. There is no proportional limitation on insurance funds deposited in banks. In 2017, 2018, and 2019, bank deposits accounted for 13, 15, and 14% of insurance funds investment.52 As an interest-earning product, bank deposits usually bring relatively low investment returns. In order to strengthen the supervision and administration of the bank deposit business for insurance funds and prevent risks associated with the utilization of funds, the CIRC issued the Notice on Regulating the Bank Deposit Business for Insurance Funds (the Notice 2014) on 28 February 2014, which came into force on the same day.53 An insurance company shall include its bank deposits (other than current account deposits which are needed in maintaining its routine operations) in the administration of investment accounts; strictly implement the rules for credit assessment, investment decision-making, and risk management; intensify administration in such operational links as the opening of accounts, transfer of funds, and safekeeping of documents; and guarantee regulation-compliant operations.54 When an insurance company handles the bank deposit business, the bank of deposit shall meet the conditions as set forth in art.7 of the Measures for the Administration of Utilization of Insurance Funds 2018 and shall have a long-term credit rating of A or equivalent to A or above for the latest year.55 When handling the bank deposit business, an insurance company shall select a commercial bank or any other professional financial institution with the custody qualification of insurance funds to implement the third-party custody so as to prevent risks of fund misappropriation. Custody responsibilities shall at least cover the safekeeping of documents, withdrawal of settled interest, financial accounting, supervision of investments, and information report.56 51 Ibid., art.20. 52 The statistical reports from the CBIRC. For example, see the report for 2019 at accessed on 16 October 2020. 53 Bao Jian Fa No. 18 [2014] (see accessed on 16 October 2020). This Notice applies to the utilization of insurance funds by insurance companies, insurance group (holding) companies, and the entrusted management of insurance funds by insurance asset management companies or other professional institutions. 54 The Notice of the CIRC on Regulating the Bank Deposit Business for Insurance Funds 2014, s.1. 55 Ibid., s.2. The “credit rating” as mentioned in this Notice shall be conducted by a credit rating institution that complies with the provisions of the CBIRC. The branch of a foreign bank may refer to the credit rating of its head office. 56 Ibid., s.3.

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No insurance company may utilize bank deposits for providing others with pledge financing, guarantee, and entrusted loans or seeking benefits for others. Where an insurance company raises capital for itself by pledging its bank deposits, the funds borrowed shall mainly be utilized for temporarily regulating positions and dealing with bulk insurance compensation and other needs, and the financing quota shall be incorporated into the administration of leveraged financing monitoring percentage.57 An insurance company shall promptly report the information on the bank deposit business as legally required. Where an insurance company raises capital for itself by pledging its bank deposits, both the insurance company and the custody institution shall report on a deal-by-deal basis.58 Insurance-related industry organizations shall strengthen the risk monitoring on bank deposit business counterparties of insurance companies according to law, and commercial banks that cooperate with insurance companies in handling the bank deposit business in violation of regulations shall be included in the industry warning list.59 Where an insurance company fails to handle the bank deposit business as legally required, the CBIRC shall punish it in accordance with regulations.60 12.7 Insurance funds investment in bonds Government bonds and financial bonds are traditionally accepted investment vehicles for insurance funds in China. The investment of insurance funds in bonds is regulated mainly by the Interim Measures for the Investment of Insurance Funds in Bonds (hereinafter, the Measures 2012), which was issued by the CIRC on 16 July 2012 and became effective on the same day.61 There are also two other pieces of regulations enacted by the CIRC: (1) The Notice of the CIRC on Strengthening the Regulation of the Application of External Credit Rating in the Investment of Insurance Funds in Bonds, which was issued on 31 July 2013 and came into force on the same day.62 (2) The Notice of CBIRC on Matters Concerning Insurance Funds Investment in Bank Capital Supplementary Bonds, which was issued on 20 May 2020 and came into force on the same day.63 Now we consider these three pieces of regulations of insurance funds in bonds. The Measures 2012 apply to the investment in bonds made by insurance group (holding) companies and insurance companies legally formed within the territory of China (hereinafter, the insurance companies) and the entrusted investment of 57 Ibid., s.4. 58 Ibid., s.5. 59 Ibid., s.6. 60 Ibid., s.7. 61 Bao Jian Fa No. 58 [2012] (see accessed on 19 June 2020). 62 Bao Jian Fa No. 61 [2013] (see accessed on 19 June 2020). 63 Yin Bao Jian Fa No. 17 [2020] (see accessed on 19 June 2020).

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insurance funds in bonds made by professional investment management institutions that meet the requirements of the CBIRC.64 The term “bonds” as mentioned in these Measures 2012 means Renminbi (RMB) bonds and foreign currency bonds issued in accordance with law within the territory of China, including government bonds, quasi-government bonds, enterprise (corporate) bonds, and other bonds that meet the requirements of relevant provisions.65 12.7.1 The Interim Measures for the Investment of Insurance Funds in Bonds (a) Qualifications An insurance company that makes investment in bonds shall meet the following conditions:66 (1) It has sound corporate governance, decision-making procedures, and internal control mechanisms along with sound bond investment management systems, risk control systems and credit rating systems; (2) It has established the mechanisms of asset custody, centralized trading, and firewall and has standardized and transparent asset management; (3) The positions of bond research, investment, trading, clearing, accounting, credit assessment, risk management, and so on are reasonably set up, and special personnel and special positions are arranged for the investment and trading of bonds; (4) It has two or more professionals with experience in bond investment, among whom one or more professionals have three or more years of experience in bond investment; it has two or more professionals of credit assessment, among whom one or more professionals have two or more years of experience in credit analysis; and (5) It has established a corresponding management information system for the bond investment business. Where a company makes investment in unsecured non-financial enterprise (corporate) bonds with insurance funds, its credit risk management capability shall meet the standards as prescribed by the CBIRC.67 (b) Government bonds and quasi-government bonds The government bonds which insurance funds are invested in refer to the bonds legally issued in China by the public finance departments of the governments at the level at or above provinces (autonomous regions, municipalities directly under the Central Government, and cities under separate state planning) of China and their agencies on the basis of governmental credit and supported by the public

64 65 66 67

The Interim Measures for the Investment of Insurance Funds in Bonds 2012, art.1. Ibid., art.2. Ibid., art.4. Ibid., art.5.

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REGULATION OF USE OF INSURANCE FUNDS

finance, including bonds of the Central Government and bonds of provincial governments.68 Instruments of the Central Bank and bonds issued and honoured by the Ministry of Finance on behalf of provincial governments shall be governed by referring to the provisions on the investment of bonds of the Central Government.69 The provisions on the investment of insurance funds in bonds of provincial governments shall be separately formulated by the CBIRC.70 The quasi-government bonds which insurance funds are invested in refer to the bonds issued by special institutions upon the approval by the State Council or the relevant department under the State Council, of which the credit level is equivalent to that of the bonds of the Central Government.71 The bonds with the governmental funds at the central level under state budget management as a source of repayment or credit support shall be included in quasigovernment bonds for management. The financial bonds and junior bonds issued by policy banks and the bonds issued by special institutions upon the approval by the State Council shall be governed by referring to the relevant provisions on the investment in quasi-government bonds.72 (c) Enterprise (corporate) bonds The enterprise (corporate) bonds which insurance funds are invested in refer to bonds which are issued by enterprises (companies) according to laws and regulations and do not have governmental credit, including financial enterprise (corporate) bonds and non-financial enterprise (corporate) bonds.73 Financial enterprise (corporate) bonds shall include convertible bonds, hybrid capital bonds, junior bonds and financial bonds of commercial banks, bonds of securities companies, convertible bonds, hybrid capital bonds, junior term bonds and corporate bonds of insurance companies, RMB bonds of international development institutions, and investment products as prescribed by the CBIRC.74 The financial enterprise (corporate) bonds which insurance funds are invested in shall meet the following conditions:75 (1) The financial enterprise (corporate) bonds issued by a commercial bank shall have a long-term credit rating of Class A or equivalent to Class A or above as assessed by a domestic credit rating institution, and the issuer shall meet the following conditions in addition to the relevant provisions of the People’s Bank of China and the CBIRC: (i) Its latest audited net assets are not less than ¥10 billion yuan; (ii) Its core capital adequacy ratio is not less than 6%; (iii) It has a long-term credit rating of Class A or equivalent to Class A or above as assessed by a domestic credit rating 68 69 70 71 72 73 74 75

Ibid., art.6. Ibid. Ibid. Ibid., art.7. Ibid. Ibid., art.8. Ibid., art.9. Ibid.

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REGULATION OF USE OF INSURANCE FUNDS

institution; and (iv) If it is listed overseas and free of domestic credit rating, it shall have a long-term credit rating of Class BB or equivalent to Class BB or above as assessed by an international credit rating institution; The hybrid capital bonds of commercial banks which insurance funds are invested in shall, in addition to meeting the aforesaid provisions, have a long-term credit rating of Class AA or equivalent to Class AA or above as assessed by a domestic credit rating institution, and the total assets of the issuer shall be not less than ¥200 billion yuan. The hybrid capital bonds of commercial banks shall be included in the unsecured non-financial enterprise (corporate) bonds for management. (2) The bonds of securities companies shall be issued publicly and have a long-term credit rating of Class AA or equivalent to Class AA or above as assessed by a domestic credit rating institution, and the issuer shall, in addition to the relevant provisions of the China Securities Regulatory Commission, meet the following conditions: (i) Its latest audited net assets are not less than ¥2 billion yuan; (ii) It has a long-term credit rating of Class AA or equivalent to Class AA or above as assessed by a domestic credit rating institution; and (iii) If it is listed overseas and free of domestic credit rating, it shall have a long-term credit rating of Class BBB or equivalent to Class BBB or above as assessed by an international credit rating institution. (3) The convertible bonds, hybrid capital bonds, junior term bonds, and corporate bonds of insurance companies shall be bonds issued by insurance companies according to the relevant provisions and upon the approval by the CBIRC and the relevant department. (4) The issuer of RMB bonds of international development institutions shall meet the following conditions in addition to the relevant provisions of the state: (i) Its latest audited net assets are not less than US$5 billion; and (ii) It has a long-term credit rating of Class AA or equivalent to Class AA or above as assessed by a domestic credit rating institution. If it is free of domestic credit rating, it shall have a long-term credit rating of Class BBB or equivalent to Class BBB or above as assessed by an international credit rating institution. The non-financial enterprise (corporate) bonds shall include enterprise bonds, corporate bonds, non-financial enterprise debt financing instruments such as medium-term notes, short-term financing bonds and ultra-short-term financing bonds, convertible corporate bonds, and other investment products as prescribed by the CBIRC which are issued by non-financial institutions.76 The non-financial enterprise (corporate) bonds which insurance funds are invested in shall meet the following conditions:77 (1) The issuer shall, in addition to the provisions of the relevant departments, meet the following conditions: (i) Its latest audited net assets are not less 76 Ibid., art.10. 77 Ibid.

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(2)

(3)

(4)

(5)

than ¥2 billion yuan; (ii) It has a long-term credit rating of Class A or equivalent to Class A or above as assessed by a domestic credit rating institution; and (iii) If it is listed overseas and free of domestic credit rating, it shall have a long-term credit rating of Class BB or equivalent to Class BB or above as assessed by an international credit rating institution. Secured non-financial enterprise (corporate) bonds shall have a long-term credit rating of Class AA or equivalent to Class AA or above as assessed by a domestic credit rating institution, and the security shall meet the following conditions: (i) Where the security is provided in the form of surety, the surety shall be of unconditional and irrevocable joint and several liabilities for the full amount of principal and interests, and its credit shall not be lower than the credit rating of the issuer; (ii) Where the security is provided in the form of mortgage or pledge, the entitlement to the property as security shall be clear. No other security has been posted over the property as security, no preservation measure has been taken against the property as security, and after being assessed by a qualified asset appraisal institution, the value of the property as security shall not be lower than the secured amount, and necessary legal procedures have been gone through for the behaviour of security; (iii) The secured amount shall constantly be not less than the total amount of the principal and interests to be repaid. The unsecured non-financial enterprise (corporate) bonds shall have a long-term credit rating of Class AA or equivalent to Class AA or above as assessed by a domestic credit rating institution. In particular, short-term financing bonds shall have a credit rating of Class A-1 as assessed by a domestic credit rating institution. Where the security for secured non-financial enterprise (corporate) bonds does not completely comply with the provisions of this Article, the bonds shall be included in the unsecured non-financial enterprise (corporate) bonds for management. The unsecured non-financial enterprise (corporate) bonds which insurance funds are invested in shall be issued in the manner of public bidding or book building. Among them, the issuance manner of book building shall meet the following conditions: (i) Before issuance, the issuer shall disclose the book building rules in detail; (ii) There shall be a book building site which meets the requirements for security and confidentiality for book building; (iii) During the period of book building, the book runner shall designate personnel to guard and maintain the order, and the personnel on-site shall not divulge the relevant information to the public; and (iv) The book runner shall properly keep the relevant information and shall not divulge or disclose it to the public. Where the enterprise (corporate) bonds which insurance funds are invested in are free of the requirements of credit rating according to the relevant provisions, the issuer shall have a credit rating not lower than the credit rating as required for such bonds. 589

REGULATION OF USE OF INSURANCE FUNDS

The term “net assets” as mentioned in these Measures shall not include minority shareholders’ interests. The issuer of the enterprise (corporate) bonds which insurance funds are invested in shall disclose the relevant information in a timely, accurate, and complete manner. The frequency of disclosure shall not be less than once each year, and the information to be disclosed shall at least include the audited financial statements and follow-up rating reports. The audited financial statements shall be disclosed not later than 31 May each year, and the follow-up rating reports shall be disclosed not later than 30 June each year.78 (d) Investment norms Where an insurance company makes investment in the bonds of the Central Government and quasi-government bonds, it may, in accordance with the requirements of asset allocation, decide the total amount of investment at its own discretion.79 Where an insurance company makes investment in secured enterprise (corporate) bonds, it may, in accordance with the requirements of asset allocation, decide the total amount of investment at its own discretion. The balance of the investment in unsecured non-financial enterprise (corporate) bonds shall not be more than 50% of the total assets of the insurance company at the end of the previous quarter.80 Where an insurance company makes investment in the same issue of a single type of Central Government bonds or quasi-government bonds, it may decide the investment ratio at its own discretion.81 The amount of the investment made by an insurance company in the same issue of a single type of financial enterprise (corporate) bonds or secured non-financial enterprise (corporate) bonds shall not be more than 40% of the issue amount of the single type of bonds of this issue, and the amount of investment in the same issue of a single type of unsecured non-financial enterprise (corporate) bonds shall not be more than 20% of the issue amount of the single type of bonds of this issue.82 The total amount of investment made by insurance companies of a same insurance group in the same issue of a single type of enterprise (corporate) bonds shall be not more than 60% of the issue amount of the single type of bonds of this issue, and the proportion of the said investment made by an insurance company and the insurance institutions in which it holds a controlling stake shall be governed by referring to the aforesaid provisions.83 Where the bonds are issued in the form of one approval (filing or registration) and raising-in-instalments, the term “same issue” means each issue in the issuance of such bonds in instalments.84 The balance of the investment made by an insurance company in the enterprise (corporate) bonds issued by the same issuer shall not be more than 20% of the net 78 79 80 81 82 83 84

Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid. Ibid. Ibid.

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REGULATION OF USE OF INSURANCE FUNDS

assets of the issuer in the previous fiscal year, and the balance of investment in the enterprise (corporate) bonds issued by an affiliated party shall not be more than 20% of the net assets of the insurance company at the end of the previous quarter.85 Where an insurance company authorizes several professional investment management institutions to make investment in bonds, the balance of the investments in these bonds shall be calculated accumulatively, and shall not exceed the investment ratio as prescribed by the CBIRC.86 The balance of the investment made by an insurance company in bonds with the investment-linked insurance products, non-life insurance type of insurance products with variable return, and other separate accounts or products shall not exceed the ratio as agreed upon in the relevant contracts.87 (e) Risk control of bonds investment Insurance companies and professional investment management institutions shall establish specific decision-making and authorization mechanisms, strict and efficient business operating processes, sound risk control systems, risk disposal emergency plans, and accountability systems.88 Insurance companies and professional investment management institutions shall, respectively in accordance with the requirements of asset allocation and the clients’ investment guides, prudently determine the benefits and risks of bond investment; rationally decide the allocation of bond types, term structure, credit distribution, and liquidity arrangements of the bond investment portfolio; and conduct follow-up assessment of the asset quality, level of yields, and risk status of bond investment.89 Where an insurance company invests in bonds or a professional investment management institution invests in bonds under entrustment, it shall make comprehensive use of the external credit rating and internal credit rating results and shall not invest in enterprise (corporate) bonds of which the internal credit rating is lower than the credit rating of the bonds in which investment may be made as determined by the company.90 Where the same bond has credit ratings as assessed by two or more external credit rating institutions at the same time, its external credit rating shall be determined according to the principle of whatever is lower; where the bond has both a domestic credit rating and an international credit rating, the domestic credit rating shall prevail. The term “credit rating” as mentioned in this article refers to the credit rating of the most recent fiscal year, and the term “at the same time” means the same issuer has obtained credit ratings during the same accounting period.91 Where an insurance company invests in bonds or a professional investment management institution invests in bonds under entrustment, it shall pay full attention to the timeliness and adequacy of the repayment sources of the issuer, and in the 85 86 87 88 89 90 91

Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid.

591

REGULATION OF USE OF INSURANCE FUNDS

case of investment in secured enterprise (corporate) bonds, it shall pay full attention to the authenticity and effectiveness of the effect of the security.92 Where the solvency adequacy ratio of an insurance company at the end of the previous quarter is less than 120%, it shall not make investment in unsecured non-financial enterprise (corporate) bonds, and if it has already held such bonds, it shall not continue to increase the investment in such bonds but shall reduce the investment in good time. Where the solvency adequacy ratio of the insurance company at the end of the previous quarter is between 120% and 150%, it shall adjust the investment strategies in a timely manner and strictly control the varieties and proportion of investment in unsecured non-financial enterprise (corporate) bonds.93 Where an insurance company invests in bonds or a professional investment management institution invests in bonds under entrustment, it shall strengthen the management of market risks and liquidity risks in bond investment, conduct stress testing and scenario analysis on a regular basis, and appropriately adjust the investment strategies according to the testing results.94 Where an insurance company invests in bonds or a professional investment management institution invests in bonds under entrustment, if it participates in the subscription for the issuance of bonds, it shall stipulate the service charges and other relevant fees in writing, and the payment shall be made through bank transfer in a transparent manner. Where an insurance company invests in enterprise (corporate) bonds or a professional investment management institution invests in enterprise (corporate) bonds under entrustment, if it invests in bonds in a manner other than competitive offer, it shall establish a price inquiry system and counterparty risk management mechanism.95 Where an insurance company investing in bonds or a professional investment management institution investing in bonds under entrustment concludes a bond custody agreement with a custodian bank, it shall specify the matters under custody, custodial duties and obligations, supervision services, and so on, and shall comply with the relevant provisions of the CBIRC.96 Where an insurance company invests in enterprise (corporate) bonds or a professional investment management institution invests in enterprise (corporate) bonds under entrustment, the fund transfer and payment of the relevant fees between it and the custodian bank and the payment of relevant fees between it and a securities business institution shall be conducted through bank transfer in a transparent manner.97 An insurance company shall not commit any of the following acts with a securities business institution or any company other than an insurance company:98 (1) Leasing or lending all kinds of bonds, unless it is otherwise provided by the CBIRC;

92 93 94 95 96 97 98

Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid. Ibid., art.26.

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REGULATION OF USE OF INSURANCE FUNDS

(2) Illegally transferring profits or transferring benefits by making use of other means to seek improper interests; or (3) Other acts as prohibited by laws, administrative regulations, and the CBIRC. Where an insurance company investing in bonds or a professional investment management institution investing in bonds under entrustment participates in bond financial derivatives transactions, it shall be limited to the management and hedge of investment risks and shall comply with the relevant provisions of the CBIRC.99 Where the bonds which insurance funds have been invested in no longer meet the provisions of these Measures, no further investment may be made in the bonds, and the insurance company or professional investment management institution shall earnestly assess the relevant risks and handle them in a timely and proper manner.100 (f) Supervision and administration of bonds investment The provisions on institutions for the credit rating of the bonds in which insurance funds may be invested shall be formulated separately by the CBIRC.101 The institutions of investment management, asset custody, securities operation, and so on, which provide services for the investment of insurance funds in bonds shall accept the inquiries by the CBIRC about the investment of insurance funds in bonds and report the relevant information.102 An insurance company shall, in accordance with the relevant provisions, submit the following information to the CBIRC in a timely manner through the insurance asset management supervisory information system and other means as provided for by the CBIRC:103 (1) bond investment statements; (2) calculation method of risk indicators and explanations; (3) the duplicate of a custody agreement concluded with a custodian bank or the duplicate of a brokerage agreement concluded with a securities business institution; and (4) other issues to be reported according to the requirements of the CBIRC. A professional investment management institution shall, in accordance with the relevant provisions, submit the relevant information on the entrusted investment of insurance funds in bonds to the CBIRC.104 Where a breach of contract or any other risk occurs during the investment of insurance funds in bonds, the relevant party shall immediately start the risk management emergency plan and report it to the CBIRC in a timely manner.105 Where an insurance company invests in bonds or a professional investment management institution invests in bonds under entrustment, it shall focus on the fluctuations in the price and value of the bonds in which it invests. During the issuance of bonds, if the quoted price of insurance funds deviates from the reasonable valuation of the comparable bonds in the open market by more than 1%, or the

99 100 101 102 103 104 105

Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid. Ibid., art.32.

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REGULATION OF USE OF INSURANCE FUNDS

trading price of the bonds it invests in deviates from the reasonable market valuation by more than 1%, it shall, within the first ten workdays in the next quarter, report to the CBIRC and explain the influencing factors and give response plans.106 The CBIRC shall, on a regular or irregular basis, inspect the decision-making and authorization mechanisms, investment management systems, business operational processes, credit risk management systems, and so on, of insurance companies and professional investment management institutions with respect to their investment or entrusted investment in bonds, and may hire accounting firms and other professional intermediaries to inspect the investment of insurance funds in bonds.107 Insurance companies and professional investment management institutions shall report the valuation rules for bonds to the CBIRC.108 Where an insurance company invests in bonds or a professional investment management institution invests in bonds under entrustment, if it violates any law, administrative regulation, or the provisions of these Measures 2012, the CBIRC shall, in accordance with the relevant regulations, punish the relevant institution and personnel.109 The investment in bonds made by a branch established within China by a foreign insurance company shall be governed by referring to these Measures 2012.110 The investment in bonds made by insurance asset management companies with their own funds shall be governed by referring to these Measures 2012.111 The CBIRC may, in accordance with the relevant provisions and the market conditions, adjust the scope, varieties, and proportion of investment of insurance funds in bonds in a timely manner and regulate the prohibited acts.112 12.7.2 Regulation of the application of external credit rating in the investment of insurance funds in bonds In order to further strengthen the credit risk management in insurance funds and standardize the utilization of external credit rating, the CIRC issued the Notice on Strengthening the Regulation of the Application of External Credit Rating in the Investment of Insurance Funds in Bonds 2013 (the Notice 2013).113 External credit rating institutions (hereinafter, the rating institutions) for investment of insurance funds in bonds of enterprises (or companies) (hereinafter, the bonds) shall satisfy the conditions on capabilities, as follows:114 (1) Having acquired the qualification of a credit rating business in the bond market approved by the relevant department of the state and having 106 Ibid. 107 Ibid., art.33. 108 Ibid. 109 Ibid., art.34. 110 Ibid., art.35. 111 Ibid., art.35. 112 Ibid., art.37. 113 Bao Jian Fa No. 61 [2013]. 114 The Notice on Strengthening the Regulation of the Application of External Credit Rating in the Investment of Insurance Funds in Bonds 2013, art.1.

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REGULATION OF USE OF INSURANCE FUNDS

capabilities for sustainable operation and a well-developed staffed, stable, and professional team; (2) Having a complete organization structure and internal control and business systems, disclosing publicly rating methods, rating procedures, and other information, and having established a complete essential data system for rating, a breach statistical system, and a rating quality management and control system; (3) The rating system operating well, the rating results having stable risk differentiation and sequencing capabilities, the rating reports playing well the role of risk disclosure, and follow-up rating reports being released in a timely manner. Rating institutions satisfying the conditions on capabilities as set forth in art.1 upon self-evaluation may apply to the CBIRC for capability approval. The CBIRC shall, in accordance with legal conditions and procedures, approve rating institutions satisfying the conditions on capabilities within 20 working days and announce the approval results.115 Rating institutions shall observe industrial standards, professional ethics, and business rules; act honestly and diligently; effectively prevent conflicts of interest; and guarantee the fairness, timeliness, consistency, and completeness of credit rating.116 Rating institutions shall be subject to the self-disciplinary management of relevant association organizations of the insurance industry in China (hereinafter, industry associations). The industry associations shall organize annually insurance institutions to conduct evaluation on the rating quality of rating institutions from the perspective of utilization by investors and announce the evaluation results. The evaluation rules shall be developed and issued by the industry associations.117 A rating institution shall cooperate in the enquiries and inspections conducted by the CBIRC on relevant credit rating business and submit an annual report to the CBIRC before 30 April every year. An annual report shall consist of basic information, business conditions, change of professional staff and senior management of a company, rating methods and procedures, change of business systems, statistical results of the accuracy and stability of rating results, audited annual financial statements, and other contents. In case of major events that might influence the professional capabilities or business management of a company, a rating institution shall submit a written report to the CBIRC within five working days.118 The CBIRC shall follow up with and conduct regular checks on the change of capabilities and rating acts of rating institutions and engage intermediary institutions for their assistance when necessary. Where a rating institution no longer satisfies the conditions on capabilities in art.1 of this Notice 2013, fails to issue early waning or adopt proper rating acts when a rating project encounters bankruptcy, debt restructuring, deferred payment or other major credit events, or is considered 115 116 117 118

Ibid., art.2. Ibid., art.3. Ibid., art.4. Ibid., art.5.

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REGULATION OF USE OF INSURANCE FUNDS

as unqualified upon evaluation by the industry associations, the CBIRC shall no longer approve of its capabilities.119 Where a rating institution of an investment of insurance funds in bonds already made no longer conforms to the provisions of this Notice 2013, no further investment shall be added. An insurance company and an entrusted management institution of insurance funds shall carefully evaluate relevant risks and handle them properly in a timely manner.120 Where an external credit rating is conducted for investment of insurance funds in other credit financial products, this Notice 2013 shall apply.121 12.7.3 Matters concerning insurance fund investment in bank capital supplementary bonds To further expand the channels for bank capital replenishment and insurance fund investment, the CBIRC revised the Notice on Matters Concerning Insurance Fund Investment in Bank Capital Supplementary Bonds 2019122 and issued a new version of the Notice on Matters Concerning Insurance Fund Investment in Bank Capital Supplementary Bonds on 20 May 2020 (hereinafter, the 2020 version of the Notice).123 The main contents of the 2020 version of the Notice are as follows. First, the 2020 version of the Notice has relaxed the requirements for issuers of capital supplementary bonds that insurance funds invest in. The requirement that total assets of the issuer should be no less than ¥1 trillion yuan and net assets no less than ¥50 billion yuan has been cancelled; the stipulation that “the issuer’s core tier 1 capital adequacy ratio shall be no less than 8%, tier 1 capital adequacy ratio no less than 9%, and capital adequacy ratio no less than 11%” has been changed to that “the issuer’s capital adequacy ratio shall meet regulatory requirements”, and the requirement that the issuer’s external credit rating shall be AAA has been removed. Second, the 2020 version of the Notice has cancelled the external credit rating requirements of bonds applicable for insurance fund investment. The credit rating requirements for tier-2 capital bonds (AAA) and perpetual bonds (AA+) have been removed. Third, the 2020 version of the Notice has clarified that credit risk management capability of insurance institutions shall meet the standards set by the CBIRC, and their solvency adequacy ratio of previous quarter shall be no lower than 120%. During the period when an insurance institution holds capital supplementary bonds, if the solvency adequacy ratio is less than 120%, it shall promptly adjust its investment strategy and adopt effective measures to control related risks. Fourth, the 2020 version of the Notice requires insurance institutions to classify the capital supplementary bonds as their equity assets or fixed income assets based

119 120 121 122 123

Ibid., art.6. Ibid., art.7. Ibid., art.8. Yin Bao Jian Fa No. 7 [2019]. Yin Bao Jian Fa No. 17 [2020].

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on the issuer’s classification of equity instruments or debt instruments, which shall be subject to the corresponding regulatory limit requirement. The 2020 version of the Notice is conducive to increasing the types of products for insurance asset allocation and expanding the investment channels of insurance funds. It gives insurance institutions a larger role in making investment decisions. It allows small- and medium-sized banks to replenish capital through multiple channels and improve their capital structure. The scope of investors for capital supplementary bonds will also be expanded, thus improving the market-oriented pricing mechanism. In the meantime, the 2020 version of the Notice requires insurance institutions to strengthen risk management and make prudent judgment on the returns and risks of investment. Insurance institutions should enhance their risk awareness and continuously strengthen risk management capacity building. They are also required to monitor investment risks and fulfil reporting obligations in a timely manner. 12.8 Insurance funds investment in stocks A number of regulations relating to insurance funds investment in stocks are in place as follows, and we will consider these regulations in this section. (1) The Interim Measures for the Administration of Stock Investments of Insurance Institutional Investors were jointly issued by the CIRC and the China Securities Regulatory Commission on 24 October 2004 and became effective on the same day.124 (2) The Notice of the CIRC on Issuing the Provisions on the Participation of Insurance Funds in the Stock Index Futures Trading was enacted on 12 October 2012 and came into force on the same day.125 This Notice has been replaced by the latest formulated Provisions on the Participation of Insurance Funds in the Stock Index Futures Trading which were issued on 23 June 2020 by the CBIRC.126 (3) The Guide to Custody of Stock Assets of Insurance Companies (for Trial Implementation) was issued by the CIRC on 8 November 2004 and came into force on 17 February 2005.127 (4) The Notice of the CIRC on Issues concerning the Increased Regulatory Ratio of Insurance Funds Invested in Blue-Chip Stocks was released on 8 July 2015 and came into force on the same day.128 (5) The Notice of the CIRC on Issues concerning the Investment in the Stocks of Companies Listed on the Growth Enterprise Market with Insurance 124 The CIRC and the CSRC No. 12 [2004] (see accessed on 16 October 2020). 125 Bao Jian Fa No. 95 [2012] (see accessed on 19 June 2020). 126 Yin Bao Jian Ban Fa No. 59 [2020] (see accessed on 16 October 2020). 127 Bao Jian Fa No. 16 [2005]. 128 Bao Jian Fa No. 64 [2015] (see accessed on 16 October 2020).

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Funds was issued on 7 January 2014 and came into force on the same day.129 (6) The Notice of the CIRC on Regulating the Stock Investment Business of Insurance Institutions was issued on 18 March 2009 and became effective on the same day.130 (7) The Notice on Matters concerning Further Strengthening the Regulation of Stock Investments with Insurance Funds was promulgated on 24 January 2017 and came into force on the same day.131 12.8.1 The Interim Measures for the Administration of Stock Investments of Insurance Institutional Investors The Interim Measures for the Administration of Stock Investments of Insurance Institutional Investors (the Measures 2004) are the major regulation for insurance funds investment in stocks. The Measures 2004 are formulated in accordance with the Insurance Law, the Securities Law, and other laws and administrative regulations in order to strengthen the administration of the stock investment business by insurance institutional investors, regulate investment activities, prevent investment risks, and safeguard the interests of the insured.132 Insurance institutional investor refers to an insurance company or insurance asset management company that meets the conditions prescribed by CBIRC and engages in stock investments. Insurance group companies and insurance holding companies engaging in stock investments are governed by these Measures 2004.133 Stock investment mentioned in these Measures 2004 means the activity that an insurance institutional investor engages in or entrusts a qualified institution to engage in the trading of stocks, convertible company bonds, and other stock market products. Stock asset custody mentioned in these Measures 2004 means that an insurance company concludes a custody agreement, in accordance with the relevant provisions of CBIRC, with a commercial bank or other professional financial institution, entrusting the bank or the financial institution to keep in custody the stocks and the funds for investing in stocks, to be responsible for settlement, valuation of assets, investment supervision, and so on.134 An insurance institutional investor shall, when investing in stocks, set up an independent custody mechanism, follow the principles of prudence, safety, and 129 Bao Jian Fa No. 1 [2014] (see accessed on 16 October 2020). 130 Bao Jian Fa No. 45 [2009] (see accessed on 16 October 2020). 131 Bao Jian Fa No. 9 [2017] (see accessed on 16 October 2020). 132 The Interim Measures for the Administration of Stock Investments of Insurance Institutional Investors 2004, art.1. 133 Ibid., art.2. 134 Ibid.

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value increase, as well as independently operate the business, bear the risks, profits, and losses by itself.135 The CBIRC and China Securities Regulatory Commission (CSRC), according to their respective duties, conduct supervision and administration over the stock investment activities carried out by insurance institutional investors.136 (a) Qualifications and conditions An insurance asset management company shall, if it is entrusted to engage in stock investments, meet the following conditions:137 (1) Its internal management system and risk control system conform to the Guide to Risk Control on Utilization of Insurance Funds 2004;138 (2) It has an independent trading department; (3) Its relevant senior management staff and major professionals meet the conditions prescribed in these Measures; (4) It has a professional investment analysis system and a risk control system; and (5) Other conditions prescribed by CBIRC. An insurance company meeting the following conditions may, upon approval of CBIRC, entrust a relevant insurance asset management company which meets the conditions prescribed in art.5 of these Measures 2004 to engage in stock investments:139 (1) Its solvency conforms to the relevant provisions of CBIRC; (2) Its internal management system and risk control system conform to the Guide to Risk Control on Utilization of Insurance Funds 2004; (3) It has a department specifically responsible for entrustment in respect of insurance funds; (4) The relevant senior management staff and major professionals meet the conditions prescribed in these Measures 2004; (5) It has set up a mechanism for stock asset custody; (6) It has no records on investment in severe violation of laws or rules during the latest three years; and (7) Other conditions prescribed by CBIRC. An insurance company meeting the following conditions may, upon approval of CBIRC, directly engage in stock investments:140 (1) Its solvency conforms to the relevant provisions of CBIRC; (2) Its internal management system and risk control system conform to the Guide to Risk Control on Utilization of Insurance Funds;

135 Ibid., art.3. 136 Ibid., art.4. 137 Ibid., art.5. 138 Bao Jian Fa No. 43 [2004]. 139 The Interim Measures for the Administration of Stock Investments of Insurance Institutional Investors 2004, art.6. 140 Ibid., art.7.

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(3) (4) (5) (6)

It has a professional fund utilization department; It has an independent trading department; It has built up a mechanism for stock asset custody; The relevant senior management staff and major professionals meet the conditions prescribed in these Measures 2004; (7) It has a professional investment analysis system and a risk control system; (8) It has no records on investment in severe violation of laws or rules during the latest three years; and (9) Other conditions prescribed by CBIRC. An insurance company that applies for directly engaging in or entrusting an insurance asset management company to engage in stock investments shall submit the following documents and materials to CBIRC in triplicate:141 (1) The application letter; (2) The board resolution on stock investments; (3) Its internal management system, risk control system, and information on the setup of its internal offices; (4) Relevant materials on stock asset custodians and the draft of the custody agreement; (5) Name list and resumes of the relevant senior management staff and major professionals; (6) The company’s financial statements of the latest three years which have been audited by an accounting firm; (7) The existing trading seats, securities accounts, and fund accounts; (8) Its stock investments plans, which shall at least state the ideology of stock investments, investment targets, and direction of investment portfolio; and (9) Other documents and materials required by CBIRC to be provided. If an insurance company applies for directly engaging in stock investments, it shall submit an additional statement on the investment analysis system and risk control system. The CBIRC shall, when examining the application of an insurance company for directly engaging in or entrusting an insurance asset management company to engage in stock investments, make a decision on whether to approve the application or not within 20 working days as of receipt of the complete application documents and materials. If CBIRC decides not to approve the application, it shall notify the applicant in writing and state the reason thereof. The CBIRC may, when considering it necessary, conduct expert appraisal on the particulars in the application filed by the insurance company and shall notify the insurance company in writing of the time needed for expert appraisal.142 Where an insurance company directly engages in stock investments, it shall, within ten working days after completing the relevant procedures for stock investments, submit to CBIRC the formal custody agreement, the basis for evaluating 141 Ibid., art.8. 142 Ibid., art.9.

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investment performance, as well as the relevant materials on trading seats, securities accounts, and fund accounts.143 Where an insurance company entrusts an insurance asset management company to engage in stock investments, it shall, within ten working days after completing the relevant procedures for stock investments, submit to CBIRC the entrustment agreement, the formal custody agreement, the investment guidance, the basis for evaluating investment performance, as well as the relevant materials on trading seats, securities accounts, and fund accounts.144 In the event that the contents in the preceding two paragraphs are modified, the insurance company shall report to CBIRC within five working days after completing the modification procedures.145 The insurance company shall submit copies of the relevant materials on trading seats, securities accounts, and fund accounts to CSRC simultaneously.146 (b) Investment scope and proportions The stock investments of an insurance institutional investor shall be limited to the following varieties:147 (1) ordinary Renminbi (RMB) stocks; (2) convertible company bonds; and (3) other investment varieties prescribed by CBIRC. Ordinary RMB stocks mentioned in Item (1) shall mean the stocks which are issued and listed for circulation inside China and subscribed and traded in RMB. The stock investments of an insurance institutional investor may be traded in the following methods:148 (1) To be subscribed on primary market, including distribution based on market value, subscription either on or off the network, participation in distribution in the identity of strategic investor, and so on; and (2) To be traded on secondary market. The stocks of one listed company which are held by an insurance institutional investor shall be less than 30% of the ordinary RMB stocks of this listed company.149 The specific proportion of the investment stocks of an insurance institutional investor shall be separately prescribed by CBIRC. An insurance asset management company may not use its own funds to invest in stocks.150 An insurance institutional investor may not invest in ordinary RMB stocks of the following types:151 (1) Those which are under “special penalty” or “warning on special penalty due to there being a risk to be terminated of the listing” imposed by the stock exchange or which have been terminated by the stock exchange; (2) The rise of price of the stocks during the past 12 months exceeds 100%; (3) The said stocks are suspected of being manipulated by others; 143 144 145 146 147 148 149 150 151

Ibid., art.10. Ibid. Ibid. Ibid. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid. Ibid., art.14.

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(4) An accounting firm has issued its opinions on refusal to comment or its reservation opinions on the financial statements of the listed company for the latest year; (5) The listed company has disclosed that its performance has gone down by a big margin, and it is in heavy loss or will be in heavy loss in the future; (6) The listed company has disclosed that it is being investigated by the regulatory authority or was severely punished by the regulatory authority within the latest year; or (7) Other types of stocks prescribed by CBIRC. The balance of the investment of an insurance institutional investor in convertible company bonds shall be calculated into the investment balance of the enterprise bonds and shall conform to the relevant provisions of the Interim Measures for the Investment of Insurance Funds in Bonds 2012.152 Where an insurance company converts the convertible company bonds it holds into stocks, such bonds shall be calculated into the investment balance of the ordinary RMB stocks at cost price and shall conform to the relevant provisions of CBIRC on the proportion of stock investments.153 In an investment account set up by an insurance institutional investor for investment-linked insurance, the proportion of stock investments may be 100%.154 In an investment account set up by an insurance institutional investor for universal life insurance, the proportion of stock investments may not exceed 80%.155 In an independent account set up by an insurance institutional investor for other insurance products, the proportion of stock investments may not exceed the relevant rate prescribed by CBIRC.156 In an independent account set up by an insurance institutional investor for the previously mentioned insurance products, the proportion of stock investments may not exceed the proportion specifically agreed upon in the insurance clauses.157 (c) Custody of stock assets For the purpose of selecting a stock asset custodian, an insurance company shall select a commercial bank or other professional financial institution which meets the conditions prescribed in the Guide to Custody of Stock Assets of Insurance Companies 2005.158 The stock asset custodian of an insurance company shall perform the following obligations:159 (1) Safely keeping custody of the insurance company’s funds and stock assets; (2) Handling settlement matters in time pursuant to the orders of the insurance company or of the insurance asset management company; 152 Bao Jian Fa No. 58 [2012]. 153 The Interim Measures for the Administration of Stock Investments of Insurance Institutional Investors 2004, art.15. 154 Ibid., art.16. 155 Ibid. 156 Ibid. 157 Ibid. 158 Bao Jian Fa No. 16 [2005]. 159 Ibid., art.18.

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(3) Supervising the investment operation of the insurance company or the insurance asset management company; (4) Valuating the stock assets entrusted by the insurance company; (5) Regularly providing reports on stock asset custody to the insurance company or the insurance asset management company; (6) Upon the regulatory requirements of CBIRC, submitting to CBIRC the relevant data on the stock assets, providing by regular and irregular intervals reports on risk evaluation and performance evaluation of the stock assets, and so on; Keeping completely the records, account books, statements on stock asset custody, as well as other relevant documents. The relevant important documents of custody of the stock assets such as vouchers, trading records, contracts, and so on shall be kept for no less than 15 years; and (8) Other obligations prescribed by CBIRC. The stock asset custodian of an insurance company must strictly separate its own assets from the stock assets under its management upon entrustment and must set up relevant accounts for different insurance companies for the sake of separate management.160 The stock asset custodian of an insurance company may not commit the following acts:161 (1) Mixing its own assets with the stock assets in its custody to manage; (2) Mixing other assets in its custody with the stock assets in its custody to manage; (3) Mixing different insurance companies’ stock assets in its custody to manage; (4) Misappropriating the insurance company’s stock assets in its custody; (5) Taking advantage of the insurance company’s stock assets in its custody and other relevant information to seek benefits for itself or for a third person; (6) Violating the laws, administrative regulations, or relevant provisions of the state or the custody agreement; or (7) Other acts prohibited by CBIRC. An insurance company shall conclude a custody agreement with the stock asset custodian. The custody agreement must set forth the following contents:162 (1) The stock asset custodian’s obligations as prescribed in articles 18 to 20 of these Measures; (2) In the event that the stock asset custodian violates the obligations in Item (1) of this Article, and CBIRC requires the insurance company to replace the stock asset custodian, the insurance company shall have the right to terminate the custody agreement in advance.

160 Ibid., art.19. 161 Ibid., art.20. 162 Ibid., art.21.

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Where a stock asset custodian is lawfully dissolved, revoked, or runs into bankruptcy, the stock assets of the insurance company which serves as the entrusting party shall not be listed as assets for liquidation.163 (d) Prohibited acts of insurance institutional investors The scope and proportion of stock investments of insurance institutional investors may not exceed the relevant provisions of CBIRC.164 None of the management staff of an insurance institutional investor in the respects of decision-making, research, trading, and settlement concerning stock investments, and other relevant persons may engage in insider trading.165 Insider trading mentioned in the preceding paragraph shall be ascertained in accordance with Securities Law 2019166 and Interim Measures for Prohibiting Securities Frauds 1993.167 An insurance institutional investor that engages in stock investments may not commit any of the following acts:168 (1) Transferring profits between securities accounts for insurance funds of different natures; (2) Buying stocks through financing by illegal means; or (3) Other acts prescribed by CBIRC. An insurance institutional investor may not obtain inappropriate benefits or transfer risks by the following means:169 (1) Centralizing advantages in respect of funds or share holding either alone or by conspiracy or utilizing information advantage to trade unitedly or continuously so as to manipulate securities trading prices; (2) Colluding with others to trade in securities pursuant to the time, price, and method agreed upon in advance or to trade in securities held by neither of them, thus affecting the securities trading price or securities trading amount; (3) Trading with itself without transferring ownership, thus affecting the securities trading price or securities trading amount; or (4) Manipulating securities trading prices in other methods. Where a listed company holds either directly or indirectly no less than 10% of shares of an insurance institutional investor, the insurance institutional investor may not invest in the stocks of this listed company or any of its associated companies.170 163 Ibid., art.22. 164 Ibid., art.23. 165 Ibid., art.24. 166 See accessed on 16 October 2020. 167 See accessed on 16 October 2020. 168 The Interim Measures for the Administration of Stock Investments of Insurance Institutional Investors 2004, art.25. 169 Ibid., art.26. 170 Ibid., art.27.

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None of the insurance institutional investors, stock asset custodians, securities operation institutions, or other securities intermediary institutions may fabricate false trading records, financial information, or other information.171 An insurance company investing in stocks may not entrust any institution other than insurance asset management companies unless otherwise prescribed by CBIRC.172 (e) Risk control for stocks investment An insurance institutional investor shall have the strategies of long-term investment and value investment, optimize allocation of assets, and disperse investment risks.173 Insurance institutional investors shall, in accordance with the Guide to Risk Control on Utilization of Insurance Funds 2004,174 build up a well-developed stock investment risk control system.175 The stock investment risk control system of an insurance institutional investor shall at least include the following contents:176 (1) (2) (3) (4) (5) (6) (7)

Investment decision making process; Investment authorization system; Study report system; Stock scope selection system; Risk assessment and performance appraisal index system; Criteria on vocational ethics; and Mechanism for dealing with major incidents.

Where an insurance company entrusts an insurance asset management company to engage in stock investments, its stock investment risk control system shall at least also include the stock custody system.177 Where an insurance company directly engages in stock investments, its stock investment risk control system shall at least also include the stock custody system, the stock trading management system, and the information management system.178 An insurance asset management company’s stock investment risk control system shall at least also include the stock trading management system and the information management system.179 An insurance institutional investor that invests in stocks must work out a written study report before making the following important decisions:180

171 Ibid., art.28. 172 Ibid., art.29. 173 Ibid., art.30. 174 Bao Jian Fa No. 43 [2004]. 175 The Interim Measures for the Administration of Stock Investments of Insurance Institutional Investors 2004, art.31. 176 Ibid., art.32. 177 Ibid. 178 Ibid. 179 Ibid. 180 Ibid., art.33.

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(1) A single item of investment fund is to exceed the amount determined by the insurance institutional investor; (2) No less than 5% of investable stock assets are to be involved; (3) The investment portfolio or investment direction needs to be adjusted greatly; (4) The standard for selecting the scope of stocks needs to be adjusted greatly; or (5) The stock investment risk tolerance needs to be adjusted greatly. An insurance institutional investor shall, when determining the investable scope of stocks, consider various indexes of the listed company such as governance structure, earning capacity, information transparency, stock liquidity, and so on.181 An insurance institutional investor must invest in stocks within the scope of investable stocks. An insurance institutional investor shall, prior to investment, determine the basis for evaluating stock investment performance by taking the indexes of quality growth stocks, blue chips, and shares of high liquidity into account for reference. The basis for evaluating stock investment performance of the insurance industry shall be separately prescribed by CBIRC.182 An insurance institutional investor shall, when making use of the following funds, separately open a securities account and a fund account for separate accounting:183 (1) (2) (3) (4) (5)

Funds for traditional insurance products; Funds for participating insurance products; Funds for universal insurance products; Funds for investment-linked insurance products; or Funds for insurance products required by CBIRC to be subject to independent accounting.

The insurance asset management companies and the insurance companies directly engaging in stock investments shall trade in stocks through independent seats. The administrative measures for independent seats for stock trading shall be separately formulated.184 To place the stock investment trading orders of either an insurance asset management company or an insurance company directly engaging in stock investments shall be the responsibility of the independent trading department and full-time trading staff.185 The insurance asset management companies and the insurance companies directly engaging in stock investments shall make information management systems in respect of firewall, on-post duties, access, security and prevention, and so on.186 181 182 183 184 185 186

Ibid., art.34. Ibid., art.35. Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39.

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The insurance asset management companies and the insurance companies directly engaging in stock investments shall regulate the operating program of such stock trading systems as computer room facilities, communication equipment, computer equipment, operating system software, database software, and so on.187 Where an insurance institutional investor selects the seat of a securities operation institution to trade in stocks, this securities operation institution shall meet the following conditions:188 (1) It is in good financial condition, in stable business operation, and its net capital is no less than ¥1 billion yuan; (2) It has well-developed internal control systems; (3) Its client trading settlement funds are fully deposited in a commercial bank with the qualification for engaging in absorbing deposits of and keeping custody of securities trading settlement funds; (4) It has set up two separate accounts in China Securities Depository Clearing Co., Ltd., one for excessive self-operation reserves, and the other for excessive client settlement reserves; (5) It sets up seats separately for self-operated businesses and non-self-operated businesses in the stock exchanges in Shanghai and Shenzhen; (6) It has high-efficiency and secured communication conditions and trading facilities, which meet the stock trading requirements and provide considerable information services; (7) It has the capability for securities market research and is able to provide consulting services in time; (8) In the latest three years, it has no records on major violation of laws or rules, nor was it punished by CSRC or in the process of investigation under a case filed; (9) It has no negative records in respect of honesty and credibility and committed no act of occupying or misappropriating the client margin or securities in the latest year; (10) It has promised in writing to accept CBIRC’s inspections on the insurance institutional investor’s stock trading and truthfully provides CBIRC with various stock trading information of the insurance institutional investor; (11) Its local business department is in regular management, good operation, and has complete service functions; and (12) Other conditions prescribed by CBIRC. Where an insurance institutional investor selects the seats of a securities operation institution’s business department to trade in stock investments, it shall conclude a relevant agreement with the head office. The agreement shall set forth the obligations of the securities operation institution as prescribed in Item (10) of art.41 of these Measures. If the securities operation institution violates the said obligations, and CBIRC requires the insurance institutional investor to replace the securities operation institution, the insurance institutional investor shall have 187 Ibid., art.40. 188 Ibid., art.41.

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right to terminate the agreement in advance. The insurance institutional investor shall, within five working days as of concluding the agreement prescribed in the preceding paragraph, submit a copy of the agreement to CBIRC.189 The insurance asset management companies and the insurance companies directly engaging in stock investments shall, prior to the opening of each day, check with the stock asset custodians the balance of securities and that of funds so as to guarantee the said balances to be enough for settlement.190 Where the stocks held by an insurance institutional investor are under any of the circumstances prescribed in art.14 of these Measures 2004, the insurance institutional investor shall formulate specific solutions.191 Where the operational situation of an insurance company is changed and no longer meets the conditions prescribed in these Measures 2004, the insurance company shall not add stocks and shall lower the stock investment proportion pursuant to the time limit, method, and other requirements prescribed by CBIRC.192 An insurance institutional investor shall reveal the stock investment risk situation by risk value and other risk measurement indexes.193 The allotment of funds between an insurance company and an insurance asset management company, a stock asset custodian, or a securities operation institution must be in a method of transfer between accounts.194 The senior management staff member of an insurance institutional investor who is in charge of stock investments shall meet the following conditions:195 (1) He or she has the academic qualification of university graduate or above; (2) He or she has no less than five years of work experience in the field of securities or finance; (3) He or she knows the operation of securities investment well and has necessary financial and legal knowledge; and (4) Other conditions prescribed by CBIRC. The senior management staff of an insurance institutional investor must, when making decisions on stock investments, strictly comply with the scope of power prescribed in the company’s internal management system and risk control system. It is strictly prohibited to make investment or make decisions in excess of the scope of power.196 A major professional in an insurance institutional investor who engages in stock investments shall meet the following conditions:197 (1) He or she has the academic qualification of university graduate or above; (2) He or she has no less than three years of work experience in the field of securities or finance; 189 190 191 192 193 194 195 196 197

Ibid., art.42. Ibid., art.43. Ibid., art.44. Ibid., art.45. Ibid., art.46. Ibid., art.47. Ibid., art.48. Ibid., art.49. Ibid., art.50.

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(3) He or she knows the securities business rules and operational procedures well; and (4) Other conditions prescribed by CBIRC. Major professionals mentioned in the preceding paragraph shall mean the persons who are either in charge of or operate the stock investment business.198 In an insurance asset management company or in an insurance company directly engaging in stock investments, the number of major professionals engaging in stock investments shall fit in with the scale of stock investments, and the company concerned shall have a suitable number of researchers in the areas of macroeconomics, industrial analysis, financial engineering, and so on.199 If the stock assets in use amount to ¥100 million yuan or more in an insurance asset management company or in an insurance company directly engaging in stock investments, there shall not be fewer than five major professionals engaging in stock investments.200 A person under any of the following circumstances may not act as a senior management staff member in charge of stock investments business or a major professional in an insurance institutional investor:201 (1) He or she was sentenced to criminal punishments due to the crime of embezzlement, bribery, malicious occupation of properties, misappropriation of properties, or destruction of socialist economic order, and so on; (2) He or she received administrative penalties or was sentenced to criminal punishments due to such illegal acts as gambling, taking drugs, visiting prostitutes, frauds, and so on; (3) He or she was a senior management staff member of a company or enterprise running into bankruptcy and liquidation due to inappropriate management and bears individual liabilities or directly leadership liabilities for the bankruptcy, and it has not been five years since the liquidation of the company or enterprise was finalized; (4) He or she is presently investigated by a judicial organ, disciplinary supervision department, or CBIRC; (5) He or she as an individual bears a large amount of debt which has been due but unpaid; or (6) It was decided by the financial regulatory authority that he or she may not hold any post in a financial institution within a time limit, and this time limit has not expired. (f) Supervision and administration of stocks investment The CBIRC and CSRC shall, pursuant to their respective duties, conduct inspections on the stock investment business of insurance institutional investors. The

198 199 200 201

Ibid. Ibid., art.51. Ibid. Ibid., art.52.

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CBIRC may retain intermediary institutions such as accounting firms to inspect stock investments of insurance institutional investors.202 An insurance institutional investor shall submit the following statements, reports, or other documents to CBIRC according to the provisions:203 (1) The basis for evaluating investment performance; (2) The method of calculating the risk index and the statement on the use thereof; and (3) The relevant statements on stock investments. The contents of the statements and reports prescribed in the preceding paragraph and the methods of submission shall be separately prescribed by CBIRC. An insurance institutional investor shall disclose the relevant information on stock investments in the method prescribed by CBIRC.204 An insurance institutional investor shall, when investing in stocks, abide by the laws, administrative regulations, and the relevant provisions of the state and accept CSRC’s supervision over its market trading acts.205 Where an insurance institutional investor violates the laws, administrative regulations, or the relevant provisions of CBIRC, CBIRC may have a supervisory talk or interrogation with the relevant senior management staff and major professionals. If the case is serious, CBIRC may impose warnings or fines in accordance with the law or order to dismiss and replace such staff or professionals.206 Where an insurance institutional investor violates the laws, administrative regulations, and relevant provisions, CBIRC and CSRC may impose administrative penalties in accordance with the law.207 Where any stock asset custodian or securities operation institution prescribed in these Measures 2004 violates the laws, administrative regulations, or the relevant provisions of the state, the relevant regulatory authorities shall impose administrative penalties pursuant to their respective scope of power or regulatory duties.208 Where a stock asset custodian or securities operation institution mentioned in the preceding paragraph violates these Measures 2004 and the case is serious, CBIRC may order the insurance institutional investor to replace the insurance assets custodian or the securities operation institution.209 12.8.2 Stock index futures trading The Notice of the CIRC on Issuing the Provisions on the Participation of Insurance Funds in the Stock Index Futures Trading was issued on 12 October 2012210

202 203 204 205 206 207 208 209 210

Ibid., art.53. Ibid., art.54. Ibid., art.55. Ibid., art.56. Ibid., art.57. Ibid., art.58. Ibid., art.59. Ibid. Bao Jian Fa No. 95 [2012].

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for the purposes of regulating the participation of insurance funds in the stock index futures trading and effectively preventing risks. This Notice 2012 has been replaced by the latest formulated Provisions on the Participation of Insurance Funds in the Stock Index Futures Trading which were issued on 23 June 2020 by the CBIRC (the Provisions 2020).211 The Provisions 2020 are formulated in accordance with the Insurance Law and the regulations such as the Measures for the Administration of the Utilization of Insurance Funds 2018.212 The term “stock index futures” as mentioned in these Provisions 2020 refers to financial futures contracts with stock price indexes as the subject matter as listed and traded on the China Financial Futures Exchange with the approval of the China Securities Regulatory Commission.213 Insurance funds participating in stock index futures trading shall not be used for speculative purposes and shall be used for hedging or risk avoidance purposes, including:214 (1) Hedging or avoiding the risk of existing assets; (2) Hedging the risk of buying assets in the next three months, or locking in its future transaction price. The assets to be bought mentioned in item (2) of this article shall be the assets that the institution has decided to buy according to its investment decision-making procedures. If the asset is not purchased within three months from the date of the decision, or if purchasing the asset is abandoned within the specified period, the relevant derivative shall be terminated or liquidated within ten trading days after the stipulated period expires or the decision to abandon purchasing the asset is made Insurance funds participating in stock index futures trading shall, on the basis of the determined asset portfolio (hereinafter referred to as asset portfolio), open separate accounts for stock index futures trading and implement independent management of accounts, assets, trading, and accounting.215 Insurance institutions participating in stock index futures trading shall formulate reasonable trading strategies and perform internal decision-making procedures in accordance with asset allocation and risk management requirements.216 Insurance institutions participating in stock index futures trading on their own or entrusted shall formulate risk hedging schemes in accordance with the provisions of the Measures for Derivatives, specify hedging objectives, tools, objects, 211 Yin Bao Jian Ban Fa No. 59 [2020] (see http://www.cbirc.gov.cn/cn/view/pages/ItemDetail.html?d ocId=912893&itemId=928&generaltype=0> accessed on 16 October 2020).The CBIRC published three pieces of regulations by the Notice of the General Office of the CBIRC on Issuing the Measures on the participation of Insurance Funds in Financial Derivative Product Transactions: namely, “the Measures on the Participation of Insurance Funds in Financial Derivative Products”, “the Provisions on the Participation of Insurance Funds in Treasury Bond Futures Trading”, and “the Provisions on the Participation of Insurance Funds in the Stock Index Futures Trading”. 212 The CIRC Order No. 1 [2018]. 213 The Provisions on the Participation of Insurance Funds in the Stock Index Futures Trading 2020, s.1. 214 Ibid., s.3. 215 Ibid., s.4. 216 Ibid., s.5.

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scale, duration, risk hedging ratio, margin management, risk exposure limits, and relevant effective hedging indicators, standards and evaluation frequency of relevant issues, the authority and division of responsibilities of relevant departments, and circumstances that may lead to unhedging, and so on, and perform internal approval procedures. The internal approval shall include the opinions of the risk management department.217 When insurance funds participate in stock index futures trading, for any asset portfolio at the end of any trading day, the value of the sold stock index futures contracts held by the insurance institution shall not be more than 102% of the book value of the hedged subject shares, equity fund assets, and other equity-based asset management products.The sum of the value of the bought stock index futures contract held and the market value of stocks, stock funds, and other net-value equity asset management products must not be more than 100% of the net asset value. At the end of any trading day, the total value of the bought stock index futures contract held by the insurance institution and the book value of equity assets shall not exceed the upper limit of the investment ratio. The value of the sold stock index futures contract and the value of the bought stock index futures contract referred to in this article shall not be calculated by way of combined netting.218 When insurance funds participate in stock index futures trading, after the settlement of any asset portfolio at the end of any trading day and the deduction of the trading margin that needs to be paid for the stock index futures contracts, liquid assets shall be kept at not less than 10% of the value of the stock index futures contract after the gap so as to effectively prevent the risks of forced liquidation.219 Insurance institutions participating in stock index futures trading shall dynamically monitor the relevant risk control indicators according to the actual situation of the company and the asset portfolio, formulate risk early warning mechanisms for the effectiveness of risk hedging, and promptly give early warnings to trading based on market changes.220 If an insurance group (holding) company or insurance company entrusts an insurance asset management institution or other professional management institutions to participate in stock index futures trading, it shall be clearly stipulated in the insurance funds entrustment contract or investment guidelines the purpose, the proportion restrictions, the valuation method, information disclosure, risk control, responsibilities, and other matters of the participation in stock index futures trading.221 Insurance institutions participating in stock index futures trading on their own or being entrusted by others, in addition to complying with the provisions of the Measures for Derivatives, the information system shall also meet the following requirements:222

217 218 219 220 221 222

Ibid., s.6. Ibid., s.7. Ibid., s.8. Ibid., s.9. Ibid., s.10. Ibid., s.11.

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(1) The stock index futures trading management system and valuation system are stable and efficient and can meet trading and valuation needs; (2) The risk management system can realize the real-time monitoring of stock index futures trading, various risk management indicators can be solidified in the system, and warning in a timely manner can be provided; (3) The information system shall be able to interface with the information system of the cooperative transaction settlement institution and shall establish corresponding backup channels. For insurance funds to participate in stock index futures trading, professional management personnel shall meet the following requirements:223 (1) Where an insurance group (holding) company or an insurance company independently participates in the stock index futures trading, the professional personnel for asset allocation and investment transaction shall be no fewer than five; the professional personnel for risk control shall be no fewer than three; and the professional personnel for clearing and accounting shall be no fewer than two. Positions of investment transaction, risk control, and clearing shall not be held concurrently. (2) Where an insurance group (holding) company or an insurance company entrusts an asset management company or any other professional institution to participate in the stock index futures trading, the professional personnel, including those for risk control, shall be no fewer than two. The professional personnel from the entrusted asset management company or any other professional institution shall satisfy the requirements as prescribed in item (1) of this article. Any other professional institution shall concurrently satisfy the other conditions as prescribed by the CBIRC. If insurance institutions and other professional management institutions are involved in the trading of government bond futures and other derivatives at the same time, the number of professionals in asset allocation and investment trading shall not be repeatedly calculated, and the number of professionals in risk control, clearing, and accounting may be doubled. The aforesaid professional personnel shall pass the futures practitioner qualification test; the persons in charge shall have futures or securities business experience of five or more years; and business managers shall have futures or securities business experience of three or more years. To participate in the stock index futures trading, an insurance institution shall, according to relevant provisions, determine with a transaction settlement institution such matters as the business transaction of stock index futures, margin management and settlement, risk control, and data transfer and specify the rights and obligations of both parties by agreement.224 The insurance institution and the asset custody institution shall, according to relevant provisions, determine such matters as the capital allocation, clearing, and 223 Ibid., s.12. 224 Ibid., s.13.

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valuation for stock index futures business and specify the rights and obligations of both parties in the custody agreement. The insurance institution may, according to the business requirements, enter into a multilateral agreement with an institution of futures trading and settlement and an asset custody institution. For insurance funds to participate in stock index futures trading, the selected futures company shall meet the following conditions:225 (1) It has been established for five or more years, the net capital at the end of last quarter reached ¥300 million yuan or more, and the ratio of net capital to the company’s venture capital reserve is not less than 150%; (2) The classified supervision evaluation of futures companies is Class A; (3) It has made a written commitment to accept the inquiries from the CBIRC and provide the CBIRC with truthful information on the participation of insurance institutions in stock index futures trading; (4) Other specified conditions. Insurance institutions participating in stock index futures transactions shall submit the following documents to the CBIRC:226 (1) Materials specified in the Measures for Derivatives, in which professional certification materials shall meet the requirements of these Provisions; (2) The agreement documents signed with institutions such as futures trading settlement and asset custody; (3) Other documents required by the CBIRC. When an insurance institution participates in stock index futures trading, if its position ratio no longer conforms to these Provisions due to such external causes as market fluctuations, the position ratio shall be adjusted within ten trading days and be reported to the CBIRC in the quarterly report, which also lists the causes and handling process. The insurance institution shall retrospectively review the deviation of the stock index futures buying plan from the actual implementation every half year and incorporate the review result into the semi-annual and annual audit reports and report to the CBIRC as required.227 12.8.3 The guidelines to custody of stock assets of insurance companies The Guide to Custody of Stock Assets of Insurance Companies (for Trial Implementation) was issued by the CIRC on 8 November 2004 and came into force on 17 February 2005.228 The Guide was formulated in accordance with the Insurance Law, the Interim Measures for the Administration of Stock Investment of Insurance Institutional Investors 2004, and other laws and regulations for the purpose 225 226 227 228

Ibid., s.14. Ibid., s.15. Ibid., s.16. Bao Jian Fa No. 16 [2005].

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of guiding insurance companies to the regulated, healthy and orderly custody of stock assets.229 The term “custody of an insurance company’s stock assets” means an insurance company’s activities of signing a custody agreement with a commercial bank or other specialized financial institution in accordance with relevant provisions of the CBIRC and entrusting it to keep custody of the stocks and funds for stock investment and to be responsible for clearing, settlement, assets evaluation, investment supervision, and so on.230 Insurance companies, insurance asset management companies, commercial banks and other specialized financial institutions that are registered within the territory of China shall comply with the present Guide when handling custody of stock assets of insurance companies.231 The Guide is also applicable to the custody of stock assets by insurance group companies, insurance holding companies, and policy-oriented insurance companies. The provisions of the Guide on the head offices of insurance companies are applicable to the subsidiaries or branches of foreign insurance companies.232 (a) Custodian Qualifications The custodian of stock assets of an insurance company (hereinafter referred to as “the custodian“) means a commercial bank or other specialized financial institution that meets the qualifications as provided for in the present Guide and perform custody duties and responsibilities in accordance with the custody agreement.233 The custodian shall meet the following qualifications:234 (1) Having a sound corporate governance structure, internal audit, and oversight and risk control systems; (2) Having a specialized custody department; (3) Having a certain number of full-time personnel engaged in custody business; (4) Having a specialized information system for undertaking custody operations and a safe, efficient clearing and settlement system; (5) Having the capacity for investment supervision and performance assessment of the custody of stock assets of insurance companies in accordance with the laws and regulations as well as the provisions of the CBIRC; (6) Having a business site, security facilities, and other facilities related to custody of stock assets of insurance companies that meet the requirements of the oversight authorities;

229 art.1. 230 231 232 233 234

The Guide to Custody of Stock Assets of Insurance Companies (for Trial Implementation) 2005, Ibid., art.2. Ibid., art.3. Ibid., art.28. Ibid., art.4. Ibid., art.5.

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(7) Having no record of any major illegal or rule-breaking activity and receiving no penalty from the oversight authorities within the last three years; and (8) Other qualifications as required by the CBIRC. To qualify for a custodian, a commercial bank shall have conducted custody operations for at least three years with paid-in capital of no less than ¥8 billion yuan. The paid-in capital of the head office of a foreign bank will be regarded as that of its subsidiary or branch.235 Where, according to relevant provisions, a commercial bank or other specialized financial institution is required to obtain the approval of or to go through record-keeping with, the oversight authorities, before qualifying for a custodian, it shall do so in accordance with relevant provisions of the oversight authorities.236 The custodian shall perform the following duties and responsibilities:237 (1) Safely keeping custody of the stock assets of insurance companies; (2) Opening a special deposit account and a securities account for an insurance company as commissioned thereby; (3) Handling the clearing and settlement of stock assets under custody in time in accordance with the investment order of an insurance company or an insurance asset management company; (4) Supervising the investment operations of insurance companies and insurance asset management companies and making timely reports to insurance companies, insurance asset management companies, and the CBIRC upon finding of any illegal activities or any breach of relevant agreement; (5) Taking charge of the evaluation of stock assets of insurance companies under custody; (6) Issuing reports on the custody of stock assets to an insurance company or insurance asset management company in accordance with the custody agreement; (7) Submitting reports on the investment performance and risk assessment of stock assets of insurance companies, as well as the data on stock assets custody, regularly or otherwise, to the CBIRC in accordance with relevant provisions and ensuring trustworthiness and accuracy of the data and the absence of any false entry or major ignorance or misleading statement in the assessment reports; (8) Keeping the records, account books, report forms, and other relevant materials in their entirety; such important materials as certificates, trading records, and contracts related to custody of insurance assets shall be preserved for at least 15 years; and (9) Other duties and responsibilities as provided for by the state or stipulated in the custody agreement.

235 Ibid. 236 Ibid. 237 Ibid., art.7.

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To qualify as a custodian, a commercial bank or other specialized financial institution shall provide to the CBIRC the certification that meets the qualifications in art.5 of the present Guide as well as a letter of undertaking promising to perform the duties and responsibilities as required in Items 4 and 7 of art.6 of the Guide. The CBIRC will conduct assessment of the commercial bank or other specialized financial institution’s engaging in custody of stock assets of insurance companies in terms of its asset scale, corporate governance, custody expertise, internal control, market status, and so on, and issue review opinions thereabout.238 (b) Selection of the custodian Insurance companies shall select qualified commercial banks or other specialized financial institutions to take custody of their stock assets.239 When selecting the custodian, an insurance company shall conduct comprehensive assessment of the capital strength, creditworthiness, custody capacity, risk control and performance assessment abilities, and so on of the optional custodians for stock assets, in accordance with the procedures and standards as provided for.240 When selecting a custodian, the insurance company shall require the commercial bank or other specialized financial institution to provide the following materials:241 (1) A photocopy of its financial license; (2) The financial statements that have been audited by an accounting firm for the last three years; (3) The document stating the organizational structure, management system, and personnel arrangement for custody operations; (4) The explanation for the information system and security facilities for keeping custody of stock assets of the insurance company; (5) The letter of custodian audit opinions issued by the CBIRC; and (6) Other materials required by the CBIRC. The insurance company shall commission a custodian to keep custody of its stock assets. Where multiple insurance companies share a stock-trading seat, they shall select the same custodian.242 A commercial bank or other specialized financial institution that holds directly or indirectly over 10% of the insurance company’s shares may not act as the stock asset custodian of the insurance company. An insurance company that holds directly or indirectly over 10% of the shares of the commercial bank or other specialized financial institution may not select such bank or institution to take custody of its stock assets.243

238 239 240 241 242 243

Ibid. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12.

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(c) Custody agreement An insurance company shall enter into an agreement with its custodian when placing its stock assets under custody. The custody agreement shall specify the following items:244 (1) Scope of assets under custody; (2) Rights and obligation of both parties; (3) Principles of and requirements for capital clearing, accounting treatment, and asset evaluation; (4) Custody services, including opening a special deposit account, opening and managing a securities account, preserving asset certificates, and taking charge of capital clearing, accounting, investment supervision, management of archival files of the assets under custody, and issuance of a custody report. (5) Designation and change of the authorized persons on both sides, including the name list, scope of authorization, duration, a specimen of signature, seal impression, official seal or business seal, and so on. (6) Measures in guard against incorrect handling; (7) Assumption of liabilities for a negligence or mistake; (8) Custody cost and the method employed for its calculation and extraction; (9) Change of custodianship; (10) Effectiveness, modification, and change of the agreement; (11) Prohibited acts; (12) Confidentiality; and (13) Liabilities for breach of the agreement. The custodian that is engaged in custody of stock assets of an insurance company may not commit any of the following acts:245 (1) Misappropriating the stock assets of the insurance company under its custody; (2) Mixing the stock assets of the insurance company under its custody with its own assets and managing them without distinction; (3) Mixing the stock assets of the insurance company under its custody with the assets of any other institution under its custody and managing them without distinction; (4) Mixing the stock assets of different insurance companies and managing them without distinction; (5) Taking advantage of the stock assets of the insurance company under its custody, as well as the related information, for inappropriate gains for itself or for others; or (6) Any other prohibited act as provided for by the state or stipulated in the custody agreement. 244 Ibid., art.13. 245 Ibid., art.14.

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The custodian shall notify the insurance company and report to the CBIRC within five days under any of the following circumstances:246 (1) (2) (3) (4) (5)

Replacing the legal representative; Replacing the controlling shareholder; Change in the paid-in capital; Involvement in a major lawsuit or imposition of any serious penalty; or Any other circumstance where a report is a must as provided for by the state or stipulated in the custody agreement.

Where a custodian is under any of the following circumstances, the insurance company shall replace it:247 (1) (2) (3) (4)

if it breaches the custody agreement with serious circumstances; if it is disqualified for custody operations in accordance with law; if it is dissolved, cancelled, bankrupt, or taken over, in accordance with law; if the oversight authorities or the insurance company has sufficient evidence and justification to believe that the custodian is unable to perform the custody duties and responsibilities; or (5) if there is any other circumstance as provided for by the state or stipulated in the custody agreement. The custodian may not expose to outsiders any information regarding the management of stock assets of the insurance company under its custody, as well as the related materials, except for the scenario of disclosure as provided for in the laws and regulations.248 Where, due to any breach of the present Guide or the custody agreement by the custodian, a loss is caused to stock assets of an insurance company under its custody, the custodian shall be responsible for compensation and be subject to civil liabilities. Resignation from custodianship results in no exemption of the compensation and civil liabilities.249 Where, in breach of the custody agreement, the custodian takes advantage of the stock assets of an insurance company under its custody for inappropriate gains for itself or for others, such gains shall remain with the stock assets, except as otherwise provided for in the laws and regulations.250 Where an insurance company changes its custodian, the outgoing custodian shall properly preserve the stock assets of the insurance company under its custody, as well as the business documents in connection with the custody, and go through the custody handover procedures in a timely manner.251

246 247 248 249 250 251

Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20.

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Where a custodian is dissolved, cancelled, bankrupt, or taken over, the stock assets of any insurance company under its custody may not be listed into the scope of asset liquidation.252 The agreement on custody of stock assets between an insurance company and its custodian shall embody all articles as provided for in the present section.253 (d) Oversight The CBIRC oversees the business activities in connection with custody of stock assets of insurance companies in accordance with law.254 Where an insurance company and its custodian enters into, modifies, or terminates a custody agreement, they shall report it to the CBIRC within five working days from the day when the custody agreement is entered into, modified, or terminated.255 The custodian shall, annually and before the termination of a custody agreement, hire an accounting firm to audit the stock assets of insurance companies under its custody and submit the audit results to the CBIRC.256 When conducting custody operations of stock assets of insurance companies, the custodian may not resort to unfair competition or market monopoly.257 Where an insurance company or insurance asset management company is in breach of the present Guide, the CBIRC will mete out penalties in accordance with relevant provisions. Where a custodian is in breach of the present Guide, the CBIRC will enter it as a flaw into the custodian’s business record; if the circumstance is serious, the CBIRC will suspend its operations for custody of stock assets of insurance companies.258 12.8.4 The increased regulatory ratio of insurance funds invested in blue-chip stocks To optimize the allocation structure of insurance assets and promote the long-term stable and sound development of the capital market, the CIRC released the Notice of the CIRC on Issues concerning the Increased Regulatory Ratio of Insurance Funds Invested in Blue-Chip Stocks on 8 July 2015, which came into force on the same day.259 The Notice is concerned with the issues relating to the investment of insurance funds in blue-chip stocks: For an insurance company satisfying the following conditions, upon recordation with the CBIRC, the upper limit of the regulatory ratio of its balance of investment in a single blue-chip stock to its total assets at the end of the previous quarter may change from 5% to 10%, and if its balance of investment in equity assets accounts for 30% or more of its total assets at the end of the previous quarter, it may 252 253 254 255 256 257 258 259

Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Bao Jian Fa No. 64 [2015].

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continue to increase its holding of blue-chip stocks, but its balance of investment in equity assets after the increased holding shall not be more than 40% of its total assets at the end of the previous quarter: (1) Its solvency adequacy ratio at the end of the previous quarter is not less than 120%; (2) Its balance of investment in blue-chip stocks is not less than 60% of its balance of investment in stocks.260 The asset admission ratio of insurance funds invested in blue-chip stocks shall be raised appropriately, and the specific criteria shall be additionally developed by the CBIRC.261 The blue-chip stocks in which insurance funds are invested shall satisfy the relevant provisions on equity investment with insurance funds, be issued and listed on the main board within China, and have a market capitalization of not less than ¥20 billion yuan each, a relatively high cash dividend ratio, and a stable dividend yield.262 Insurance companies shall, according to the liability-asset management needs and market changes, strengthen the risk monitoring of equity assets and conduct stress testing on a regular basis to ensure that their solvency and other indicators are in compliance with the regulatory provisions.263 Where an insurance company adjusts the relevant investment ratio in accordance with this Notice, it shall file a report on its investment with the CBIRC within 15 working days after the end of each quarter.264 12.8.5 Insurance funds investment in the stocks of companies listed on the growth enterprise market (GEM) Insurance funds may be invested in the stocks of GEM listed companies. In order to promote the support of the insurance industry for the adjustment, transformation, and upgrading of economic structure and to support the development of small- and medium-sized enterprises and optimize the insurance asset allocation structure, in accordance with the Interim Measures for the Administration of Utilization of Insurance Funds and other relevant provisions, the CIRC formulated the Notice of the CIRC on Issues concerning the Investment in the Stocks of Companies Listed on the Growth Enterprise Market with Insurance Funds, which was issued on 1 July 2014 and came into force on the same day.265 Insurance funds may be invested in the stocks of companies listed on GEM. Insurance group (holding) companies, and insurance companies shall have stock investment abilities in order to directly invest in the stocks of companies listed on GEM; companies that do not have stock investment abilities shall entrust qualified

260 The Notice of the CIRC on Issues concerning the Increased Regulatory Ratio of Insurance Funds Invested in Blue-Chip Stocks 2015, s.1. 261 Ibid., s.2. 262 Ibid., s.3. 263 Ibid., s.4. 264 Ibid., s.5. 265 Bao Jian Fa No. 1 [2014].

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professional management institutions (including insurance asset management companies and other professional management institutions) with stock investment.266 Insurance group (holding) companies and insurance companies shall include the book balance of their investments in the stocks of companies listed on GEM into their stock assets for a unified computation of the percentage of shares held.267 Insurance group (holding) companies and insurance companies may not invest in the stock of a company listed on GEM which falls under any of the following circumstances:268 (1) The listed company has disclosed that it is under the investigation of the regulatory authority or it has been punished by the regulatory authority in the last year. (2) It has been publicly reprimanded by a stock exchange in the last year. (3) An accounting firm has issued qualified opinions, adverse opinions, or a disclaimer of opinions on the financial statements of the listed company for the last year. (4) The stock is suspected of being manipulated. (5) Other circumstances as prescribed by the CBIRC Where insurance group (holding) companies and insurance companies entrust professional management institutions with investments in GEM stocks and other stocks, the percentage of the same stock held by the same client through its multiple asset accounts that are entrusted to the same professional management institution shall be computed on a consolidated basis. Where the same professional management institution manages the asset accounts of different clients under entrustment, it shall respectively compute the aggregated percentage of shares held by each client under their respective asset accounts. If the aggregated percentage is 5% or more, the insurance institution and the professional management institution concerned shall report to the CBIRC in a timely manner and fulfil the information disclosure obligations in accordance with the relevant provisions.269 Insurance group (holding) companies and insurance companies shall follow the principles of prudence, safety, and value increment; optimize stock asset allocation; establish transparent and standardized investment decision-making procedures; develop scientific and effective investment risk evaluation systems; and improve the investment risk control rules, stock trusteeship rules, stock trading management rules, and information management rules.270 The relevant associations in the insurance industry shall strengthen industry self-regulation on stock investments with insurance funds. For such behaviours as investment of insurance funds in stocks in violation of the relevant regulations and relevant parties’ unfair treatment of insurance funds in stock offering and

266 The Notice of the CIRC on Issues concerning the Investment in the Stocks of Companies Listed on the Growth Enterprise Market with Insurance Funds 2014, s.1. 267 Ibid., s.2. 268 Ibid., s.3. 269 Ibid., s.4. 270 Ibid., s.5.

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trading, the relevant associations in the insurance industry shall apply the negative list management system.271 12.8.6 Regulating the stock investment business of insurance institutions The business of stocks investment of insurance institutions is governed by the Notice of the CIRC on Regulating the Stock Investment Business of Insurance Institutions, which was issued on 18 March 2009 and became effective on the same day.272 To improve the management of allocation of stock assets. An insurance company shall, in light of the characteristics of insurance funds and its solvency, uniformly allocate the domestic and overseas stock assets and reasonably determine the stock investment scale and proportion. If its solvency adequacy ratio reaches 150% or higher, it may carry out the normal stock investment under the relevant provisions. If its solvency adequacy ratio is between 100% and 150% for four consecutive quarters, it shall adjust its stock investment strategies. If its solvency adequacy ratio is lower than 100 % for two consecutive quarters, it shall not increase its stock investment and shall in a timely manner report the market risks and take effective response and control measures.273 To strengthen the management of the stock pool system. An insurance company or insurance asset management company shall establish different levels of stock pools such as forbidden stock pool, alternative stock pool, and core stock pool; strengthen the routine maintenance and management of stock pools; improve the research support capabilities; track and analyze the market situations; and pay close attention to the changes of listed companies. If the stocks which it has invested in are under the circumstances as described in art.14 of the Interim Measures for the Administration of Stock Investment of Insurance Institutional Investors 2004, it shall timely dispose of them according to authorization and may remove them from the investment stock pool.274 To establish a fair trading system. An insurance company or insurance asset management company shall regulate the fair trading in stock investment and ensure that various accounts or investment portfolios enjoy fair opportunities in terms of research information, investment advice, trading execution, and so on. An insurance institution shall arrange independent stock investment managers according to the nature of accounts or portfolios so as to strictly prevent stock purchase at high prices through different accounts to support such high prices, reverse operation, and other illicit acts of benefit transmission. It shall reinforce the education on professional ethics and establish a stock account declaration system for the relevant stock investment personnel and their linear relatives so as to prevent the operational and moral risks.275 271 Ibid., s.6. 272 Bao Jian Fa No. 45 [2009]. 273 The Notice of the CIRC on Regulating the Stock Investment Business of Insurance Institutions 2009, s.1. 274 Ibid., s.4. 275 Ibid., s.3.

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To operate according to the relevant provisions and control the overall risks. An insurance company shall, according to the new accounting standards and relevant provisions, compute the base amount of total assets, strictly control the short-term financing, regulate the investment operation acts, and prevent excessive use of leveraged financing for investment in stocks. An insurance company or insurance asset management company shall furnish to the custodian bank a laundry list of the stocks in its stock pools and large blue-chip stocks, a name list of stocks of affiliated parties, and the data on the total assets and various insurance product account scale necessary for computing proportions and assist the custodian bank in performing the oversight obligation as an independent third party.276 To strengthen the dynamic monitoring of market risks. An insurance company or insurance asset management company shall strengthen the basic construction, employ value-at-risk (VAR) and other quantification analysis means to quarterly perform stress test of stock risks, analyze the risk exposure degrees, and assess the potential risk factors and overall risk bearing capacity; in the event of any abnormality such as drastic fluctuations on the stock market, an insurance company or insurance asset management company must increase the test frequency and expand the test scope, take measures to eliminate the risks in a timely manner, and submit a Stock Investment Risk Control Report to the regulatory institution. An insurance institution shall, under the principle of decentralization, set forth the concentration indicators for industries and individual stocks and regulate its participation in the stock subscription, issuance of new shares, placement, and other activities so as to prevent the concentration risks and the market risks likely arising during the lock-up period.277 To put in place the post risk accountability. An insurance company or insurance asset management company shall further put in place the post accountability system, do a good job in the relevant analysis preparation for reference, strengthen the internal audit on the implementation of stock investment rules, establish a routine monitoring mechanism for abnormal trading activities, and strengthen the management and control in respect of the trading independence and fairness and the process of allocation. The relevant senior management and risk controllers of an insurance institution shall earnestly perform their management duties, faithfully record and report irregularities, strictly execute the accountability system, and put in place the duties of investment managers at all investment stages. Whoever violates a law, regulation, or operation rule shall be subject to the liabilities for his or her violation and the loss caused by him or her.278 12.8.7 Further strengthening the regulation of stock investments with insurance funds In order to further specify the policies on the supervision of stock investment by insurance institutions, regulate the stock investment behaviours and prevent the risks 276 Ibid., s.4. 277 Ibid., s.5. 278 Ibid., s.6.

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in the utilization of insurance funds, the CIRC formulated the Notice on Matters concerning Further Strengthening the Regulation of Stock Investments with Insurance Funds on 24 January 2017, which came into force on the same day.279 Investment in stocks of listed companies by insurance institutions or insurance institutions and non-insurance persons acting in concert are divided into three circumstances, including general stock investment, major stock investment, and acquisition of listed companies.The CBIRC shall implement differential supervision in accordance with the different circumstances. Insurance institutions shall invest in the stocks of listed companies under the principle of mainly making financial investment.280 “General stock investment” means the stock investment behaviour that an insurance institution or an insurance institution and non-insurance person acting in concert invests in stocks of a listed company accounting for less than 20% of the total capital stocks of the listed company and does not possess any control power over the listed company.281 “Major stock investment” means the stock investment behaviour that an insurance institution or insurance institution and non-insurance person acting in concert hold stocks of a listed company accounting for no less than 20% of the total capital stocks of the listed company and does not possess any control power over the listed company.282 “Acquisition of a listed company” includes becoming a controlling shareholder of a listed company through acquisition of shares, becoming the actual controller of a listed company through investment relations, agreement, and other arrangements, or possessing the control power over a listed company by concurrently adopting the aforesaid methods and approaches.283 The standards of possessing the control power over a listed company, persons acting in concert, and relations of acting in concert shall be governed by the provisions of the securities regulatory authority of the State Council. Insurance institutions include insurance companies, insurance group (holding) companies, insurance asset management institutions, and other institutions in the insurance industry. Non-insurance persons acting in concert means investors that constitute relations of acting in concert in the investment in the stocks of listed companies other than insurance institutions.284 Where an insurance institution makes general stock investment, the comprehensive solvency adequacy ratio at the end of the previous quarter shall not be lower than 100%, and where an insurance institution makes major stock investment and acquires a listed company, the comprehensive solvency adequacy ratio at the end of the previous quarter shall not be lower than 150%, the insurance institution has undergone the formalities of recordation of the stock investment management 279 Bao Jian Fa No. 9 [2017]. 280 The Notice of the CIRC on Matters concerning Further Strengthening the Regulation of Stock Investments with Insurance Funds 2017, s.1. 281 Ibid. 282 Ibid. 283 Ibid. 284 Ibid.

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capacity, and the said institution meets the regulatory requirements concerning the internal control of the use of insurance funds.285 An insurance institution may use its insurance funds to invest in the stocks of a listed company and independently choose the industry scope of the listed company but shall rationally choose investment subjects according to the source, costs, and time limit of funds, strengthen the asset-liability matching management, and serve the development of the main business of insurance.286 Insurance institutions shall acquire listed companies with their own funds. An insurance institution shall not joint acquire any listed company with any noninsurance person acting in concert or conduct mortgage financing with the stock assets in which it invests for the investment in the stocks of listed companies.287 Where an insurance institution and a non-insurance person acting in concert jointly make major stock investment and continue to invest in the stocks of the listed company after undergoing recordation, the newly increased investment shall be made with their own funds, except as otherwise prescribed by the banking regulatory institution of the State Council on the investment in banking financial institutions by insurance institutions.288 An insurance institution that raises placards in the general stock investment shall disclose the relevant information in a timely manner according to the requirements of the securities regulatory laws and regulations and shall, within five working days after the parties with information disclosure obligations issue an announcement, submit a report including investment research, internal decision-making, follow-up investment plans, risk management measures, and other factors to the CBIRC.289 An insurance institution shall, within five working days after the party with information disclosure obligations issues an announcement, submit the recordation materials, including the materials as prescribed in s.4 of the Notice and the following contents, to the CBIRC after meeting the standards of major stock investment in accordance with the requirements of the securities regulatory laws and regulations:290 (1) The source of the investment funds, follow-up investment program, holding period, compliance report, and follow-up management program, among others; (2) The self-examination report of meeting the regulatory requirements concerning the internal control of the use of insurance funds and the resolution and minutes of the board of directors and investment decision-making committee involving this investment; (3) The basic information on making information disclosure according to the Standards for the Disclosure of Capital Use Information by Insurance Companies No. 3: Raising Plates for the Stocks of Listed Companies; and 285 286 287 288 289 290

Ibid., s.2. Ibid. Ibid., s.3. Ibid. Ibid., s.4. Ibid., s.5.

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(4) Other materials required by the CBIRC to be submitted under the principle of prudential regulation. The CBIRC shall strictly control the acquisition of listed companies by insurance institutions. To acquire a listed company, an insurance institution shall file an application for approval with the CBIRC in advance. Besides the documents as listed in s.5 of the Notice, an application report shall also include the following materials:291 (1) The resolution of the shareholders’ meeting or the board of directors; (2) The main business plan and description of business relevance; (3) The financial advisory reports, due diligence investigation reports, and legal opinions provided by professional institutions; (4) The business integration plan; (5) The description of the investment team and management experience; (6) The stress test report on asset-liability matching; and (7) The investment agreement containing the conditions for the approval for entry into force by the regulatory institution or department. The industries of the listed companies to be acquired by insurance institutions shall be limited only to the industries of insurance companies and non-insurance financial enterprises and the industries that are relevant to insurance business, are in line with industrial policies of the state, and have stable expected return of cash flow; listed companies that produce high pollution, are high energy-consuming, fail to reach the national standards on energy conservation or environmental protection, and have low technical value added shall not be acquired.292 Insurance institutions shall, in accordance with the relevant regulatory provisions, strictly control the scope of personnel who are exposed to major stock investment information to avoid insider trading or abnormal fluctuations in the stock prices of listed companies due to information disclosure.293 Insurance institutions shall strengthen the asset and liability management and risk limit management to prevent stock investment concentration risks and market risks. An insurance institution’s book balance of investments in equity assets is not more than 30% of the company’s total assets at the end of the previous quarter. Except as otherwise prescribed on a listed company’s acquisition and investment in the stocks of a listed commercial bank, an insurance institution’s book balance of investment in a single stock shall not be more than 5% of the company’s total assets at the end of the previous quarter. Insurance institutions that have increased shareholding of blue-chip stocks according to relevant policies shall, within two years or the time limit as prescribed by the relevant regulatory institutions, adjust the investment proportions until meeting the requirements of the regulatory provisions on proportion.294

291 292 293 294

Ibid., s.6. Ibid., s.7. Ibid., s.8. Ibid., s.9.

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The CBIRC shall examine the ex post recordation materials submitted by insurance institutions and issue recordation opinions within 15 working days after the essential elements are ready and shall issue approval opinions within the prescribed time limit for prior approval items. Before obtaining the recordation opinions or written approval documents, an insurance institution shall not continue to increase its shareholding in the listed company.295 Where the CBIRC determines that an insurance institution does not meet the requirements for recordation of major stock investment or does not grant approval, it shall have the right to order the insurance institution to make rectification according to the provisions of the CBIRC and relevant regulatory institution within the prescribed time limit. For insurance institutions investing in stocks in violation of the policies on the regulation of the utilization of insurance funds, the CBIRC may restrict the proportion of stock investment, suspend or cancel the recordation of stock investment capacity, and take other regulatory measures.296 Where an insurance institution and non-insurance person acting in concert jointly raise placards in the stock investment, the CBIRC may, besides requesting insurance institutions to disclose information and submit reports in a timely manner according to the provisions of s.4 of the Notice, take one or several of the following regulatory measures according to the solvency adequacy ratio, categorized supervision evaluation results, stress test results, and other indicators:297 (1) Requesting the insurance institution to report other activities with the non-insurance person acting in concert involving insurance funds. (2) Requesting the insurance institution to report the information on the pledge and financing of the non-insurance person acting in concert from a bank or other institution with the equity or stocks of the insurance institution. (3) Suspending the insurance institution’s direct investment in equity, immovable property, and other items with funds ultimately flowing to the non-insurance person acting in concert, and investment in plans of creditor’s rights, equity plans, asset management plans, or other financial products with funds ultimately flowing to the non-insurance person acting in concert. (4) Other measures required by the CBIRC to be taken under the principle of prudential regulation. An insurance institution that jointly makes major stock investment with a noninsurance person acting in concert shall submit a recordation report including the relevant information on the company and the non-insurance person acting in concert.298 Insurance institutions that make major stock investment or acquisition of listed companies shall, in accordance with the investment plans and strategic arrangements,

295 296 297 298

Ibid., s.10. Ibid. Ibid., s.11. Ibid., s.12.

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strengthen communication with the shareholders and the management of the listed companies and maintain operational stability of the listed companies.299 Insurance institutions shall invest in the stocks of overseas listed companies under the market rules in the place where the investment is made and mutatis mutandis to the provisions of the Notice on implementing differential supervision and persons acting in concert.300 The CBIRC shall, according to the regulatory responsibilities, carry out dynamic and continuous supervision of insurance institutions’ stock investment behaviours, strengthen communication with the relevant regulatory departments, and notify the relevant information on insurance institutions’ major stock investment and acquisition of listed companies in a timely manner.301 12.9 Investment of insurance funds in real estate Another channel for insurance funds investment is the investment in real estate. To regulate the investment of insurance funds in real estate, prevent investment risks, guarantee asset safety and protect the legitimate rights and interests of the insurer and the insured, the CIRC promulgated the Notice of CIRC on Issuing the Interim Measures for the Investment of Insurance Funds in Real Estate on 31 July 2010, which became effective on the same day.302 These Measures were formulated in accordance with the Insurance Law, the Trust Law, the Real Right Law, the Company Law, the Interim Measures for the Administration of Use of Insurance Funds, and other provisions.303 The real estate invested with insurance funds refers to the land, buildings, and other fixtures on the land.304 Insurance funds may be invested in infrastructure real estate, non-infrastructure real estate, and real estate-related financial products.305 The investment of insurance funds in infrastructure real estate is governed by the Administrative Measures for the Indirect Investment of Insurance Funds in Infrastructure Projects which was issued on 14 June 2016 and came into force on 1 August 2016306 and other relevant provisions. This will be considered in section 12.10. The investment in non-infrastructure real estate and the relevant financial products is governed by the Interim Measures for the Investment of Insurance Funds in Real Estate 2010 (the Interim Measures 2010).307 We consider the Interim Measures 2010 in this section.

299 Ibid., s.13. 300 Ibid., s.14. 301 Ibid., s.15. 302 Bao Jian Fa No. 80 [2010] (see accessed on 16 October 2020. 303 The Notice of CIRC on Issuing the Interim Measures for the Investment of Insurance Funds in Real Estate 2010, art.1. 304 Ibid., art.2. 305 Ibid. 306 The CIRC Order No.2 [2016] (see accessed on 16 October. This will be considered later. 307 The Notice of CIRC on Issuing the Interim Measures for the Investment of Insurance Funds in Real Estate 2010, art.2.

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The term “real estate investment management institutions” (hereinafter, investment institutions) refers to the institutions legally registered within the territory of China to engage in real estate investment management. The term “professional service institutions” (hereinafter, the professional institutions) refer to the institutions with the corresponding professional qualifications, which have been recognized by the relevant department of the state and provide legal services, financial audit, assets appraisal, and other services for the investment of insurance funds in real estate.308 The property derived from the investment of insurance funds in real estaterelated financial products shall be independent from the inherent property of the investment institution, custody institution, or any other relevant institution and other property under its management. The property and income obtained by an investment institution from investment, management, or disposal of real estaterelated financial products shall be included in the property of real estate-related financial products.309 An insurance company (including insurance group [holding] company) that invests in real estate shall follow the principles of soundness and security, adhere to asset-liability matching management, prudently conduct investment operations, and effectively prevent risks.310 An insurance company, investment institution, or professional institution that engages in the investment of insurance funds in real estate shall abide by the provisions of these Measures, be duteous and diligent, and perform its obligations of being honest, creditworthy, prudential, and abiding by the law.311 12.9.1 Qualification conditions An insurance company that invests in real estate shall meet the following conditions:312 (1) It has sound corporate governance and management rules, decision-making procedures, and internal control mechanisms; (2) It implements asset custody mechanisms and has standardized and transparent asset operations; (3) Its asset management department has no fewer than eight professionals with real estate investment and relevant experience, of whom no fewer than three people have five or more years of relevant experience, and no fewer than three people have three or more years of relevant experience; (4) Its solvency adequacy ratio at the end of the previous accounting year is not less than 150%, and at the time of investment, its solvency adequacy ratio at the end of the previous quarter is not less than 150%; (5) Its profits in the previous accounting year and its net assets are not less than 100 million yuan (currency unit); 308 309 310 311 312

Ibid., art.3. Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.8.

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(6) It has funds needed for its investment in real estate and real estate-related financial products, and the source of funds is adequate and stable; (7) It has no gross violation of law or regulation in the last three years; and (8) It meets other prudent conditions as prescribed by the CBIRC. Where a company invests in real estate-related financial products, it shall conform to the provisions of subparagraphs (1), (2) (4), (5), (6), (7) and (8) of the preceding paragraph, and its asset management department shall have no fewer than two professionals who have three years or more real estate investment and relevant experience. Where an insurance company hires an investment institution to provide real estate management services, the requirements on the number of professionals may be properly relaxed. An investment institution that provides investment management services for the investment of insurance funds in real estate shall meet the following conditions:313 (1) It was legally registered within the territory of China and has business qualifications recognized by the relevant department of the state; (2) It has sound corporate governance, good market reputation, scientific and effective management, and stable investment performance; (3) It has a sound business flow, risk management, and internal control and audit system, which have been effectively implemented; (4) Its registered capital is not less than ¥100 million yuan; (5) The balance of assets under its management is not less than ¥5 billion yuan, and it has rich real estate investment management and relevant experience; (6) It has no fewer than 15 professionals who have real estate investment and relevant experience, of whom no fewer than three have five or more years of relevant experience and no fewer than four have three or more years of relevant experience; (7) It accepts the interrogation of the CBIRC on the investment of insurance funds and reports relevant information; (8) It has no gross violation of law or regulation in the last three years; and (9) It meets other prudent conditions as prescribed by the CBIRC. The investment institutions meeting the aforesaid conditions may provide relevant professional services for the investment of insurance funds in real estate and launch or issue real estate-related financial products. The rules on real estate investment plans launched or issued by an investment institution with insurance funds shall be prescribed by the CBIRC separately. A professional institution that provides the relevant services for the investment of insurance funds in real estate shall meet the following conditions:314 (1) It has the business qualifications recognized by the relevant department of the state; (2) It has sound management rules, business flow, and internal control mechanisms; 313 Ibid., art.9. 314 Ibid., art.10.

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(3) It has good understanding of the laws, regulations, policies, business flow, and transaction structure on the investment of insurance funds in real estate, has the experience and abilities to undertake the relevant services on real estate investment, and has a good business reputation; (4) It has no affiliated relationship with the relevant parties to the investment of insurance funds in real estate; (5) It accepts the inquiry of the CBIRC on the investment of insurance funds and reports relevant information; (6) It has no gross violation of law or regulation in the last three years; and (7) It meets other prudent conditions as prescribed by the CBIRC. A commercial bank that provides asset custody services for the investment of insurance funds in real estate shall accept the inquiry of the CBIRC on the investment of insurance funds and report relevant information. 12.9.2 Subject matter of investment and investment methods Insurance funds may be invested in real estate that meets the following conditions:315 (1) Projects with a state-owned land use right certificate and a license for construction land use planning; (2) Projects under construction with a state-owned land use right certificate, a license for construction land use planning, a license for construction project planning, and a construction license; (3) Transferable projects with a state-owned land use right certificate, a license for construction land use planning, a license for construction project planning, a construction license, and a presale license or sale license; (4) Projects with a certificate of title or certificate of other rights; and (5) Qualified government land reserve projects. The real estate invested with insurance funds shall have clear property rights with no dispute with respect to ownership; have complete, legal, and effective right certificates; and be located in a municipality directly under the Central Government, provincial capital city, city under separate state planning, or a city with obvious location advantages. The management rights shall be relatively centralized so as to satisfy the requirements for insurance asset allocation and risk control. Insurance funds may be invested in the real estate-related financial products that meet the following conditions:316 (1) The investment institution meets the provisions of art.9; (2) The products have been recognized by the relevant department of the state, are launched or issued within the territory of China, and are managed by a professional team;

315 Ibid., art.11. 316 Ibid., art.12.

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(3) The underlying assets or invested real estate is located within the territory of China and conforms to the provisions of subparagraphs (1) to (5), paragraph (1) of art.11; (4) The asset custody system is implemented and the risk segregation mechanism has been established; (5) There are specific investment objectives, investment plans, follow-up management plans, income distribution system, and liquidity and clearing arrangements on the products; (6) There are clear transaction structures, adequate risk warning, and truthful and complete information disclosure; (7) There are registration or bookkeeping arrangements on the products, which can satisfy the requirements for market transactions or transfer by agreement; and (8) The products meet other prudent conditions as prescribed by the CBIRC. The real estate-related financial products with regular earnings shall have Class AA or a long-term credit rating equivalent to Class AA or above, which is given by a domestic credit rating agency recognized by the CBIRC and legal and effective credit enhancement arrangements. The corresponding investment right protection mechanism shall be established for the financial products of the equity type. The rules on investment of insurance funds in real estate-related financial products shall be prescribed by the CBIRC separately. Insurance funds may be invested in the real estate prescribed in subparagraphs (1) to (4), paragraph (1) of art.11 in the form of equity, invested in the real estate prescribed by subparagraphs (1) to (5), paragraph (1) of art.11 in the form of creditor’s right, and invested in the real estate prescribed by subparagraphs (3) and (4), paragraph (1) of art.11 in the form of real right. The real estate invested with insurance funds in the form of creditor’s right, equity or real right shall be restricted to commercial real estate, office real estate, real estate for the aged, medical care, automobile services, and so on. relevant to the insurance business and self-use real estate.317 The investment of insurance funds in the real estate for medical care and automobile services shall not be restricted by subparagraphs (2) to (5), paragraph (1) of art.11 and the restriction of location. The investment in the real estate for the aged and purchase of self-use real estate shall not be restricted by subparagraphs (1) to (5), paragraph (1) of art.11 and the restriction of location. The aforesaid investment in the preceding paragraph shall follow the principle of designated land for designated purposes, and speculation in real estate in a disguised form and development and sales of residence in the form of commercial real estate in the name of investment in the real estate for the aged and self-use real estate (project companies) shall be prohibited. With respect to the investment in the real estate for the aged, medical care, automobile services, and so on, the amount of

317 Ibid., art.13.

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investment in its supplementary construction shall not exceed 30% of the total investment of the project.318 The investment of insurance funds in real estate may be made in the form of debt-for-equity swap, debt-for-property swap, equity-for-property swap, and so on. except for government land reserve projects. In the case of any change of investment methods, the management methods shall be adjusted according to these Measures. The investment of insurance funds in the same real estate in multiple forms shall be governed by these Measures accordingly.319 An insurance company’s investment in real estate (excluding self-use real estate) shall comply with the following provisions on proportion:320 (1) The book balance of investment in real estate shall not exceed 10% of the total assets of the company at the end of the previous quarter; the book balance of investment in real estate-related financial products shall not exceed 3% of the total assets of the company at the end of the previous quarter; and the total book balance of investment in real estate and real estate-related financial products shall not exceed 10% of the total assets of the company at the end of the previous quarter; and (2) The book balance of an investment plan for an individual real estate shall not exceed 50% of the issuance scale of such plan, and the book balance of investment in any other real estate-related financial product shall not exceed 20% of the issuance scale of such product. For the investment of insurance funds in real estate, the methods, types, and term of holding real estate shall be rationally arranged. The remaining term for land use of real estate invested in the form of creditor’s rights, equity, and property right shall not be less than 15 years, and such real estate shall not be transferred within five years from the date of conclusion of the investment agreement. The selfuse real estate transferred within an insurance company, or the real estate-related financial products launched or issued by an authorized investment institution on the basis of the real estate it holds shall be excluded.321 No insurance company that invests in real estate shall carry out any of the following acts:322 (1) (2) (3) (4)

Providing unwarranted claim financing; Providing mortgage guarantee for the real estate in which it invests; Investing in the development or sales of commercial residential properties; Directly engaging in real estate development and construction (including grade one land development); (5) Investing in the establishment of any real estate development company, or investing in the equity of any unlisted real estate enterprise (excluding project companies), or obtaining controlling shares of any real estate 318 319 320 321 322

Ibid. Ibid. Ibid., art.14. Ibid., art.15. Ibid., art.16.

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enterprise in the form of share investment. Where an insurance company has invested in the establishment or has obtained the controlling shares of any real estate enterprise, it shall withdraw the investment within a prescribed time limit or exit through share transfer; (6) Investing in real estate with the funds collected in the form of borrowing, issuance of bonds, repurchase, inter-bank lending, and so on, except that it is otherwise prescribed by the CBIRC on the issuance of bonds; (7) Violating the investment proportion prescribed by these Measures; or (8) Committing any other act prohibited by laws and regulations and the CBIRC. 12.9.3 Risk control of investment in real estate Where a company invests in real estate with insurance funds, it shall establish standard and effective business flow and risk control mechanisms covering project appraisal, investment decision-making, compliance examination, investment operations, management and operations, asset valuation, financial analysis, risk monitoring and other key links, and form a whole-process management system involving risk identification, warning, control and disposal, and regularly or irregularly conduct stress tests to comprehensively prevent and manage real estate investment risks.323 Where a company invests in real estate with insurance funds, it shall, according to the regulatory provisions and internal control requirements, regulate and improve the decision-making procedures and authorization mechanism, and determine the decision-making and approval power of the shareholders’ meeting (general assembly of shareholders), board of directors and the management.324 The management responsible for decision-making and implementation shall perform their respective functions, prudently make decisions, be diligent and duteous, give full consideration to real estate investment risks, and according to the asset recognition standards and capital constraint, prudently appraise the influence of real estate investment on solvency and income level, strictly implement the relevant procedures, and be responsible for decision-making and operations. For the investment of insurance funds in real estate, no voting shall be made on the spot.325 Where a company invests in real estate with insurance funds, it shall hire a professional institution meeting the conditions prescribed in Article 10 to provide due diligence investigation reports and legal opinions, make effective investment plans, business plans and financial budgets, and control investment management and operation risks through scientific transaction structure and sound contractual arrangement.326 Where a company invests in real estate with insurance funds in the form of equity, the project company to be invested in shall be the direct owner of the real estate and such real estate shall be the major assets of the project company. The 323 324 325 326

Ibid., art.17. Ibid., art.18. Ibid. Ibid., art.19.

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project company shall not be involved in any material legal action, and the equity shall not be lapsed or harmed due to restriction on the mortgage of real estate, and so on.327 Where a company invests in real estate with insurance funds in the form of equity, it shall designate directors, senior managers and personnel to the key posts of the project company, and give its opinions on equity transfer, asset sales, guaranteed mortgage, funds accommodation and other major matters of the project company so as to protect all its legitimate rights and interests.328 Where a company invests in real estate with insurance funds in the form of creditor’s rights, it shall state in the contract the source and methods of repayment, types of guarantee and interest rate level, advance or delayed repayment and other contents. The debtor shall have good financial ability and solvency, and have no gross violation of law or regulation or bad credit record.329 Where a company invests in real estate with insurance funds in the form of real right, it shall complete the establishment, restriction, modification, cancellation and other ownership registration of the real right of real estate in a timely manner so as to prevent ownership disputes or legal risks caused by missed registration or wrong registration. Where there are restrictions on handling formalities for property right certificate, the company shall conclude a written contract to agree on the conditions for lifting restrictions, operating procedures, payment of contract consideration and other matters to prevent and control transaction risks.330 Where a company invests in real estate-related financial products, it shall conduct due diligence investigation, analysis and evaluation of the legality and compliance of such products, the reliability and sufficiency of underlying assets, and the feasibility of investment strategies and investment plans. During the period of holding products, it shall require the investment institution to strictly perform its functions, effectively prevent risks and protect the rights and interests of investors according to the stipulations of the investment contract or the prospectus.331 Where a company invests in real estate with insurance funds, it shall manage the fund in designated accounts, urge the opening bank to conduct monitoring throughout the whole process, strictly examine fund payment, obtainment of the relevant consideration and other matters.332 The transaction price shall be rationally determined in the investment of insurance funds in real estate. An insurance company or investment institution shall have no affiliated transaction with any custody institution or professional institution. Where an insurance company has affiliated transactions with an investment institution, the transactions shall not deviate from the price or charging standards of the independent third party on the market, and the interests of the insurance company shall be not infringed upon through affiliated transactions or any other method.333 327 328 329 330 331 332 333

Ibid., art.20. Ibid. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid.

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Where a company invests in real estate with insurance funds, it shall strengthen the follow-up management of assets, establish and improve management rules, set up special posts, designate managers, monitor the real estate market, appraise the asset value and quality of real estate, adjust investment strategies and the type of operation of real estate at an appropriate time, and prevent investment risks, business risks and market risks. In the case of serious investment risks, it shall in a timely manner activate the emergency plan, and report to the CBIRC the cause of risks, loss, disposal measures, subsequent impact, and so on.334 Where a company invests in real estate with insurance funds, it shall hire a professional institution in compliance with the conditions prescribed in article 10, fully consider the location of real estate, market and other relevant factors under the principle of prudence, and adopt the cost approach, market comparison approach, income capitalization approach and other appraisal methods so as to rationally appraise the asset value of real estate.335 Where a company invests in real estate with insurance funds, it shall specify the risk responsibility and post duties of the relevant personnel, and establish an accountability system.336 Where any senior manager or main business personnel of an insurance company is found during his or her term of office or after he or she leaves his or her post that he or she has violated any relevant law, administrative regulation or provision of these Measures on real estate investment when he or she works in the company, the insurance company shall deal with his or her liability according to law.337 Where a company invests in real estate with insurance funds, it shall require the investment institution to perform its information disclosure obligations according to the laws, regulations, the relevant provisions and stipulations of the contract, and be responsible for the timeliness, authenticity, integrity and legality of the disclosed information. The information disclosed by the investment institution shall satisfy the requirements for the insurance company to understand the risk features, risk level of the real estate and real estate-related financial products and the requirements for its investment management. The disclosed information shall at least include the investment scale, operational management, asset valuation, asset quality, investment income, transactions and transfer, risk level, and so on. on the real estate or real estate-related financial products.338 12.9 4 Supervision and administration of investment in real estate Where an insurance company invests in real estate, and the investment balance exceeds two billion yuan or 20% of the limit for investment, it shall report to the CBIRC within five working days after the conclusion of the investment agreement. Where it makes additional investment on a real estate project in which it once invested, it shall

334 335 336 337 338

Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid. Ibid., art.28.

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report to the CBIRC upon the deliberation of the board of directors within five working days after the conclusion of the investment agreement.339 The report prescribed in the preceding paragraph shall at least include the resolution of the board of directors or the institution authorized by it, the feasibility study report, asset allocation plan, legality and compliance report, assets appraisal report, risk assessment report, statement on affiliated transactions, solvency analysis, follow-up management plans, legal opinions, investment agreement, and so on.340 Where a company invests in a project for the aged with insurance funds, it shall, after determining the investment proposal, notify the CBIRC of the proposal, and report to the CIRC within five working days after the conclusion of the investment agreement. In addition to the contents prescribed in paragraph (2) of this article, it shall state the business purposes and development plans, and submit the overall design proposal, specific implementation plans and other materials.341 Where the CBIRC finds that the investment of an insurance company has violated any law, regulation or provision of these Measures, it shall be entitled to order the company to make correction.342 Where an insurance company invests in real estate, it shall submit a quarterly report within 15 working days after the end of each quarter and submit an annual report to the CBIRC before 31 March each year, which shall at least include the following contents:343 (1) (2) (3) (4) (5) (6) (7)

A summary of investment; Utilization of capital funds; Asset management and operation; Asset valuation; Asset risks and quality; Major emergencies and the handling thereof; and Other prudent contents prescribed by the CBIRC.

In addition to the aforesaid contents, the annual report shall also cover the information on investment income and distribution, asset recognition and changes in solvency and investment capacity, and so on. and be attached with the relevant report audited by a professional institution.344 An investment institution shall, before 31 March each year, submit to the CBIRC a report on the investment of insurance funds in real estate-related financial products, which shall at least include the following contents:345 (1) Investment of insurance funds; (2) Product operation management, major risks and the disposal thereof, asset valuation and income, and so on;

339 340 341 342 343 344 345

Ibid., art.29. Ibid. Ibid. Ibid. Ibid., art.30. Ibid. Ibid., art.31.

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(3) Changes in the underlying assets or asset pool, product transfer, transactions and circulation, and so on; (4) The annual financial report of products audited by a professional institution; and (5) Other prudent contents prescribed by the CBIRC. In addition to the aforesaid contents, the investment institution shall also report the changes in the professional team and investment capability, regulatory punishments, legal disputes and other information.346 Where the real estate-related financial products are publicly issued or collected, the relevant information shall be disclosed according to the relevant provisions.347 A custody institution shall submit a quarterly report within 15 working days after the end of each quarter and submit an annual report to the CBIRC before 31 March each year, which shall at least include the following contents:348 (1) (2) (3) (4) (5) (6) (7)

Investment of insurance funds; Legality and compliance of investment; Abnormal transactions and the matters for attention; Asset valuation; Main risk conditions; The related affiliated transactions; and Other prudent contents prescribed by the CBIRC.

The CBIRC shall formulate real estate investment capability standards, and insurance companies and the relevant investment institutions shall conduct a selfassessment according to the prescribed standards and submit the appraisal reports to the CBIRC. The CBIRC shall examine, track down and monitor the real estate investment management capability of insurance companies and the relevant investment institutions and the changes thereof.349 The CBIRC may, according to market needs, properly adjust the proportion of investment, the qualifications of the relevant parties concerned, the materials submitted and other matters. The materials submitted by the relevant parties to the CBIRC on the investment of insurance funds in real estate and real estaterelated financial products shall conform to regulatory provisions, and the parties concerned shall be responsible for the authenticity of the materials.350 The CBIRC shall conduct on-site supervision and off-site supervision of the investment of insurance companies in real estate, and may, when necessary, hire a professional institution to assist in investigation.351 Where an insurance company invests in real estate, and is not sufficiently solvent, encounters any material business problem or major investment risk, which may produce adverse effects upon the financial system, financial industry and the 346 347 348 349 350 351

Ibid. Ibid. Ibid., art.32. Ibid., art.33. Ibid. Ibid., art.34.

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financial market, the CBIRC shall take such regulatory measures prescribed by the relevant laws and regulations as ceasing the investment business, restricting investment proportion, adjusting investment personnel, ordering the disposal of real estate assets and restricting the distribution of dividends of shareholders and remuneration of senior managers. Where an insurance company fails to continuously comply with the provisions of art.8 after making an investment in real estate, the CBIRC shall order it to make correction.352 The CBIRC shall not include the real estate illegally invested or invested exceeding the prescribed proportion in the recognized scope of assets according to the relevant provisions. Where non-subjective factors such as emergency events and market changes result in the proportion of real estate exceeding that prescribed in these Measures, the insurance company shall adjust the investment proportion as required within the prescribed time limit.353 The assets appraisal standards, methods and rules on risk indicators on the investment of insurance funds in real estate shall be prescribed by the CBIRC separately.354 Where an investment institution or a professional institution participating in the investment of insurance funds in real estate violates any relevant law, administrative regulation or provision of these Interim Measures 2010, the CBIRC shall be entitled to record its misconduct and report the violations of law or regulation to its regulatory or competent department. Where the circumstances are serious, the CBIRC shall order the insurance company to cease the relevant business with this institution, and consult with the relevant regulatory or competent department to impose administrative punishment on it according to law.355 No insurance company shall have any business relationship with any investment institution or professional institution recorded in the list of bad records.356 An insurance company shall use capital funds to invest and purchase office premises, training centres, back-up centres, disaster relief centres and other selfuse real estate.357 The book balance of investment of an insurance company in the purchase of self-use real estate shall not exceed 50% of the net assets of the company at the end of the previous year.358 Where the same real estate invested by an insurance company includes both selfuse real estate and real estate used for investment purposes, the insurance company shall, according to the provisions of these Interim Measures 2010, respectively determine the proportion of capital funds and the reserves for insurance liabilities, respectively calculate the cost and investment income, and conduct accounting treatment.359 352 353 354 355 356 357 358 359

Ibid. Ibid. Ibid. Ibid., art.35. Ibid. Ibid., art.36. Ibid. Ibid.

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The investment of insurance funds in overseas real estate is governed by the Interim Measures for the Administration of Overseas Investment with Insurance Funds and other relevant provisions of the CBIRC. The proportion of investment of insurance funds in domestic and overseas real estate and the relevant financial products are calculated on a consolidated basis.360 The relevant provisions of the Interim Measures for the Investment of Insurance Funds in Equity are not apply to the investment of insurance funds in the equity of a project company for the purpose of obtaining the ownership of real estate.361 12.10 Indirect investment of insurance funds in infrastructure projects The investment of insurance funds in infrastructure real estate is governed by the Administrative Measures for the Indirect Investment of Insurance Funds in Infrastructure Projects (hereinafter, the Measures 2016) which was issued on 14 June 2016 and came into force on 1 August 2016,362 and other relevant provisions. To strengthen the administration of the indirect investment of insurance funds in infrastructure projects, prevent and control the risks in management and operation, guaranteeing the security of insurance funds, protect the lawful rights and interests of the insurer, the insured and all parties, and promote the stable and sound development of the insurance sector, these Measures 2016 are developed in accordance with the Insurance Law, the Trust Law, the Contract Law, and other relevant laws and administrative regulations.363 For the purpose of these Measures 2016, “indirect investment of insurance funds in infrastructure projects” means that the principal entrusts his or her insurance funds to the trustee, and the trustee creates an investment plan in its own name according to the principal’s wishes, invests in infrastructure projects, and manages or disposes of insurance funds for the benefits of the beneficiary or for specific purposes.364 The principal that invests in an investment plan created by the trustee shall retain the custodian to take into custody property under the investment plan. The beneficiary shall retain an independent supervisor to oversee the management and operation of the investment plan.365 The principal, the trustee, the beneficiary, the custodian, the independent supervisor and other parties that participate in the investment plan shall conduct relevant business activities in accordance with the law, and according to these Measures 2016, enter into written contracts to indicate the rights and obligations of all parties.366 360 Ibid., art.37. 361 Ibid. 362 The CIRC Order No.2 [2016]; These Measures also apply, mutatis mutandis, to the indirect investment of insurance funds in the form of investment plans in non-infrastructure real estate and other projects. 363 The Administrative Measures for the Indirect Investment of Insurance Funds in Infrastructure Projects 2016, art.1. 364 Ibid., art.2. 365 Ibid., art.3. 366 Ibid., art.4.

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REGULATION OF USE OF INSURANCE FUNDS

Property under an investment plan shall be independent from the intrinsic property of the trustee, the custodian, the independent supervisor and any other natural person, legal person or organization that provides services for the management of the investment plan and from other properties managed by them. The property and income obtained by the trustee from managing, utilizing, selling, or otherwise disposing of property under the investment plan shall be incorporated into property under the investment plan.367 Where the trustee, the custodian, the independent supervisor or any other natural person, legal person or organization that provides services for the management of an investment plan is liquidated for being dissolved, abolished or declared bankrupt in accordance with the law or for any other reason, the property under the investment plan is not liquidating property.368 The claims owned by property under the investment plan shall not be used to offset the debts incurred by the intrinsic property of the trustee, the custodian, the independent supervisor or any other natural person, legal person or organization that provides services for the management of the investment plan. The claims owned and debts incurred by properties under different investment plans shall not be offset mutually.369 No enforcement may be conducted against property under an investment plan, except for the debts incurred by the implementation of the investment plan.370 The indirect investment of insurance funds in infrastructure projects shall observe the principles of safety, benefits, liquidity, and asset-liability matching. The principal shall prudently make investment and prevent risks. The trustee, the custodian, the independent supervisor or any other natural person, legal person or organization that provides services for the management of the investment plan shall devote themselves to their duties, and perform their obligations of good faith, prudence and diligence.371 12.10.1 Investment plans The term “investment plan” means a financial instrument through which all parties agree on their rights and obligations in the form of a contract, and determine investment shares, amount, currencies, term or investment withdrawal methods, uses of funds, income payment, transfer of the beneficiary certificate, and other content.372 An investment plan may invest in infrastructure projects by creditors’ rights, stock rights, real rights and other feasible methods.373 Where an investment plan invests in an infrastructure project by creditors’ rights, it shall have specific repayment arrangements. If the investment plan invests in an infrastructure project by stock rights or public-private partnership, it shall select a 367 368 369 370 371 372 373

Ibid., art.5. Ibid., art.6. Ibid. Ibid. Ibid., art.7. Ibid., art.9. Ibid., art.10.

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REGULATION OF USE OF INSURANCE FUNDS

project with a transparent charging and pricing mechanism, predictable and stable cash flows or specific withdrawal arrangements.374 The infrastructure project invested by an investment plan shall meet the following conditions:375 (1) It complies with national industry policies and relevant policies. (2) It has performed statutory procedures for project establishment, development, construction and operation, among others. (3) The fundraiser has no bad credit record in the last two years. (4) It meets other conditions prescribed by the CBIRC. An investment plan shall not invest in any infrastructure project falling under any of the following circumstances:376 (1) Investment in the project is explicitly prohibited or restricted by the state. (2) The project fails to obtain a legal and valid license as required by the state. (3) The subject is indefinite, the ownership is unspecific, or there are any other legal risks. (4) The fundraiser fails to meet the statutory conditions for financing. (5) Any other circumstance prescribed by the CBIRC. An investment plan shall at least include the following legal documents:377 (1) The prospectus of the investment plan. (2) The entrustment contract entered into by the principal and the trustee, which shall at least cover the name of the investment plan, the management methods, the rights and obligations of all parties, the term or investment withdrawal methods, amount, the distribution and payment of income from property under the investment plan, the management expenses and remuneration, the subject undertaking the loss of property under the investment plan and the methods therefor, the liability for compensation for breach of contract, and the dispute resolution methods, among others. (3) The custody contract entered into by the principal and the custodian, which shall at least cover the scope of property under custody, the transfer of income from property under the investment plan, fund clearing, accounting and valuation, provisioning of expenses, and liability for compensation for breach of contract, among others. (4) The investment contract or relevant agreement entered into by the trustee and the fundraiser, which shall at least cover the investment amount, term or investment withdrawal method, uses of funds, fund transfer methods, project management methods, operation and management, and liability for compensation for breach of contract, among others.

374 375 376 377

Ibid. Ibid., art.11. Ibid., art.12. Ibid., art.13.

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REGULATION OF USE OF INSURANCE FUNDS

(5) The supervision contract entered into by the beneficiary and the independent supervisor, which shall at least cover the supervision scope of the independent supervisor, confirmation of transfer of funds beyond the quota, fund transfer methods, project management and operation, supervision of construction quality, and liability for compensation for breach of contract, among others. (6) By-laws of the beneficiaries’ meeting. (7) Legal documents on credit enhancement if the investment plan has credit enhancement arrangements. (8) Other legal documents prescribed by the CBIRC. The legal documents prescribed in items (2) through (6) of the preceding paragraph shall indicate such matters as entrustment, custody, project investment, and supervision participated by other parties. The prospectus of an investment plan shall at least indicate the following matters:378 (1) Investment and management risks. (2) Objective of the investment plan and basic information on the infrastructure project, including the use, amount and term or investment withdrawal methods of project funds, repayment methods, guarantee clauses, liability for breach of contract, and information disclosure, among others. (3) Basic information on all parties, including their names, domiciles, contact information and their relationships. (4) Investment feasibility analysis. (5) Business flow of the investment plan, including registration and custody matters, post-investment management, risk and control measures, liquidity arrangements, profit distribution, and account management. (6) Creation and termination of the investment plan. (7) Tax payment under the investment plan. (8) Other matters as agreed upon in the investment plan or prescribed by any law, administrative regulation or the CBIRC. Investment and management risks shall be indicated at a conspicuous place of the prospectus of the investment plan. All parties to an investment plan shall agree upon in writing in the investment plan the standards for the provisioning of trust management expenses, custody expenses, supervision expenses and other remuneration, calculation methods, modes of payment, clauses on contract performance guarantee, and liability for the breach of contract, among others.379 All parties shall, under the principle of market fairness, rationally determine the relevant fee rates by taking into comprehensive consideration operating cost, requirements for the performance of functions, and other factors. The relevant

378 Ibid., art.14. 379 Ibid., art.15.

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REGULATION OF USE OF INSURANCE FUNDS

parties may, upon negotiation, increase or decrease the amount of remuneration agreed upon, and amend the agreements on remuneration.380 The beneficiary’s rights under an investment plan shall be divided into shares of equal amount.381 The beneficiary shall hold the beneficiary’s rights through the beneficiary certificate. The beneficiary may transfer the beneficiary certificate. The transferee of the beneficiary certificate shall be a qualified investor with risk recognition and tolerance. If the beneficiary certificate is transferred, the transferee shall succeed to the rights and obligations of the original beneficiary, and the rights and obligations of all other parties to the investment plan will not change due to transfer.382 The rules for the transfer of the beneficiary certificate under an investment plan shall be otherwise developed by the CBIRC.383 An investment plan shall be terminated under any of the following circumstances:384 (1) The cause for termination as agreed upon in the investment plan occurs. (2) The existence of the investment plan is against the objective of the investment plan. (3) The objective of the investment plan has been realized or cannot be realized. (4) The investment plan is cancelled or rescinded. (5) The termination is agreed upon by the parties to the investment plan through negotiation. (6) Any other circumstance as agreed upon in the investment plan or prescribed by any law, administrative regulation or the CBIRC. After the termination of an investment plan, the trustee shall complete the clearing of the investment plan within 90 days as of the date of termination, and issue an audited clearing report to the relevant parties and the regulatory department. The beneficiary, other right holders of property under the investment plan and relevant parties to the investment plan shall make comments within 30 days of receipt of the clearing report. If they do not raise any written objection, it shall be deemed that they have accepted the clearing report, and the liability of the trustee shall be removed for the matters listed in the clearing report, unless the trustee has any misconduct.385 All parties to an investment plan shall distribute income from the investment plan and relevant property in strict accordance with the time and procedures agreed upon in the investment plan.386 Where the trustee, the custodian or the independent supervisor violates the provisions of these Measures or those agreed upon in the investment plan, which

380 381 382 383 384 385 386

Ibid. Ibid., art.16. Ibid. Ibid. Ibid., art.17. Ibid., art.18. Ibid., art.19.

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REGULATION OF USE OF INSURANCE FUNDS

causes any loss to the property under the investment plan, it shall assume corresponding compensatory liability in accordance with the law.387 12.10.2 Principal For the purpose of these Measures 2016, “principal” means an insurance company, insurance group company, or insurance holding company formed within the territory of China with the approval of the CBIRC (hereinafter, the insurance institution), or any other qualified investor with risk recognition and tolerance.388 One or several principals may invest in one investment plan, and one principal may invest in several investment plans.389 An insurance institution, as the principal of an investment plan, shall meet the following conditions:390 (1) It has the investment approval resolution of the company’s board of directors or institution authorized by the board of directors. (2) It has established sound investment decision-making and authorization mechanisms, risk control mechanisms, business operation flows, internal management rules, and accountability rules. (3) It has introduced a mechanism for the custody of property under the investment plan. (4) It has a certain number of relevant professional investors. (5) It has no record of serious violation of law or regulation on investment in the last three years. (6) Its solvency complies with the relevant provisions of the CBIRC. (7) It meets other conditions prescribed by the CBIRC. Where an insurance institution authorizes an insurance asset management company or any other professional management institution to perform relevant rights and obligations on behalf of it, it shall not be subject to the restriction of item (4) of the preceding paragraph.391 The principal shall perform the following functions:392 (1) Assessing the investment feasibility of the investment plan. (2) Testing the risks and risk tolerance of the investment plan and formulating risk prevention measures and plans. (3) Selecting the trustee and the custodian and agreeing on the beneficiary’s rights. (4) Signing the entrustment contract with the trustee, determining the management form of the investment plan, agreeing on the power for the management, utilization and disposal of the trustee, and overseeing the trustee’s performance of duties. 387 388 389 390 391 392

Ibid., art.20. Ibid., art.21. Ibid Ibid., art.22. Ibid. Ibid., art.23.

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REGULATION OF USE OF INSURANCE FUNDS

(5) Overseeing the custodian’s performance of functions. (6) Agreeing on the methods for the calculation and withdrawal of remuneration for the relevant parties and the payment methods. (7) Obtaining on a periodical basis information on the management, utilization, revenues and expenditures, and disposal of property under the investment plan and information on project construction, management, and operation from relevant parties and requiring them to make specific explanations. (8) Requiring the trustee to adjust the management methods of property under the investment plan according to the provisions of relevant laws and administrative regulations and as agreed upon in the investment plan or if the investment plan fails to meet the beneficiary’s interests due to any unexpected special cause. (9) Requiring the trustee to restore property under the investment plan to the original status and making compensation if the trustee violates any relevant legal provisions or those agreed upon in the investment plan, which causes any loss to the property under the investment plan. (10) Dismissing the trustee or the custodian according to those as agreed upon in the investment plan and the provisions of these Measures if the trustee or the custodian disposes of property under the investment plan against the objective of the investment plan or has gross negligence in the management, utilization, or disposal of property under the investment plan. (11) Retaining the accounting books and statements, among others, on investment under the investment plan. (12) Accepting the CBIRC’s supervision and administration and submitting the relevant documents and materials in a timely manner. (13) Other functions as agreed upon in the investment plan or prescribed by any law, administrative regulation, or the CBIRC. The principal shall not commit any of the following conduct:393 (1) Investing in any investment plan that fails to be registered according to relevant provisions. (2) Illegally transferring insurance funds by utilizing the investment plan or transferring illicit interests to affiliated parties. (3) Obstructing any relevant party’s performance of functions as agreed upon in the investment plan. (4) Committing any conduct prohibited in the investment plan or by any law, administrative regulation or the CBIRC. 12.10.3 Trustee For the purpose of these Measures 2016, “trustee” means a trust company, an insurance asset management company, an industry investment fund management 393 Ibid., art.24.

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REGULATION OF USE OF INSURANCE FUNDS

company or any other professional management institution that invests in infrastructure projects in its own name for the beneficiary’s benefits, according to the principal’s wishes and as agreed upon in the investment plan.394 The trustee and the custodian, independent supervisor or fundraiser shall not be the same person, and the trustee and the independent supervisor or fundraiser shall not be affiliated.395 Where the trustee and the custodian are affiliated, the trustee shall disclose to all parties to the investment plan in a timely manner, and report to the CBIRC.396 To create an investment plan, the trustee shall have the corresponding investment management capability. The specific rules shall be otherwise developed by the CBIRC.397 The trustee that creates an investment plan shall register the plan with the registration institution designated by the CBIRC.398 The trustee shall submit registration materials according to the requirements of the registration institution. The registration materials submitted by the trustee shall be true, complete and standard.399 The registration institution shall conduct procedural examination of the integrity and regulatory compliance of registration materials, and shall not make essential judgments on the investment value and risks of the investment plan.400 The trustee shall perform the following functions:401 (1) Investigating investment projects, and issuing due diligence reports. (2) Selecting infrastructure projects, and assessing the investment values and management and operation risks of projects. (3) Creating investment plans and signing entrustment contracts with the principal. (4) Signing investment contracts or relevant agreements with the fundraiser to agree on that the fundraiser makes a written commitment to accept the supervision of the independent supervisor and providing convenience for the supervisory work of the independent supervisor. (5) Signing a custody contract with the custodian on behalf of the principal, and opening one separate bank account on property under the investment plan for each investment plan. (6) Signing an independent supervision contracts with the independent supervisor on behalf of the beneficiary, prudentially handling affairs under the investment plan for the maximum benefits of the beneficiary, and guaranteeing the safety of property under the investment plan. (7) Assigning project fund transfer orders to the custodian in a timely manner within the quota authorized by the investment plan. 394 395 396 397 398 399 400 401

Ibid., art.25. Ibid. Ibid. Ibid., art.26. Ibid., art.27. Ibid. Ibid. Ibid., art.28.

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REGULATION OF USE OF INSURANCE FUNDS

(8) Distributing and paying income of the investment plan to the beneficiary in a timely manner, and returning property under the investment plan to the beneficiary upon maturity. (9) Assisting the beneficiary in handling matters on the transfer of the beneficiary certificate. (10) Disclosing information on the investment plan in a timely manner, accepting the inquiry of relevant parties, faithfully providing relevant materials, and reporting information on project management and operation. (11) Continually managing, monitoring and tracking the construction or operation of infrastructure projects, and requiring the fundraiser to perform the relevant information disclosure obligation. (12) Preparing investment plan management and financial accounting reports. (13) Retaining an accounting firm or any other intermediary institution to audit investment plan management and investment project operation. (14) Retaining complete records on the handling of affairs under the investment plan, as well as accounting books and statements, among others, on investment projects. (15) Keeping confidential trade secrets of the investment plan in accordance with the law. (16) Submitting the documents and materials on the modification to the investment plan to the CBIRC in a timely manner, if any essential modification to the investment plan is made at the beneficiaries’ meeting. (17) Reporting to the relevant party, the CBIRC and the competent regulatory department in a timely manner in the case of any emergency. (18) Voluntarily accepting the supervision of the relevant party, the CBIRC and the competent regulatory department, and submitting relevant documents and materials. (19) Performing other functions as agreed upon in the investment plan or prescribed by any law, administrative regulation or the CBIRC. The trustee shall obtain remuneration as agreed upon in the investment plan. Where the trustee disposes of property under the investment plan in violation of the investment plan, or leads to the loss of property under the investment plan due to the violation of management functions or inappropriate handling of the investment plan, it shall not request the payment of remuneration before resuming to the original status of property under the investment plan or making compensation.402 The trustee shall assume liability with its own property for the debts borne by a third party or its loss resulting from its violation of those as agreed upon in the investment plan.403 The illicit benefits obtained by the trustee from the management, operation, and disposal of property under the investment plan in violation of those agreed upon in the entrustment contract shall be included in property under the investment 402 Ibid., art.29. 403 Ibid., art.30.

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REGULATION OF USE OF INSURANCE FUNDS

plan; and shall assume compensatory liability if any loss is caused to the property under the investment plan.404 Where the trustee provides any false or fuzzy information that misleads the independent supervisor and causes loss to the property under the investment plan, the trustee shall assume the compensatory liability.405 The functions of the trustee shall terminate under any of the following circumstances:406 (1) The trust business of the trustee is suspended or terminated in accordance with the law. (2) The trustee is dismissed by the principal or the beneficiaries’ meeting. (3) The trustee is dissolved, abolished, taken over or declared bankrupt in accordance with the law. (4) Any other circumstance as agreed upon in the investment plan. Where the functions of the trustee terminate, a new trustee shall be appointed by the principal or the beneficiaries’ meeting within 30 days.407 Where the functions of the trustee terminate, before the new trustee takes office, the original trustee shall continue performing relevant functions, properly retain relevant materials, and handle transfer formalities for the entrusted management business in a timely manner. The new trustee shall succeed to the functions of the original trustee in handling affairs under the investment plan.408 When the trustee falls under the circumstance as set forth in item (3), art.31 of these Measures, a temporary trustee shall be designated by the principal or the beneficiaries’ meeting to be responsible for matters relating to the investment plan.409 When an investment plan is terminated, the trustee shall continue performing relevant functions till the completion of clearing.410 Where the functions of the trustee terminate, an accounting firm shall be retained to audit the trustee’s management of an investment plan entrusted to it, notify other parties to the investment plan of the audit result in writing, and report the result to the CBIRC and the competent regulatory department.411 The trustee shall not commit any of the following conduct:412 (1) Misappropriating property under the investment plan. (2) Using the property under the investment plan for credit transactions. (3) Providing guarantee to any other person or providing loans to any party other than the fundraiser with property under the investment plan. (4) Mixing the property under the investment plan with its own property or the property of others for management. 404 405 406 407 408 409 410 411 412

Ibid. Ibid. Ibid., art.31. Ibid., art.32. Ibid. Ibid. Ibid. Ibid., art.33. Ibid., art.34.

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REGULATION OF USE OF INSURANCE FUNDS

(5) Mixing properties under different investment plans for management. (6) Seeking benefits other than remuneration agreed upon by using property under the investment plan, or seeking illicit benefits for others. (7) Making any commitment of guaranteeing principal or minimum investment return in any form. (8) Managing properties under different investment plans in an unfair manner. (9) Conducting transactions between the trustee’s own property and the property under an investment plan, or between properties under different investment plans. (10) Making any investment leading to the assumption of unlimited liability by the property under an investment plan. (11) Committing any conduct prohibited in an investment plan or by any law, administrative regulation or the CBIRC. 12.10.4 Beneficiary For the purpose of these Measures 2016 “beneficiary” means the party that holds the beneficiary certificate under an investment plan, and enjoys the beneficiary’s right to the investment plan.413 The beneficiary in an investment plan may be the principal. The beneficiary may concurrently serve as the independent supervisor.414 Where the principal is the only beneficiary, the principal may require the rescission of the investment plan, unless it is otherwise agreed upon in the investment plan.415 To transfer the beneficiary certificate under an investment plan, an insurance institution shall meet the conditions as set forth in art.22 of these Measures.416 The beneficiary shall, in accordance with the law, enjoy the following rights after an investment plan comes into force:417 (1) Sharing income from property under the investment plan. (2) Participating in the distribution of residual property under the investment plan after liquidation. (3) Transferring the beneficiary certificate held by him or her under the investment plan in accordance with law. (4) Convening the beneficiaries’ meeting as required, and exercising voting rights according to the share of the beneficiary certificate held by the beneficiary under the investment plan or exercising voting rights as agreed upon in the investment plan. (5) Inquiring relevant parties to the investment plan about the management of the investment plan and project construction and operation, and overseeing the parties’ performance of duties.

413 414 415 416 417

Ibid., art.35. Ibid. Ibid. Ibid., art.36. Ibid., art.37.

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REGULATION OF USE OF INSURANCE FUNDS

(6) Other rights as agreed upon in the investment plan or prescribed by any law, administrative regulation or the CBIRC. Where there are two or more beneficiaries, the beneficiaries’ meeting shall be set up. The beneficiaries’ meeting shall exercise the following powers in accordance with the law:418 (1) Deliberating the by-laws of the beneficiaries’ meeting and the independent supervision contract. (2) Deciding to terminate the entrustment contract in advance or extending the term of the investment plan. (3) Deciding to change the investment form of property under the investment plan. (4) Deciding to replace the trustee, the custodian and the independent supervisor. (5) Deciding to adjust the remuneration standards for the trustee, the custodian and other parties to the investment plan. (6) Performing other functions as agreed upon in the investment plan. The beneficiary’s meeting shall be convened as proposed by the beneficiaries holding one third or more of shares of the beneficiary certificate under an investment plan or by the trustee. Except for an emergency, the convener shall notify the time to convene the beneficiaries’ meeting, form of meeting, matters to be deliberated, rules of procedure, voting methods, and other matters at least ten days in advance, and report to the CBIRC at the same time. The CBIRC may assign supervisors to attend the beneficiaries’ meeting as observers.419 The convening of the beneficiaries’ meeting, proposal submission, deliberation, voting, and other matters shall be governed by the by-laws of the beneficiaries’ meeting and relevant provisions.420 After an investment plan terminates or the beneficiary transfers the beneficiary certificate under the investment plan, the beneficiary’s rights and obligations shall automatically terminate.421 The beneficiary shall not commit any of the following conduct:422 (1) Instigating the trustee to make investment in violation of any law or regulation. (2) Damaging the interests of any other beneficiary. (3) Obstructing any other party’s performance of functions in accordance with the law. (4) Committing any conduct prohibited as agreed upon in the investment plan or by any law, administrative regulation or the CBIRC.

418 419 420 421 422

Ibid., art.38. Ibid., art.39. Ibid. Ibid., art.40. Ibid., art.41.

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REGULATION OF USE OF INSURANCE FUNDS

12.10.5 Custodian For the purpose of these Measures 2016, “custodian” means a commercial bank or any other professional financial institution retained by the principal as agreed upon in the investment plan to be responsible for the custody of property under an investment plan.423 One custodian shall be selected for one investment plan.The custodian shall not be the same as the trustee or fundraiser, and shall not be affiliated with the fundraiser.424 Where the custodian and the beneficiary are the same party, and the custodian is affiliated with the beneficiary or the trustee, it shall disclose to all parties to the investment plan in a timely manner, and report to the CBIRC.425 The custodian shall meet the relevant conditions prescribed by the CBIRC, and have obtained the qualification for the relevant custody business.426 The custodian shall perform the following functions:427 (1) Performing custody functions in a faithful manner. (2) Setting special accounts separately for different investment plans, and guaranteeing the independence, safety and integrity of property under investment plans. (3) Taking into custody property under an investment plan in a timely manner and handling the principal’s fund transfer based on the order of the principal. (4) As agreed upon in the investment plan, examining the trustee’s order, handling the transfer of funds under an investment plan in a timely manner, and incorporating investment income and property under the investment plan upon maturity to the account designated by the beneficiary. (5) Ensuring the transfer of investment income paid and liquidating property distributed by the fundraiser to the special account of the investment plan. (6) Being responsible for the accounting of an investment plan, and reviewing and examining the value of property under the investment plan calculated by the trustee. (7) Acquiring information on the management and operation of an investment plan, and requiring the trustee or fundraiser to make an explanation. (8) Overseeing the use and recovery of funds under an investment plan, the calculation and distribution of income of the investment plan, and if it finds any operation of the trustee violating any regulation, reporting to other parties, the CBIRC and the competent regulatory department in a timely manner. (9) Preparing custody reports on a periodical basis. (10) Disclosing information on the investment plan in a timely manner, faithfully providing relevant materials, reporting information on the implementation

423 424 425 426 427

Ibid., art.42. Ibid. Ibid. Ibid., art.43. Ibid., art.44.

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REGULATION OF USE OF INSURANCE FUNDS

of the investment plan, and accepting the inquiry of the principal, the beneficiary and the independent supervisor. (11) Retaining the transfer order of funds under the investment plan, and the accounting books and statements on the calculation, payment and distribution of income, among others. (12) Voluntarily accepting the supervision of the principal, the beneficiary, the CBIRC and the competent regulatory department, and submitting relevant documents and materials to them. (13) Performing other functions as agreed upon in the investment plan or prescribed by any law, administrative regulation or the CBIRC. The custodian shall obtain remuneration as agreed upon in an investment plan. Where the custodian causes any loss to the property under an investment plan due to a failure to perform the custody obligation, it shall assume the compensatory liability.428 The functions of the custodian shall terminate under any of the following circumstances:429 (1) The custodian’s custody business is suspended or terminated in accordance with the law. (2) The custodian is dismissed by the trustee or the beneficiaries’ meeting. (3) The custodian is dissolved, abolished, taken over or declared bankrupt in accordance with the law. (4) Any other circumstance as agreed upon in the investment plan. Where the functions of the custodian terminate, a new custodian shall be appointed by the principal or the beneficiaries’ meeting within 30 days. Where the functions of the custodian terminate, before the new custodian takes office, the original custodian shall continue performing the relevant functions, appropriately preserve custody management materials, and undergo custody business transfer formalities in a timely manner. The new custodian shall succeed to the functions of the original custodian in handling affairs under the investment plan.430 When the custodian falls under the circumstance as set forth in item (3), art.46 of these Measures 2016, a temporary custodian may be designated by the principal or the beneficiaries’ meeting to be responsible for the relevant custody matters.431 Where the functions of the custodian terminate, an accounting firm shall be retained to audit property under the investment plan under its custody, notify other parties to the investment plan of the audit result, and report the result to the CBIRC and the competent regulatory department.432 The custodian shall not commit any of the following conduct:433

428 429 430 431 432 433

Ibid., art.45. Ibid., art.46. Ibid., art.47. Ibid. Ibid., art.48. Ibid., art.49.

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(1) Misappropriating the property under an investment plan under its custody. (2) Mixing the property under an investment plan under its custody with its own property for management. (3) Mixing the properties under different investment plans under its custody for management. (4) Transferring property under an investment plan under its custody to any other party for custody. (5) Colluding with the trustee, the fundraiser or the independent supervisor to damage the beneficiary’s interests. (6) Committing any other conduct prohibited in the investment plan or by any law, administrative regulation or the CBIRC. 12.10.6 Independent supervisor The term “independent supervisor” means a professional management institution which is retained by the beneficiary as agreed upon in an investment plan to conduct supervision of the investment plan managed by the trustee and the specific operation of the fundraiser for the purpose of protecting the beneficiary’s interests.434 One independent supervisor shall be selected for one investment plan, and different independent supervisors may be retained during the project construction period and the operation period, unless it is otherwise agreed upon in the investment plan. The independent supervisor and the trustee or the fundraiser shall not be the same person, and shall not be affiliated.435 The following institutions may serve as the independent supervisor:436 (1) Beneficiary of an investment plan. (2) Financial institutions rated as AA or above in China in the last year. (3) Professional institutions which have been issued the relevant business permit by the relevant department of the state. (4) Other institutions recognized by the CBIRC. The independent supervisor shall meet the following conditions:437 (1) Having good faith and a good market image. (2) Having sound internal management, project monitoring and operation rules, and implementing them in a standard manner. (3) Having the professional knowledge and skills for the assumption of independent supervision functions. (4) Having conducted the relevant business for three years or more and having relevant experience. 434 435 436 437

Ibid., art.50. Ibid. Ibid., art.51. Ibid., art.52.

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(5) Having not been punished by the competent department or regulatory department in the past three years. (6) Meeting other conditions prescribed by the CBIRC. The independent supervisor shall perform the following functions:438 (1) Abiding by professional rules, and performing supervision functions in a faithful manner. (2) Retaining any legal person, natural person or any other organization when necessary to assist in the completion of independent supervision functions. (3) Overseeing the trustee’s management investment plan and performance of functions prescribed by laws and agreed upon in the investment plan. (4) Tracking and monitoring information on the infrastructure projects managed by the fundraiser, including but not limited to the investment direction of an investment plan, project term, quality, cost, operation, and contract performance. If the independent supervisor finds that the financial status of the fundraiser seriously deteriorates, the guarantor cannot continue providing effective guarantee, or any other major situation occurs, it shall report to the relevant parties, the CBIRC and the competent regulatory department in a timely manner. (5) Analyzing project construction and operation risks, and offering prevention and alleviation proposals in a timely manner. (6) Acquiring information on the management of investment plans and the operation of projects, and requiring the trustee or fundraiser to make an explanation. (7) Being present at the beneficiaries’ meeting. (8) Submitting supervision reports to the beneficiary and the CBIRC, voluntarily accepting the supervision and inspection of the beneficiary, the CBIRC and the competent regulatory department, and submitting relevant documents and materials. (9) Other functions as agreed upon in the investment plan or prescribed by any law, administrative regulation or the CBIRC. The independent supervisor shall obtain remuneration as agreed upon in the investment plan. Where the independent supervisor causes any loss to the property under an investment plan due to ineffective supervision, it shall assume the compensatory liability.439 The functions of the independent supervisor shall terminate under any of the following circumstances:440 (1) The independent supervisor’s independent supervision is suspended or terminated in accordance with the law. (2) The independent supervisor is dismissed by the beneficiary.

438 Ibid., art.53. 439 Ibid., art.54. 440 Ibid., art.55.

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(3) The independent supervisor is dissolved, abolished, declared bankrupt or taken over in accordance with the law. (4) Any other circumstance as agreed upon in the investment plan. Where the functions of the independent supervisor terminate, a new independent supervisor shall be appointed at the beneficiaries’ meeting within 30 days.441 Where the functions of the independent supervisor terminate, before the new independent supervisor takes office, the original independent supervisor shall continue performing the relevant functions, appropriately take into custody the supervision materials, and handle the supervision business transfer formalities in a timely manner. The new independent supervisor shall succeed to the functions of the original independent supervisor in handling affairs under the investment plan.442 When the independent supervisor falls under the circumstance as set forth in item (3), art.55 of these Measures, a temporary independent supervisor may be designated at the beneficiaries’ meeting to be responsible for relevant matters on independent supervision.443 Where the functions of the independent supervisor terminate, it shall notify other parties and report to the CBIRC.444 The independent supervisor shall not commit any of the following conduct:445 (1) Colluding with the trustee, the custodian or the fundraiser to damage the beneficiary’s interests. (2) Committing any other conduct prohibited by the investment plan or any law, administrative regulation or the CBIRC. 12.10.7 Information disclosure All parties shall, according to those agreed upon in an investment plan or laws, administrative regulations and the provisions of the CBIRC or relevant departments, retain complete materials relating to the investment plan, perform the information disclosure obligation, and guarantee that relevant parties may consult or duplicate them.446 All parties shall, according to the time and method agreed upon in an investment plan, submit the documents and materials relating to the management, operation and supervision of the investment plan in an accurate, timely and standard manner, and be responsible for the authenticity and integrity thereof.447 The trustee shall, according to art.13 of these Measures 2016, provide the principal with legal documents, legal opinions and other written documents on an investment plan, sufficiently disclose relevant information, explicitly indicate the

441 442 443 444 445 446 447

Ibid., art.56. Ibid. Ibid. Ibid., art.57. Ibid., art.58. Ibid., art.59. Ibid.

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REGULATION OF USE OF INSURANCE FUNDS

factors of the investment plan, and warn of all types of risks and the principles for the assumption of risks in a conspicuous manner.448 The trustee shall, according to those as agreed upon in an investment plan, disclose the following information to the trustee, the beneficiary, the custodian and the independent supervisor:449 (1) Creation of the investment plan, including the scope and number of the principal and the beneficiary, and the sum of funds, among others. (2) Information on the operation and management of the investment plan, including the latest updates on the trustee, the project, the fundraiser and credit enhancement, information on income and principal payment, information on investment management, information on the termination of the investment plan and the attribution and distribution of property under the investment plan, and information on other transactions conducted by the affiliated parties with the assistance of the investment plan with the parties to the investment plan, among others. (3) Major matters, emergencies, and the measures to be taken. (4) Quarterly, semi-annual and annual management reports on the investment plan, the financial accounting report audited by the accounting firm shall be attached to the annual management report. (5) Information disclosed as agreed upon in the investment plan or as provided for by any law, administrative regulation, the CBIRC and the competent regulatory department. The trustee shall report to the CBIRC all information as set forth in art.61 of these Measures.450 The annual management report submitted to the CBIRC shall also cover the following information: (1) Operation of the relevant subsidiary company or business department. (2) Performance of functions by relevant managers. An insurance institution, as the trustee or the beneficiary, shall submit an investment report according to the provisions of the CBIRC. Where the beneficiaries convene the beneficiaries’ meeting, the resolution of the beneficiaries’ meeting and the relevant information shall be disclosed to all beneficiaries in a timely manner.451 The custodian and the independent supervisor shall disclose and report the following information and matters to the principal, the beneficiary, the CBIRC and the competent regulatory department:452 (1) The trustee’s performance of functions. (2) Income of the investment plan and the current status of property. 448 449 450 451 452

Ibid., art.60. Ibid., art.61. Ibid., art.62. Ibid., art.63. Ibid., art.64.

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REGULATION OF USE OF INSURANCE FUNDS

(3) Custody reports and supervision reports. (4) Other matters that shall be disclosed and reported. The trustee and the independent supervisor shall take necessary measures to promote the fundraiser’s sufficient disclosure of relevant information in a detailed manner.453 All parties shall, when providing reports and disclosing information, guarantee that the provided reports and information are true, valid and complete, shall not make false statements, defame any other party, and shall not make any commitment in violation of any law, administrative regulation or these Measures 2016.454 All parties shall have the obligation to perform the function of disclosing information that may have material impact on the decision-making or interests of the principal and the beneficiary, in addition to the content provided for in these Measures 2016.455 12.10.8 Risk management The principal or the beneficiary shall conduct essential assessment of risks of investment plans, and according to the fund nature, investment management capability and risk management capability, rationally make investment plans, perform corresponding internal examination procedures, independently make investment, and assume risks by themselves.456 The trustee shall establish an effective risk control system covering such key links as project development, project review, approval decision-making and risk monitoring. The board of directors of the trustee shall be responsible for examining and evaluating business operations on a periodical basis, and assume the ultimate responsibility for risk management.457 The trustee shall improve investment accountability rules, determine the person responsible for risks, and effectively play the role of the person responsible for risks in overseeing business operations. The relevant reports submitted by the trustee to the principal, the beneficiary and the CBIRC shall be signed by the person responsible for risks upon confirmation.458 The trustee shall establish a corresponding net capital management mechanism and a risk reserve mechanism, and ensure that it satisfies the requirements for withstanding unexpected loss in the business. The risk reserve shall be calculated and drawn from the management fee paid under an investment plan, the withdrawal ratio shall not be lower than 10%, and the risk reserve shall be mainly used to compensate for the loss caused by the trustee to the property under the investment plan due to any violation of any law or regulation, violation of the entrustment contract, or failure to perform duties in a responsible manner, among others. If 453 454 455 456 457 458

Ibid., art.65. Ibid., art.66. Ibid., art.67. Ibid., art.68. Ibid., art.69. Ibid., art.70.

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REGULATION OF USE OF INSURANCE FUNDS

the risk reserve is insufficient to compensate for the aforesaid loss, the trustee shall use its own property to make compensation.459 The trustee shall perform its duties in a diligent manner, strengthen the tracking and continual monitoring of fundraisers, credit enhancement and investment projects, among others, obtain information on the use of funds and the operation of investment projects in a timely manner, determine corresponding risk control measures based on the investment form of investment plans, and effectively perform entrusted duties.460 The principal and the beneficiary shall maximize investors’ supervision role, notify the trustee of relevant information, the custodian and the independent supervisor in a timely manner, and track and monitor the implementation and specific management of the investment plan.461 The principal and the beneficiary shall conduct due diligence appraisal of the trustee, the custodian and the independent supervisor each year, and when necessary, replace them as agreed upon in the investment plan.462 Where any abnormal, significant or unexpected risk incident occurs during the existence of an investment plan, all parties shall take active measures to reduce the property loss of the investment plan as much as possible.463 The trustee shall, within five days as of the day when it is aware of or should have been aware of the risk incident, perform the obligation of disclosing information to the trustee, the beneficiary and other relevant parties, and report to the CBIRC.464 No party shall violate those agreed upon in the investment plan or any law, administrative regulation or provision of the CBIRC, or disclose any trade secret relating to the investment plan.465 12.10.9 Supervision and administration The CBIRC shall, in accordance with the law, oversee the business operations of the parties to an investment plan, and when necessary, may order all parties to retain an accounting firm with the corresponding qualification to audit the business operation and financial status of the investment plan. All parties shall actively cooperate and shall not commit any of the following conduct:466 (1) Rejecting or obstructing the supervisor’s supervision and inspection. (2) Rejecting or delaying the provision of materials relating to the matter under inspection. (3) Concealing, forging, altering or destroying any accounting certificate, accounting book, accounting statement or any other relevant materials. (4) Committing any other conduct prohibited by the CBIRC. 459 460 461 462 463 464 465 466

Ibid., art.71. Ibid., art.72. Ibid., art.73. Ibid., art.74. Ibid., art.75. Ibid. Ibid., art.76. Ibid., art.77.

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REGULATION OF USE OF INSURANCE FUNDS

The relevant regulatory department shall, according to its functions, conduct supervision and inspection of the business operations of the trustee, the custodian, the independent supervisor and other relevant parties in accordance with the law. The CBIRC shall establish accountability rules, and be responsible for inspecting and investigating the liabilities of the trustee, the beneficiary, and its senior executives and major business personnel. It shall address inquiries and hold regulatory talks on any violation of any relevant law or administrative regulation or these Measures, and impose an administrative penalty on the violator in accordance with the law.467 Where the CBIRC finds after any senior executive or major business specialist of the principal or the beneficiary leaves office that he or she has any violation of any relevant law or administrative regulation or these Measures when he or she works in the institution, the violator shall be held liable in accordance with the law.468 Where the trustee, the custodian or the independent supervisor violates any relevant law, administrative regulation or these Measures 2016, the CBIRC will record its misconduct. If the circumstances are serious, the CBIRC may, in accordance with the law, suspend its indirect investment of insurance funds in infrastructure projects, and in accordance with the law, impose an administrative penalty on it together with the competent regulatory department.469 The CBIRC may restrict or prohibit the principal or the beneficiary from investing in any investment plan participated by any trustee, the custodian or the independent supervisor with bad records. If the beneficiary has invested in such an investment plan, the CBIRC may require the beneficiary to transfer the beneficiary certificate.470 A professional intermediary service institution providing services for an investment plan and the relevant personnel thereof shall observe the code of practice and professional ethics, and offer professional opinions in an objective, impartial, diligent, responsible and independent manner. If any relevant intermediary service institution or person fails to perform duties in a diligent manner, or any report issued by it or him or her contains any false record, misleading statement or material omission, the violator shall assume the corresponding legal liability.471 The CBIRC may, according to market changes and investment operations, adjust the qualification conditions of relevant parties and investment scope of infrastructure projects provided for in these Measures 2016 in good time.472 For the purpose of these Measures 2016, “affiliation” means that the relevant parties have a control relationship in terms of shares or capital contributions or they are controlled by the same third party in terms of shares or capital contributions.473

467 468 469 470 471 472 473

Ibid., art.78. Ibid. Ibid., art.79. Ibid. Ibid., art.80. Ibid., art.82. Ibid.

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REGULATION OF USE OF INSURANCE FUNDS

The specific ratio of an investment plan invested by an insurance institution as the principal or the beneficiary of the investment plan shall comply with the relevant provisions on supervision over the ratio of insurance funds.474 A non-insurance institution that serves as the principal or beneficiary of an investment plan shall also abide by other relevant laws, administrative regulations and the provisions of relevant regulatory departments.475 12.11 Insurance funds investment in equities For purposes of regulating equity investment with insurance funds, prevent investment risks, guarantee asset safety and protect the legitimate rights and interests of the parties to insurance, the CIRC issued the Notice of CIRC on Issuing the Interim Measures for Equity Investment with Insurance Funds (the Interim Measures 2010) on 31 July 2010 which came into force on the same day.476 The term “equity” refers to the equities of joint stock limited companies and limited liability companies that are legally formed and registered within the territory of China and not publicly listed in any stock exchange within the territory of China (hereinafter, the enterprise equity).477 Insurance funds may be directly or indirectly invested in the equity of an enterprise (hereinafter, direct and indirect equity investment).478 The term “direct equity investment” refers to the investment in and holding of the equity of an enterprise by an insurance company (including insurance group [holding] company) in the name of capital contributor. The term “indirect equity investment” refers to an insurance company’s investment in the equity investment funds and other relevant financial products (hereinafter, investment funds) launched and established by an equity investment management institution (hereinafter, the investment institution).479 The term “investment institutions” refers to the institutions legally registered within the territory of China to engage in equity investment management.480 The term “professional service institutions” (hereinafter, professional institutions) refers to the institutions with the corresponding professional qualifications, which have been accredited by the relevant department of the state and provide investment consultation, legal services, financial audit, assets appraisal and other services for the investment of insurance funds in the equity of an enterprise.481 The property derived from the investment of insurance funds in equity investment funds shall be independent from the inherent property of investment institutions, custody institutions and other relevant institutions and from other properties under 474 Ibid., art.83. 475 Ibid., art.84. 476 Bao Jian Fa No. 79 [2010] (see accessed on 16 October 2020. 477 The Notice of CIRC on Issuing the Interim Measures for Equity Investment with Insurance Funds 2010, art.2. 478 Ibid., art.3. 479 Ibid. 480 Ibid., art.4. 481 Ibid.

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REGULATION OF USE OF INSURANCE FUNDS

its management. The property and income obtained by an investment institution from investment, management or disposal of investment funds shall be included in the property of the investment funds.482 A company that invests with insurance funds in the equity of an enterprise shall follow the principles of soundness and security, adhere to management of asset in match with liability, prudently conduct investment operations, and effectively prevent risks.483 An insurance company, an investment institution or a professional institution that engages in the investment of insurance funds in the equity of an enterprise shall abide by the provisions of these Measures, be duteous and diligent, and perform its obligations of being honest, creditworthy and prudential, and abiding by the law.484 The investment of insurance funds in the equities of infrastructure enterprises shall be governed by the relevant provisions of these Interim Measures 2010.Where any existing provisions on equity investment with insurance funds are inconsistent with these Interim Measures 2010, the provisions of these Interim Measures 2010 shall prevail.Where there are different provisions regarding the scope and proportion of the self-owned funds of the insurance group (holding) companies not engaged in the insurance business, such provisions shall prevail.485 12.11.1 Qualifications of an insurance company for equity investment An insurance company that makes direct equity investment shall meet the following conditions:486 (1) It has sound corporate governance and management rules, decision-making procedures and internal control mechanisms; (2) It has clear development strategies and market positioning, and in the case of a major equity investment, it shall have strong M&A (merger and acquisition) and integration ability and cross-sector management ability; (3) It implements asset custody mechanisms and has standardized and transparent asset operations; (4) Its asset management department has five or more professional personnel with three or more years of equity investment and related experience, and in the case of a major equity investment, it shall have professional personnel who are familiar with the enterprise’s business management; (5) Its solvency adequacy ratio at the end of the previous accounting year is not less than 150%, and at the time of investment, its solvency adequacy ratio at the end of the previous quarter is not less than 150%; (6) Its profits in the previous accounting year and its net assets are not less than one billion yuan (currency unit); (7) It has no gross violation of law or regulation in the recent three years; and (8) It meets other prudent conditions as prescribed by the CBIRC. 482 483 484 485 486

Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.39. Ibid., art.9.

663

REGULATION OF USE OF INSURANCE FUNDS

Where a company makes indirect equity investment, it shall conform to the provisions of subparagraphs (1), (3), 5, (7) and (8) of the preceding paragraph, and its asset management department shall have two or more professional personnel with three years or more equity investment and the relevant experience.487 An insurance company that invests in the equities of enterprises of the insurance category is not governed by subparagraphs (2) and (4) of the preceding paragraph.488 The term “major equity investment” as mentioned in the preceding paragraph shall refer to the investment which aims to control the non-insurance financial enterprise or the insurance-related enterprise to be invested in.489 Where an insurance company invests in equity investment funds, the investment institution that launches, establishes and manages such funds shall meet the following conditions:490 (1) It has sound corporate governance and management rules, decision-making procedures and internal control mechanisms; (2) Its registered capital is not less than ¥100 million yuan, and it has established a risk reserve fund system; (3) Its investment management is governed by the relevant laws, regulations and policies of China; (4) It has a stable management team with ten or more professional personnel who have equity investment or related experience, has accomplished 3 or more projects of which two or more have five or more years of related experience, and three or more have three or more years of the relevant experience. It has one or more senior managers who have eight or more years of related experience, and three or more professional personnel who are familiar with enterprise operations, financial management and project financing. (5) It has rich equity investment experience, the balance of assets under its management is not less than ¥3 billion yuan, and it has outstanding historical performance and good business reputation; (6) It has a sound project reserve system, and asset custody and risk isolation mechanisms; (7) It has established a scientific incentive and restraint mechanism and an investment follow-up mechanism, which have been effectively implemented; (8) It accepts the inquiry of the CBIRC on the investment of insurance funds and reports the relevant information to the CBIRC; (9) The investment institution and the major personnel thereof have no gross violation of law or regulation in the recent three years; and (10) It meets other prudent conditions as prescribed by the CBIRC.

487 488 489 490

Ibid. Ibid. Ibid. Ibid., art.10.

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REGULATION OF USE OF INSURANCE FUNDS

A professional institution which is hired to provide related services for the investment of insurance funds in the equity of an enterprise shall meet the following conditions:491 (1) It conforms to the provisions of subparagraphs (1), (3), (8), (9) and (10) of art.10; (2) It has the business qualifications recognized by the relevant department of the state; (3) It has good understanding of the laws, regulations, policies, business flow and transaction structure on equity investment with insurance funds, has the experience and capacity to undertake the relevant services on equity investment, and has good business reputation; and (4) It has no affiliated relationship with the relevant parties to the investment of insurance funds in the equity of enterprises. An institution that provides investment consulting services shall also meet the following conditions in addition to the provisions of the preceding paragraph: (i) It has a mature and stable professional team with six or more professionals who have equity investment and related experience, of whom three or more have five or more years of related experience; and (ii) Its registered capital is not less than ¥2 million yuan.492 A commercial bank that provides asset custody services for the investment of insurance funds shall accept the inquiry of the CBIRC on the investment of insurance funds and report the relevant information to the CBIRC.493 12.11.2 Subject matter of investment An enterprise to which direct or indirect equity investment is made with insurance funds shall meet the following conditions:494 (1) It was legally registered and formed and has the legal person status; (2) It complies with the industrial policies of the state and has the qualifications prescribed by the relevant department of the state; (3) Its shareholders and senior managers are of good faith and good business reputation; (4) Its industry is at the stage of growth or maturity or is strategically new, or it has the specific intent of initial public offerings (IPO) and has relatively high value for merger and acquisition; (5) It has advantages in terms of market, technologies, resources, or competition and has room for value appreciation, expected good cash returns and a specific dividend system; (6) Its management team has the professional knowledge, industrial experience and management ability appropriate for performing its functions; 491 492 493 494

Ibid., art.11. Ibid. Ibid. Ibid., art.12.

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REGULATION OF USE OF INSURANCE FUNDS

(7) It is not involved in any major legal disputes, the property rights of its assets are integrated and intact, and there is no legal defect in its equities or ownership; (8) It has no affiliated relationship with any insurance company, investment institution or professional institution, except for the relationship permitted by regulatory provisions, and has been reported and disclosed in advance; and (9) It meets other prudent conditions as prescribed by the CBIRC. No insurance funds shall be invested in the equity of an enterprise which does not comply with the industrial policies of the state, has no prospect for a stable cash return or appreciation in asset value, is under high pollution or is a high energy-consuming project, fails to reach the national standards on energy conservation or environmental protection, has relatively low added value in technology, and so on. No investment shall be made in startup or venture investment funds. No investment shall be made in establishing or obtaining non-controlling shares of an investment institution.495 The investment of insurance funds in the equity of enterprises of the insurance category is not governed by the restriction of subparagraphs (2), (4), (5) and (8).496 The equities in which insurance funds may be invested directly are restricted to the enterprises of the insurance category, non-insurance financial enterprises, and enterprises for the aged, medical care and automobile services, and so on. which are related to the insurance business.497 The investment funds invested with insurance funds shall meet the following conditions:498 (1) The investment institution conforms to the provisions of art.10 of these Measures; (2) The direction or subject matter of investment conforms to art.12 of these Measures and the provisions of other financial regulatory authorities; (3) There are specific investment objectives, plans, strategies, standards, and procedures, as well as follow-up management, income distribution and fund settlement arrangements; (4) There are clear transaction structures, adequate risk warning, and truthful and complete information disclosure; (5) An investment fund custody mechanism has been implemented, and the funds raised or subscribed is not less than ¥500 million yuan. It has feasible exit arrangements and sound and effective risk control measures, and the transactions are conducted in the market prescribed by the regulatory authority; and (6) The funds meet other prudent conditions as prescribed by the CBIRC.

495 496 497 498

Ibid. Ibid. Ibid. Ibid., art.13.

666

REGULATION OF USE OF INSURANCE FUNDS

12.11.3 Investment standards An insurance company that invests in the equity of an enterprise shall conform to the following provisions:499 (1) To obtain a controlling share, it shall use capital funds to make equity investment; (2) For other direct equity investments, it may use capital funds or liability reserve funds that are commensurate with the term of investment in assets; (3) For indirect equity investment, it may use capital funds or liability reserve funds of insurance products. A life insurance company shall use funds for all-purpose products, bonus products and investment-linked insurance products, and a property insurance company shall use funds for non-life insurance products with variable returns according to the features of products and the requirements of investment plans; and (4) It shall not invest in an enterprise’s equity with the funds collected in the form of borrowing, issuing bonds, repurchase, inter-bank lending, and so on, unless it is otherwise prescribed by the CBIRC on the issuance of bonds. An insurance company that invests in the equity of an enterprise shall comply with the following provisions on proportion:500 (1) The book balance of investment in the equities of unlisted enterprises shall not be more than 5% of the total assets of the company at the end of the previous quarter; the book balance of investment in equity investment funds and other financial products related to the equities of unlisted enterprises shall not be more than 4% of the total assets of the company at the end of the previous quarter; and the total book balance of the aforesaid two investments shall not be more than 5% of the total assets of the company at the end of the previous quarter; (2) The book balance of direct equity investment shall not exceed the net assets of the company. Except for major equity investment, the book balance of investment in the equities of a same enterprise shall not exceed 30% of the net assets of the company; and (3) The book balance of investment in the same investment funds shall not exceed 20% of the issuance scale of such funds. Where a company invests in the equity of an enterprise, it shall, according to the regulatory provisions and internal control requirements, regulate and improve the decision-making procedures and authorization mechanism, and determine the decision-making and approval power of the shareholders’ meeting (general assembly of shareholders), the board of directors and the management. It shall do a good job in making arrangements on the relevant systems according to its solvency, investment management ability, the mode, objectives and scale of investment, and so on.501

499 Ibid., art.14. 500 Ibid., art.15. 501 Ibid., art.16.

667

REGULATION OF USE OF INSURANCE FUNDS

The management responsible for decision making and decision implementation shall perform their respective functions, prudently make decisions, be diligent and duteous, give full consideration to the equity investment risks, and according to the asset recognition standards and capital constraint, prudently appraise the influence of equity investment on solvency and income level, strictly observe the relevant procedures, and be responsible for decision making and operations. For the investment of insurance funds in the equity of an enterprise, no voting shall be made on the spot.502 Where it makes more investment of insurance funds in the equity of a same enterprise, it shall perform the corresponding procedures according to the provisions of these Measures 2010.503 Where a company makes equity investment with insurance funds, which involves any affiliated relationship, during the process of making investment decisions and the specific implementation thereof, it shall, according to the provisions on affiliated transactions, take effective measures so as to prevent any shareholder, director, supervisor, senior manager or related party from infringing upon the interests of the insurance company and the insured, conducting insider trading or transferring interests through affiliated transactions or other methods by taking advantage of his or her special position.504 Where a company makes direct equity investment with insurance funds, it shall hire a professional institution that satisfies the requirements of art.11 of these Measures 2010 to provide due diligence investigation, investment consultation, legal consultation and other professional services.505 Where a company makes indirect equity investment, it shall appraise the investment management ability of the investment institution and the investment funds issued by it. The appraisal of investment management ability shall at least cover the elements set out in art.10 of these Measures 2010. The appraisal of investment funds shall at least cover the elements set out in art.13 of these Measures 2010.506 Where a company makes indirect equity investment, it shall also require the investment institution to provide the investment prospectus and other documents, or provide the relevant feasibility study reports or due diligence investigation reports according to the stipulations of the agreement.507 Where a company invests in the equity of an enterprise with insurance funds, it shall fully exercise the rights prescribed by law, and protect the legitimate rights and interests of the parties to insurance through legal and effective methods.508 Where a company makes a major equity investment, it shall appoint or dispatch directors, supervisors, management personnel or personnel at key posts to ensure the controlling right or controlling force on the enterprise, and maintain the validity of investment decisions and business management. Where a company makes other 502 503 504 505 506 507 508

Ibid. Ibid. Ibid., art.17. Ibid., art.18. Ibid. Ibid. Ibid., art.19.

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REGULATION OF USE OF INSURANCE FUNDS

direct equity investment, it shall participate in and influence the system arrangements, contractual provisions, transaction structure and transaction flow, and so on. so as to protect all legitimate rights and interests of all parties to insurance parties, such as their right to knowledge and to income. Where a company makes indirect equity investment, it shall sign an investment contract or agreement with the investment institution, which shall state the rate of management fees, performance-based remuneration, changes in key personnel of the management team, revocation of the investment institution, handling of interest conflicts, handling of unusual circumstances, and so on. It shall also exchange information with other investors of investment funds, analyze the relevant reports on the contributed funds and the funds industry, compare the management of different investment institutions, and supervise the investment of investment funds through communication and exchange with the investment institution and inspection of the enterprises accepting the investment funds, and so on.509 Where the investment funds take the form of a corporation, an independent director system shall be established so as to improve the governance structure. Where the funds are contractual, a beneficiaries’ general meeting system shall be established. Where the funds take the form of a partnership, an investment consultancy committee shall be established. Where a company makes indirect equity investment, it may require the investment institution to follow up the investment as per the agreed ratio, and state it in the investment contract or the agreement on launching and establishing such funds.510 Where an insurance company invests in the equity of an enterprise, it shall strengthen follow-up management of the investment projects within the investment period and formulate whole-process management rules centring on the appreciation of asset value and risk control. In addition to the implementation of art.19 of these Measures 2010, it shall also take the following measures:511 (1) Where it makes a major equity investment, it shall plan and develop the enterprise synergy effect, improve the business management of the enterprise in question, prevent risks in its business operations and investment, select and appoint professional personnel who have good knowledge of the industrial operations, financial management, the capital market, and so on, participate in and guide the business management of the enterprise in question, and take comprehensive measures, such as governance, resource integration, debt restructuring, equity optimization and IPO, and so on. so as to enhance the value of the enterprise. (2) Where it makes any other direct equity investment, it shall designate people to manage each investment project, be responsible for communicating with the management team of the enterprise in question, examine the enterprise’s financial affairs and business performance, require the target enterprise to periodically report its business management, obtain the information on its

509 Ibid. 510 Ibid. 511 Ibid., art.20.

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REGULATION OF USE OF INSURANCE FUNDS

business operations and the major decisions it makes, compile analysis reports and put forward suggestions, and when necessary, it shall hire a professional institution to conduct a financial audit or due diligence investigation of the target enterprise. (3) Where it makes indirect equity investment, it shall require the investment institution to take the measures other than those prescribed in this article to enhance the value of the enterprise and to maximize profits. Where a company invests in the equity of an enterprise with insurance funds, it shall determine the rate of investment management fees and performance remuneration level through negotiations under the market principles and considering international conventions, and include them in the investment contract. An investment institution shall give full consideration to asset quality, investment risks and benefits, and other factors, determine the rate of investment management fees, realize the performance remuneration level, enhance positive incentives and guidance, and prevent adverse selection and moral risks.512 A company that invests in the equity of an enterprise with insurance funds shall hire a professional institution that meets the requirements of art.11 of these Measures 2010 and adopt two or more internationally employed valuation methods to continuously conduct valuation, and shall stress the test of the equity assets held by the company, work out prudent and reasonable valuation results, and report them to the CBIRC. The valuation methods shall include but not be limited to the face value method based on assets, replacement cost methods, market comparison method, cash flow capitalization method, multiple method, and so on.513 A company that invests in the equity of an enterprise with insurance funds shall abide by these Measures 2010 and other relevant provisions, assume social responsibility, observe the code of ethics, fully protect the environment and be a responsible institutional investor.514 12.11.4 Risk control in equity investment A company that invests in the equity of an enterprise with insurance funds shall pay attention to the basic construction of investment management rules, risk control mechanisms, investment codes of conduct, incentive and restraint arrangements, and so on, establish a business flow featuring project review, investment decisionmaking, risk control, asset custody, follow-up management, emergency response, and so on, formulate risk budget management policies and crisis solutions to conduct comprehensive risk management and continuous risk monitoring, and prevent operational risks and moral risks.515 An insurance company that invests in the equity of an enterprise shall take solvency and liquidity into prudent consideration, and rationally use funds according to the features of insurance products, fund structure, asset-liability matching 512 513 514 515

Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24.

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REGULATION OF USE OF INSURANCE FUNDS

management requirements and the relevant regulatory provisions for the diversification of asset allocation and investment risks.516 Where a company invests in the equity of an enterprise with insurance funds, it shall abide by these Measures 2010 and other relevant provisions so as to ensure the legitimacy and compliance of the investment projects and the ways of operation. The enterprise in which it invests shall comply with the laws and regulations of the state and the provisions of these Measures 2010 and meet all the elements for business operations.517 A company that invests in the equity of an enterprise with insurance funds shall establish a major emergency response mechanism, which shall include but not be limited to the risks, emergency response plans, work objectives, reporting lines, operating procedures, handling measures, and so on.When necessary, it shall timely activate the emergency response mechanism so as to control and reduce losses to the greatest possible extent.518 An insurance company shall establish the accountability system.Where any senior manager or main business personnel, in violation of any regulatory provision or management rule of the company, fails to perform or accurately perform his or her functions, which causes any asset loss, he or she shall be subject to liability. Where it involves any senior manager or main business personnel of a non-insurance institution, the insurance company shall deal with its liability according to the relevant provisions and stipulations of the contract.519 Where a company invests in the equity of an enterprise with insurance funds, it shall establish an effective exit mechanism. The exit methods shall include but not be limited to IPO, repurchase and transfer by agreement, and the trading or settlement of investment funds, and so on.520 The investment of insurance funds in the equity of an enterprise may be made in the form of debt-equity swap or exit in the form of equity-debt swap.521 Where an insurance company invests in the equity of an enterprise, it shall require the investment institution to perform information disclosure obligations to the insurance company and other related parties concerned according to the relevant provisions and the stipulations of the contract. The disclosed information shall at least include the investment team, investment operations, project operations, asset value, follow-up management, key personnel changes, business management of the enterprise, major risks, major matters, and so on. The major matters shall include but not be limited to equity dispute, debt dispute, judicial litigation, and so on.522 There shall be no false statement, misleading information, major omission and fraud, and so on. in information disclosure. The investment institution shall assume

516 517 518 519 520 521 522

Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid. Ibid., art.28. Ibid. Ibid., art.29.

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legal responsibility for the timeliness, accuracy, authenticity and integrity of the information disclosed.523 12.11.5 Supervision and administration of equity investment Where an insurance company makes a major equity investment, it shall apply to the CBIRC for verification and approval, and submit the following written materials:524 (1) Investment resolution of the shareholders’ meeting (general assembly of shareholders) or the board of directors; (2) Primary business plan, investment scale and a summary of business relevance; (3) Financial consulting report, due diligence investigation report and legal opinions provided by a professional institution; (4) Investment feasibility report, compliance report, a summary of affiliated transactions, follow-up management plan and business integration plan; (5) Statement on the shareholders’ qualifications examined by the relevant regulatory department or recognized by the competent authority; (6) A summary of the investment team and its management experience; (7) Investment agreement subject to the conditions for effectiveness and special remarks on the effectiveness upon the verification and approval of the relevant regulatory authority or department; and (8) Other prudent contents as prescribed by the CBIRC. Where, during the examination of the CBIRC, the target enterprise falls under any of the following circumstances, the CBIRC may require the insurance company to cease the equity investment:525 (1) Material adverse financial matters such as huge loss, huge civil compensation and adjustment of taxation policy occur or may occur; (2) Material adverse changes, such as significant loss of core business personnel, target market or core business competitiveness, occur or may occur; (3) The relevant department imposes significance punitive and regulatory measures on it; and (4) The CBIRC believes that there are other adverse matters that may have a great impact on the investment. The company shall report the equity transfer or withdrawal of major equity investment to the CBIRC, stating the reasons and plans for transfer or withdrawal, and attach the relevant resolution of the shareholders’ meeting (general assembly of shareholders) or the board of directors.526

523 524 525 526

Ibid. Ibid., art.30. Ibid. Ibid.

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Where an insurance company invests in non-major equities or investment funds, it shall report to the CBIRC within five working days after signing the investment agreement and submit the following materials in addition to the elements set out in subparagraphs (3), (6) and (8) of art.30 of these Measures 2010:527 (1) Investment resolution of the board of directors or its authorized institution; (2) Investment feasibility report, compliance report, summary of affiliated transactions, follow-up management plan, legal opinions, and the investment agreement or subscription agreement; and (3) The appraisal report on the investment institution or investment funds. Where the CBIRC finds that an investment violates any law, regulation or provision of these Measures, it shall be entitled to order the insurance company to make a correction. Where an insurance company invests in the equity of an enterprise, it shall submit to the CBIRC a quarterly report within 15 working days after the end of each quarter and an annual report before 31 March each year, and attach the following written materials:528 (1) (2) (3) (4) (5) (6) (7)

A summary of investment; Use of capital funds; Asset management and operations; Asset valuation; Asset quality and major risks; Major emergencies and the handling thereof; and Other prudent contents as prescribed by the CBIRC.

In addition to the aforesaid contents, the annual report shall also cover investment income and distribution, asset recognition and changes in solvency and investment capability, and so on. and be attached with the relevant report audited by a professional institution. An investment institution shall, before 31 March each year, submit to the CBIRC an annual report on the investment of insurance funds in equity investment funds.529 A custody institution shall submit to the CBIRC a quarterly report and an annual report on the investment of insurance funds in the equity of an enterprise and in investment funds within 15 working days after the end of each quarter and before 31 March each year, and attach the following materials:530 (1) (2) (3) (4) (5) 527 528 529 530

Investment of insurance funds; Legality and compliance of investment; Abnormal transactions and the matters for attention; Asset valuation; Major risks;

Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34.

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(6) The related affiliated transactions; and (7) Other prudent contents as prescribed by the CBIRC. The CBIRC shall formulate equity investment capability standards. All insurance companies and relevant investment institutions shall conduct self-assessment according to the prescribed standards and submit the appraisal reports to the CBIRC. The CBIRC shall examine, track down and monitor the equity investment management capability of insurance companies and the relevant investment institutions.531 The CBIRC may, according to market needs, properly adjust the proportion of investment, the qualifications of the relevant parties concerned, the materials submitted, and so on. The materials submitted by the relevant parties to the CBIRC on the investment of insurance funds in the equity of an enterprise shall conform to regulatory provisions, and the parties concerned shall be responsible for the authenticity of the materials.532 The CBIRC shall conduct on-site supervision and off-site supervision of the investment of insurance funds in the equity of an enterprise, and when necessary, hire a professional institution to assist in investigation.533 Where an insurance company invests in the equity of an enterprise, and there is inadequate solvency, material business problem or major investment risk, which may have adverse effects upon the financial system, financial sector and the financial market, the CBIRC shall take such regulatory measures as prescribed by the relevant laws and regulations as ceasing the investment business, restricting investment proportion, adjusting investment personnel, ordering the disposal of equity assets and restricting the distribution of dividends of shareholders and remuneration of senior managers. Where an insurance company fails to continuously comply with the provisions of art.9 after investing in the equity of an enterprise, the CBIRC shall order it to make a correction.534 The CBIRC shall not include the enterprises’ equity assets arising from illegal investment in the recognized scope of assets according to the relevant provisions. Where non-subjective factors such as emergency events and market changes result in the proportion of investment in the equity of an enterprise exceeding that prescribed in these Measures, the insurance company shall adjust the investment proportion as required within three months.The assets appraisal standards, methods and rules on risk indicators on the investment of insurance funds in the equity of enterprises shall be prescribed by the CBIRC separately.535 Where any senior manager or major business personnel of an insurance company is found during his or her incumbency or after he or she leaves his or her post that he or she has violated any relevant law, administrative regulation or provision of these Measures 2010 on the equity investment of an enterprise

531 532 533 534 535

Ibid., art.35. Ibid. Ibid., art.36. Ibid. Ibid.

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when he works in the company, the CBIRC shall deal with his or her liability according to law.536 Where an investment institution or a professional institution participating in an equity investment with insurance funds violates any relevant law, administrative regulation or provision of these Measures, the CBIRC shall be entitled to record its misconduct and report it to its regulatory or competent department.Where the circumstances are serious, the CBIRC shall order the insurance company to cease the relevant business with this institution, and consult with the relevant regulatory or competent department to impose an administrative punishment on it according to law.537 No insurance company shall have any business relationship with any investment institution or professional institution recorded in the list of bad records.538 Where an insurance asset management institution conforms to the provisions of subparagraphs (1), (3), (7) and (8) of art.9 of these Measures 2010 and its profits in the previous accounting year and net assets are not less than ¥500 million yuan, it may use its capital funds to directly invest in the equity of non-insurance financial enterprises.539 The investment of insurance funds in the equity of unlisted enterprises shall be governed by the Interim Measures for the Administration of Overseas Investment with Insurance Funds and the relevant provisions of the CBIRC. The proportion of investment of insurance funds in the equities of domestic and overseas unlisted enterprises and the relevant financial products on the equities of unlisted enterprises shall be calculated on a consolidated basis.540 12.11.6 Insurance funds investment in preferred shares One of the types of equity investment is the investment in preferred shares. This type of investment vehicle is regulated by the Notice of the CIRC on Matters concerning the Investment of Insurance Funds in Preferred Shares (the Notice 2014) which was promulgated and implemented on 17 October 2014.541 The term “preferred shares” means a class of shares prescribed in addition to common shares in accordance with relevant laws and regulations of China, the holders of which have priority over those of common shares in the distribution of profits and residual assets but have restricted rights in decision-making and management of the company. Preferred shares include those publicly offered and non-publicly offered.542 Insurance funds may be invested in preferred shares directly, or through investment management institutions that meet the requirements set out in the Interim

536 Ibid., art.37. 537 Ibid. 538 Ibid. 539 Ibid., art.38. 540 Ibid., art.39. 541 Bao Jian Fa No. 80 [2014] (see accessed on 16 October 2020. 542 The Notice of the CIRC on Matters concerning the Investment of Insurance Funds in Preferred Shares 2014, s.1.

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Measures for the Administration of Entrusted Investment of Insurance Funds. To invest in preferred shares, insurance institutions shall have the corresponding investment management capacity.543 The investment of insurance funds in preferred shares shall be conducted with sound decision-making processes and internal control mechanisms. Investment in preferred shares via primary market shall be subject to the item by item written decision of the board of directors or the body authorized by the board of directors. For investment in preferred shares via secondary market, specific rules regarding the chain of authorizations shall be developed.544 Preferred shares in which insurance funds invest shall have a long-term credit rating of, or equivalent to, A or above. Preferred shares in which insurance funds invest shall be rated by a credit rating agency recognized by the CBIRC. In principle, the credit rating of preferred shares shall be at least two notches lower than that of the ordinary debts of the last issue or at least one notch lower than that of subordinated debts of the last issue, whichever is lower. If the ordinary debts or subordinated debts recently issued by the issuer have been rated by the aforesaid agency and still exist, the credit rating of the preferred shares may be directly determined by the rating agency according to the aforesaid principle.545 For insurance funds to invest in preferred shares, an internal credit assessment mechanism shall be established, credit granting rules and credit assessment methods shall be developed, and the internal credit ratings of preferred shares acceptable for investment shall be specified. The preferred shares in which insurance funds invest shall satisfy the internal credit assessment requirements.546 The Insurance Asset Management Association of China may develop relevant rules to conduct industry internal assessment where preferred shares are under any of the following circumstances:547 (1) (2) (3) (4)

Dividend distribution is not compulsory. Dividend distribution is not cumulative. The issuer has the option to convert preferred shares into common shares. The investors have no option to sell back.

The preferred shares in which insurance funds invest shall be classified as equity assets or fixed income assets according to the issuer’s classification of the preferred shares as equity financing instruments or debt financing instruments, and be included in equity assets or fixed income assets for investment proportion control.548 Where the preferred shares in which insurance funds invest have been included in fixed income assets for calculation of investment proportion, but the issuer reclassifies them as equity financing instruments or dividends are not paid as required for three accumulative fiscal years or for two consecutive fiscal years, the preferred

543 544 545 546 547 548

Ibid., s.2. Ibid., s.3. Ibid., s.4. Ibid., s.5. Ibid., s.6. Ibid., s.7.

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shares shall be reclassified as equity assets for calculation of investment proportion within 20 working days after the issuer publishes the relevant resolution.549 Preferred shares in which insurance funds invest shall be valued in accordance with the relevant accounting standards and regulatory provisions; and when its trading is inactive and its fair value cannot be reliably measured, may be valued based on investment costs.550 For preferred shares in which insurance funds invest, the admissibility ratio shall be determined by the CBIRC in accordance with relevant provisions and the market risk status, and may be adjusted upon assessment when necessary.551 For insurance funds to invest in preferred shares with an option to convert into common shares, insurance institutions shall give full attention to the triggering conditions and the conversion price. When the conversion conditions and price are evidently unreasonable, insurance institutions shall adequately assess the investment risk.552 For insurance funds to invest in preferred shares, insurance institutions shall, taking into consideration the characteristics of insurance products, carefully assess the liquidity of the preferred shares under the current condition so as to effectively prevent liquidity risk; adequately assess the issuer’s profitability, credit standing, and risk handling capability and pay attention to essential terms so as to effectively prevent credit risk; establish, improve, and strictly implement operating procedures so as to prevent moral risk. When any affiliated transaction is involved, they shall disclose information in accordance with relevant regulatory provisions.553 For insurance funds to invest in preferred shares, insurance institutions shall file relevant information with the CBIRC through the insurance asset management regulatory information system within five working days after such investment.554 Insurance asset management institutions may use their own funds and the funds from asset management products issued to invest in preferred shares in accordance with this Notice 2014. Matters concerning investing with non-insurance funds under the custody of insurance asset management institutions shall be determined according to relevant contracts.555 12.12 Investing insurance funds in infrastructure debt investment plans The “debt investment plan” is a kind a financial product, whereby insurance asset management companies (IAMC) and other professional management institutions as trustees, issue beneficiary certificates to clients, raise funds for investing in infrastructure projects by way of debt investment, and pay the expected income and redeems the principal as agreed. 549 550 551 552 553 554 555

Ibid., s.8. Ibid., s.9. Ibid., s.10. Ibid., s.11. Ibid., s.12. Ibid., s.13. Ibid., s.14.

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Insurance funds may invest in infrastructure debt investment plans, this kind of investment channel was, in previous years, regulated by the Guidelines for the Administration of Indirect Investment of Insurance Funds in Infrastructure Debt Investment Plans (Trial Implementation) 2007,556 and the Guidelines for the Establishment of Infrastructure Debt Investment Plan Products 2009557 (hereinafter, the Guidelines). On 12 October 2012, the CIRC promulgated and implemented the Interim Provisions on the Administration of Infrastructure Debt Investment Plans 2012558 (hereinafter, the Interim Provisions 2012).The Interim Provisions replaced the afore-mentioned two Guidelines. On 24 January 2013, the CIRC also issued the Notice of the CIRC on Matters concerning the Registration of Debt Investment Plans 2013 (the Notice 2013) which came into force on the same day.559 Now, these two pieces of regulations provide rules for infrastructure debt investment plans and are considered in this section. 12.12.1 The Interim Provisions on the Administration of Infrastructure Debt Investment Plans The Interim Provisions 2012 consists of 55 articles in eight chapters, providing detailed rules on the standards that insurance institutions must meet in order to be eligible to invest their insurance funds in infrastructure debt projects, and they also establish the procedures that insurance institutions must complete in order to create a debt investment plan.560 In comparison to the abolished Guidelines, the Interim Provisions 2012 relax some of the standards that insurance institutions have to meet in order to invest in infrastructure debt investment plans. The goal of relaxing the standards is to increase the development of the infrastructure debt investment market by increasing the number of investment opportunities that exist, and enlarging the pool of investors that can invest in infrastructure debt investments. It is appropriate to take a look at the primary differences between the Interim Provisions and the abolished Guidelines.561 (a) Registration with the CBIRC has been changed to record/register with the related organization The abolished Guidelines established that when an IAMC created an infrastructure debt investment plan, it had to register that plan with the CIRC. In practice, the 556 Bao Jian Fa No. 53 [2007]. 557 Bao Jian Fa No. 41 [2009]. 558 Bao Jian Fa No. 92 [2012] (see accessed on 16 October 2020. 559 Bao Jian Fa No. 93 [2013] (see accessed on 16 October 2020). 560 The Interim Provisions on the Administration of Infrastructure Debt Investment Plans 2012, arts 7–20. 561 Kirby Carder and Yuan Min, “China’s insurance industry regulator revises the requirements for investing insurance funds in infrastructure debt investment projects”, 20 December 2012 (see accessed on 16 October 2020).

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CIRC actually required that IAMCs seek the CIRC’s approval for a debt investment plan prior to actually creating the plan. Thus, in essence, there really was a standard where the CIRC required prior approval, even though the abolished Guidelines only actually required registration after creation. However, the Interim Provisions no longer require that debt investment plans be registered with the CBIRC, instead they require an IAMC that intends on creating a debt investment plan to submit information about the potential debt investment plan to a “designated organization” so that this “designated organization” can register or record that the IAMC will establish the plan, and then once the plan has been created it can be issued and traded through an eligible “financial asset trade centre.” The Interim provisions establish that the “designated organization” is responsible for providing the CBIRC information on the debt investment plan. Therefore, an IAMC does not have any CBIRC application or registration obligations; all of the obligations to the CBIRC fall on the “designated organization.” The Interim Provisions do not specify what entity is the “designated organization”, the Notice of the CIRC on Matters concerning the Registration of Debt Investment Plans 2013 specifies that China Insurance Security Fund Co., Ltd. can act as the “designated organization” for registration. (b) Conditions for the debtor to seek financing In comparison with the abolished Guidelines, the Interim Provisions 2012 change the conditions the debtor must meet in order to have its debt financed with investments from insurance funds. First, the Interim Provisions no longer require the debtor to be a listed company, a controlling shareholder of a listed company, or a large national enterprise or group company like the abolished Guidelines did. Instead, the Interim Provisions 2012 establish that a debtor only needs to be a company that is duly registered with the Chinese government registration authority. Second, the Interim Provisions no longer require the debtor to have been profitable for two consecutive years prior to financing the infrastructure project, and they no longer require the debtor to have been operating for a minimum of 3 years. Instead, the Interim Provisions use more subjective standards. For instance, they state that debtors are required to have the ability to continuously operate, have a “bright” development future, have stable and reliable income, and have a good financial status. Therefore, now even if the debtor has not been profitable for two years, or has not existed for a minimum of 3 years, it could still be eligible to have insurance funds invested in the debt of its infrastructure projects. Finally, the Interim Provisions 2012 no longer allow the debtor and the IAMC to have affiliated relationships. This new requirement was specifically put in place to ensure that there is some separation of risk in infrastructure debt projects. However, even with the changes the Interim Provisions 2012 made, there are some requirements that are exactly the same as they were in the abolished Guidelines. For instance, all of the following requirements are the same in both the Interim Provisions and the abolished Guidelines: a debtor must have a good credit record, it must have no record for violating laws, and it must have a reliable source of income. 679

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(c) Conditions the investment project must meet The Interim Provisions 2012 relax the requirements infrastructure debt investment projects must meet in order to be eligible for insurance funds investment. Specifically, the Interim Provisions no longer require an investment project to obtain the State Council or an industry related ministry department’s approval to be able to receive insurance funds financing. Based on the infrastructure debt investment projects that were approved while the abolished Guidelines were in place, it appears that in practice, the State Council or industry related ministry department would only provide a development plan an informal acknowledgement that they accepted a project in principle, but they would not issue formal approval for a project.This lack of a formal approval created a large legal obstacle that these projects had to overcome because the Guidelines standards for the establishment of debt investment plans required projects to have formal approval. However, this problem has been eliminated in the Interim Provisions 2012 because formal State Council or industry related ministry department approval is no longer necessary for a project to be eligible to create a debt investment plan. Instead, the Interim Provisions 2012 focus more on whether a project meets the Chinese government’s environmental, industry, land use, and energy savings policy standards, whether a project will have a significant economic and positive social impact on Chinese society, and whether the project was properly set up and developed, it will be constructed in a high quality manner, and whether it is well operated. (d) Project credit-worthiness requirements Just like the abolished Guidelines, the Interim Provisions 2012 create three credit worthiness standards (type A, type B, and type C) for infrastructure projects that wish to have insurance funds finance the projects’ debt. The Interim Provisions 2012 establish that an type A credit standard project must be certified by a national special fund, a policy bank, or a commercial bank that has, at least, an AA credit rating, and in order to have type A credit the project must be financed with the full amount of principal and interest and have an unconditional, irrevocable and joint and several liability guarantee for the project. In comparison with the abolished Guidelines standards for type A projects, the Interim Provisions 2012 only made a slight adjustment by adding the words, “at least AA credit rating” for the commercial bank, which did not exist in the abolished Guidelines. On the other hand, the type C projects are given that status when a listed company that is building the project has pledged shares in the company that can be freely transferred, the company building the project has pledged its assignable accounts receivable that are derived from the right to charge collection, or the company building the project has offered some of its other assets as security for it to be eligible to have its debt financed by insurance funds. Under the abolished Guidelines the type B projects were deemed as such when a listed company or the controlling shareholder of a listed company that has net assets of more than ¥20 billion provided a joint and several liability guarantee for the infrastructure project. However, the Interim Provisions expand the types 680

REGULATION OF USE OF INSURANCE FUNDS

of entities that can provide joint and several liability guarantees to include all companies. In addition, the Interim Provisions remove the ¥20 billion minimum net asset requirement. Instead of a minimum net asset requirement, the Interim Provisions allow a project owner’s net assets to be in line with the scale of the overall debt investment plan. In practice, when the abolished Guidelines were in place it was very difficult for an infrastructure debt investment plan project investor to find a national special fund or a bank to provide guarantees for a project, and listed companies and controlling shareholders of listed companies tended to be very hesitant to pledge assets (as is required for a type C project) to a project. In general, there were few adjustments made to the type A and type C credit worthiness requirements, in turn, there probably will not be a spike in those types of credit worthy projects now that the Interim Provisions are in place. Thus, like before, type B projects are probably going to be the most common types of infrastructure debt projects in the Chinese market. The changes the Interim Provisions 2012 made to the standards for type B projects will probably make it a little easier for these types of projects to be certified. The Interim Provisions’ more relaxed standards will make it easier for debtors to receive a credit-worthiness determination, which will help the overall development of the Chinese debt investment plan market by increasing the number of investment opportunities. 12.12.2 Matters concerning the registration of debt investment plans To promote the innovative development of the debt investment plan business and enhance regulatory efficiency and transparency, in accordance with the Interim Provisions 2012 on the Administration of Infrastructure Debt Investment Plans 2012 and the Interim Measures for the Investment of Insurance Funds in Real Estate 2010, the CIRC issued the Notice of the CIRC on Matters concerning the Registration of Debt Investment Plans 2013 (the Notice 2013).562 The recordation system for the issuance of debt investment plans are changed into the registration system. To promote debt investment plans, insurance asset management companies and other professional management institutions (hereinafter, professional management institutions) shall, in accordance with regulatory provisions, submit registration materials to the registration institution designated by the CBIRC for registration as legally required. During the transition period, the registration institution shall be temporarily China Insurance Security Fund Co., Ltd.563 The registration materials submitted by a professional management institution shall include one original copy and one electronic compact disc. The registration materials shall, in standard formats, comply with the regulatory provisions and satisfy the requirements of the registration institution, with true, accurate and complete information and without false records, misleading statements or major omissions.564

562 Bao Jian Fa No. 93 [2013]. 563 The Notice of the CIRC on Matters concerning the Registration of Debt Investment Plans 2013, s.1. 564 Ibid., s.2.

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The registration institution shall, according to the regulatory provisions and registration rules filed, examine the completeness and compliance of registration materials in a procedural and standardized manner. Where the registration materials comply with the relevant provisions, the registration institution shall, within 15 working days, complete the registration procedure and issues a written notice of product registration.565 For debt investment plans with a complicated trading structure or a relatively large investment scale, the CBIRC may organize the relevant experts to conduct independent risk assessment and urge the issuers to fully assess, alert and disclose investment risks associated with debt investment plans.566 After the registration of debt investment plans, the relevant parties shall remain to handle the registration, issuance, and trading of debt investment plans in accordance with the existing provisions of the CBIRC and perform their obligations of information disclosure and reporting as legally required. The CBIRC shall conduct supervision and administration of the debt investment plan business through onsite and off-site inspections.567 Where any other type of asset management products issued by a professional asset management institution needs to be registered, registration shall be conducted by reference to this Notice 2013.568 12.13 Insurance funds investment in collective trust funds Insurance funds may also invest in collective trust funds. Previously, this kind of investment was regulated by the Notice of the CIRC on Matters concerning the Investments in Collective Fund Trust Plans with Insurance Funds 2014.569 In recent years, the investment of insurance fund in trust funds has been growing rapidly. As of the end of 2018, the trust funds invested by insurance institutions reached ¥1.27 trillion yuan.570 For the purposes of strengthening the administration of investments in collective trust funds by insurance institutions, regulating investor behaviour, and preventing investment risks of insurance funds, the CBIRC issued and implemented the Notice of the General Office of the CBIRC on Matters concerning the Investments in Collective Fund Trust Plans with Insurance Funds on 19 June 2019,571 which has replaced the Notice of the CIRC on Matters concerning the Investments in Collective Fund Trust Plans with Insurance Funds 2014. The 2019 Notice is expanded to 19 articles from the 8 articles in 2014 Notice. The decision-making and authorization mechanism of insurance institutions investing in trust funds, qualification of professional responsible persons, scope of

565 Ibid., s.3. 566 Ibid., s.4. 567 Ibid., s.5. 568 Ibid., s.6. 569 Bao Jian Fa No. 38 [2014]. 570 See accessed on 16 October 2020. 571 Yin Bao Jian Ban Fa No. 144 [2019] (see accessed on 16 October 2020.

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underlying assets, legal risks, post-investment management, information reporting, industry self-discipline, and other relevant requirements are retained. Requirements on trust companies qualifications, credit rating of trust funds, connected transactions, accountability mechanism and others have been amended. Some new requirements have also been added, such as banning the use of trust companies as conduit, enhancing proactive management responsibilities of trust companies, looking through underlying assets, strengthening suitability management of investors, imposing caps on investment proportions, and credit enhancement arrangement and conditions for exemption from credit enhancement. The issuance of the 2019 Notice is an important step by the CBIRC to prompt insurance funds to better serve the insurance industry and the real economy. It expands the cooperation between insurance institutions and trust companies and helps create a level playing field for both parties. It clarifies the supervisory objective of preventing the use of trust as shadow bank channels and avoids the embedded complex structures so as to cap non-compliant investments. It stipulates that the credit enhancement of the trusts that insurance funds invest in shall not be provided by financial institutions so as to prevent rigid redemption by financial institutions. It also clarifies the scope for underlying asset investment, which helps insurance institutions to take advantage of the expertise of trust companies in non-standard assets so that insurance funds may better serve the real economy. The 2019 Notice also applies the principle of “non-retroactivity” so as to ensure sufficient liquidity for relevant institutions and a stable market transition. 12.14 Investment of insurance funds in venture capital funds Insurance funds may also be invested in venture capital funds. To standardize the act of investment of insurance funds in venture capital funds, support the development of scientific and technological enterprises, small and micro-sized enterprises, and strategic emerging industries, and prevent investment risks, the CIRC issued and implemented the Notice on Matters concerning the Investment of Insurance Funds in Venture Capital Funds 2014 on 12 December 2014.572 Venture capital funds mean the private equity funds established according to the law, managed by qualified funds management institutions, and mainly invested in common shares of venture companies or preferred stock, convertible bonds and other equities convertible into common shares according to the law.573 Venture companies mean the unlisted companies which are at the period from the start-up period to the initial stage of growth, or belong to an industry that has entered into the initial stage of growth but is lack of a mature developing mode.574

572 Bao Jian Fa No. 101 [2014] (see accessed on 16 October 2020. 573 The Notice of the CIRC on Matters concerning the Investment of Insurance Funds in Venture Capital Funds 2014, s.1. 574 Ibid.

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Insurance funds may be invested in venture capital funds. A fund management institution making investment of insurance funds in venture capital funds shall satisfy the following conditions:575 (1) It shall be established according to the law, with sound and effective corporate governance, internal control mechanism and management system, over five years of experience in venture capital management, outstanding historical performance, and accumulative size of venture capital asset under management no less than ¥1 billion yuan. (2) It shall have arranged an exclusive and stable management team with at least five investment professionals, no less than a total of ten venture capital projects from which it successfully exited, at least three investment professionals who have been working together for five years, and investment decision-makers with more than five years of experience in venture capital management, including at least two people with more than three years of experience in enterprise management and operation. (3) It shall have established an incentive and restraint mechanism, a follow-up investment mechanism, an asset custody mechanism, and a risk isolation mechanism. And there shall be no conflict of interests between different assets under management. (4) It shall accept inquiry by the CBIRC on investment of insurance funds, and report the relevant situation. (5) It shall have no significant acts violating laws and rules in the recent three years. The venture capital fund invested with insurance funds shall not be the first venture capital fund managed by the fund management institution and shall satisfy the following conditions:576 (1) The venture company in which investment is made shall have been established according to the law, comply with the industrial policies of the state, and possess an excellent management team and strong growth potential. The company and the key management personnel thereof shall have no bad records. (2) The scale of a single fund shall not exceed ¥500 million yuan. (3) The balance of investment of a single fund in the equity of a single venture company shall not exceed 10% of the raising scale of the fund. (4) The total balance of fund invested or subscribed by general partners of the fund (or fund management institutions), their associated parties, and main management personnel of the fund shall be no less than 3% of the raising scale of the fund. An insurance company investing in venture capital funds shall have the capacity of equity investment, the solvency adequacy ratio of no less than 120% at the end of the previous quarter, and shall comply with the Interim Measures for Equity 575 Ibid., s.2. 576 Ibid., s.3.

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Investment with Insurance Funds 2010577 and relevant regulations in investment norms, risk control, supervision and management, and other aspects.578 An insurance company shall strengthen the principle of investment diversification. The balance of investment in venture capital funds shall be included in the equity assets ratio management and the total amount shall not exceed 2% of the insurance company’s total assets at the end of the previous quarter. The balance of investment in a single venture capital fund shall not exceed 20% of the raising scale of the fund.579 Insurance funds may be indirectly invested in venture companies through investment in other private equity funds or may be indirectly invested in venture capital funds through investment in fund of funds for private equity. Fund management institutions investing in other private equity funds and fund of funds for private equity, their main investment, management and operation, and other respects shall comply with the provision of the CBIRC on indirect investment of insurance funds in equity.580 Fund management institutions making investment of insurance funds in venture capital funds may hire professional institutions to provide related services, including custody institutions, investment consulting institutions, raising agencies, law firms, accounting firms, and so on. These institutions shall comply with the relevant regulatory requirements, accept the inquiries by the CBIRC on investment of insurance funds, and report the relevant situation.581 Insurance companies, fund management institutions, and custody institutions shall, in accordance with the Interim Measures for Equity Investment with Insurance Funds 2010 and relevant provisions, report the information on the fund operation of investment of insurance funds in venture capital funds to the CBIRC.582 Fund management institutions shall, within twenty working days subsequent to the funds’ raising of insurance funds, submit relevant information on the funds to the CBIRC or an information registration platform designated thereby.583 Where insurance companies, fund management institutions or professional organizations violate this Notice 2014 and relevant regulatory provisions, the CBIRC shall be entitled to order concerned parties to make corrections, grant administrative punishment according to the law or include them in the negative list for management.584 12.15 The proportional regulation of the utilization of insurance funds In order to further enhance the market-oriented reform of the insurance fund utilization system and strengthen and improve the proportional regulation of the

577 Bao Jian Fa No. 79 [2010]. 578 The Notice of the CIRC on Matters concerning the Investment of Insurance Funds in Venture Capital Funds 2014, s.4. 579 Ibid., s.5. 580 Ibid., s.6. 581 Ibid., s.7. 582 Ibid., s.8. 583 Ibid. 584 Ibid., s.9.

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utilization of insurance funds, the CIRC reviewed the policies on proportional regulation and, on the basis of integration of policies and classification of assets, formed a multilevel proportional regulation framework. Therefore, the Notice of the CIRC on Strengthening and Improving the Proportional Regulation of the Utilization of Insurance Funds was issued on 23 January 2014.585 The issuance of the Notice aims to unify the investment ratios that were previously regulated in different notices in one regulatory document which supersedes all previous regulatory requirements on ratios of investments made by insurance funds. 12.15.1 Classification and definitions of insurance assets586 The investment assets of insurance companies (excluding assets in independent accounts) are classified into five categories: liquid assets, fixed-income assets, equity assets, real estate assets, and other financial assets. (1) Liquid assets. Liquid assets are cash on hand, deposits on demand for making payment, and other assets with short terms and high liquidity, capable of being converted quickly and easily into cash in definite amounts, with little or no loss in value. (2) Fixed-income assets. Fixed-income assets are assets featuring definite durations or maturities and interest and principal repayment at assumed interest rates and modes and assets whose main value depends on fluctuations in the value of the aforesaid assets. (3) Equity assets. Equity assets include listed equity assets and unlisted equity assets. Listed equity assets are ownership certificates publicly listed for trading on stock exchanges or other financial asset trading floors conforming to state laws and regulations (collectively referred to as “exchanges”) and representing the equities or other rights to the residual income of enterprises, as well as assets whose main value depends on fluctuations in the value of the aforesaid assets. Unlisted equity assets are equities or other rights to the residual income of legally formed and registered enterprises which are not listed on exchanges, as well as assets whose main value depends on fluctuations in the value of the aforesaid assets. (4) Real estate assets. Real estate assets are land purchased or invested in and buildings and other fixtures on the land, as well as assets whose main value depends on fluctuations in the value of the aforesaid assets. (5) Other financial assets. Other financial assets are assets available for investment which distinctly differ from the aforesaid categories of assets in terms of risk and return characteristics and liquidity status and are not included in the aforesaid categories. 585 Bao Jian Fa No. 13 [2014] (see accessed on 16 October 2020. This Notice came into force on the date of issuance, and the original regulatory proportions for the utilization of insurance funds and the investment proportions applicable to innovative and pilot business were revoked. 586 The Notice of the CIRC on Strengthening and Improving the Proportional Regulation of the Utilization of Insurance Funds 2014, s.1.

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12.15.2 Setting the regulatory proportions for major classes of assets587 To prevent systemic risk, the following upper limits for utilizing insurance funds are set for an insurance company to hold assets in the five categories. (1) The total book balance of investments in equity assets is not more than 30% of the company’s total assets at the end of the last quarter, and the book balance of significant equity investments is not more than the company’s net assets at the end of the last quarter. Book balance does not cover investments made by the company with its own funds in the equities of enterprises in the insurance category. (2) The total book balance of investments in real estate assets is not more than 30% of the company’s total assets at the end of the last quarter. Book balance does not cover real estate purchased by the company for its own use. The book balance of real estate purchased by the company for its own use is not more than 50% of the company’s net assets at the end of the last quarter. (3) The total book balance of investments in other financial assets is not more than 25% of the company’s total assets at the end of the last quarter. (4) The total balance of overseas investments is not more than 15% of the company’s total assets at the end of the last quarter. 12.15.3 Setting the regulatory proportions for concentration risks588 To prevent concentration risk, the following upper limits for utilizing insurance funds are set for an insurance company to invest in a single asset or a single counterparty. (1) The book balance of investment in a single fixed-income asset, equity asset, real estate asset, or other financial asset is not more than 5% of the company’s total assets at the end of the last quarter, except investments in central government bonds, quasi-government bonds, and bank deposits inside China, major equity investments, investments made with its own funds in the equities of enterprises in the insurance category, purchases of real estate for its self-use, and purchases of insurance asset management products inside the group. Investment in a single asset means investment in a single instrument as detailed in the five categories. If the instrument is issued in instalments, the book balance of investment in a single asset shall be the total of investment made in instalments. (2) The total balance of investments in a single corporate body is not more than 20% of the company’s total assets at the end of the last quarter, excluding, among others, investments in central government bonds and quasi-government bonds

587 Ibid., s.2. 588 Ibid., s.3.

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inside China and investments made with its own funds in the equities of enterprises in the insurance category. A single corporate body means a single fundraising entity with a legal person status with which an insurance company has developed a direct debtor-creditor relationship or a direct equity relationship as a result of the insurance company’s investment in it. 12.15.4 Setting the risk monitoring proportions589 To prevent liquidity risk, risk of high fluctuation, and other relevant risks of assets, the following risk monitoring proportions are set in terms of, among others, liquidity status, size of financing, and asset categories, mainly for the purpose of early warning of risk. Under the following circumstances, an insurance company shall report to the CBIRC and be under priority monitoring: (1) In terms of liquidity monitoring, the total book balance of investments in liquid assets and investments in government bonds and quasi-government bonds with more than one year to maturity is less than 5% of the company’s total assets at the end of the last quarter or 7% if it is a property insurance company, excluding insurance group (holding) companies not engaged in insurance operations. Other liquidity risk indicators shall be governed by the relevant provisions issued by the CBIRC. (2) In terms of financing leverage monitoring, the total balance of capital borrowed from within the sector and bond repurchases is more than 20% of the company’s total assets at the end of the last quarter. (3) In terms of asset category monitoring, the total book balance of investments in bonds with a long-term credit rating of AA or below as assigned by domestic credit rating agencies is more than 10% of the company’s total assets at the end of the last quarter, the total book balance of investments in equity assets is more than 20%, the total book balance of investments in real estate assets is more than 20%, the total book balance of investments in other financial assets is more than 15%, and the total book balance of overseas investments is more than 10%. The book balance of a single insurance asset management product purchased inside the group is more than 5% of the company’s total assets at the end of the last quarter. The CBIRC will, in light of the actual circumstances, determine the monitoring proportions for risks such as asset-liability matching risk, market risk, and credit risk. 12.15.5 Management of internal control proportions590 Insurance companies shall, pursuant to this Notice and other relevant provisions, make decentralized investment management rules and risk control measures 589 Ibid., s.4. 590 Ibid., s.5.

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according to liability-asset management and asset allocation requirements to strictly control the proportion of investments in the five categories of assets, the proportion of investments in high-risk (type) assets, and the proportion of investments in industries, a single instrument, or a single counterparty. In addition, insurance companies shall also determine the monitoring proportions for liquidity risk, credit risk, and market risk, among others, for early warning. An insurance company shall closely watch the relevant risk exposures to ensure that they are within its risk tolerance and capital coverage. Insurance companies shall make liquidity risk management plans, including but not limited to liquidity risk management systems and governance structures, management strategies and important policies, principal methods and procedures for identifying, measuring, and monitoring liquidity risk, liquidity risk assessment indicators, stress testing, and emergency response plans so as to effectively prevent liquidity risk. 12.15.6 Supervision and administration of proportional investment591 (1) Regulatory proportions. Those that violate the relevant provisions on regulatory proportions shall be ordered by the CBIRC to take corrective action within a certain time limit. Where, for any objective reason such as an emergency, an investment proportion exceeds the regulatory proportion, an insurance company may not continue to increase the relevant investment, and shall report to the CBIRC within five working days after the excess occurs, and adjust the investment proportion within the time limit prescribed by the CBIRC. (2) Monitoring proportions. In the event of exceeding a monitoring proportion or violating the relevant provisions on monitoring proportions, an insurance company shall report to the CBIRC within five working days after the excess or violation occurs. If the CBIRC determines that the situation needs to be disclosed, the insurance company shall disclose the relevant information, and the specific provisions on this requirement shall be additionally issued by the CBIRC. Where an insurance company fails to fulfil the reporting or disclosure obligation as required, the CBIRC will conduct regulatory interviews with the senior management of the company, disclose the company’s non-compliance records, and take further regulatory measures. (3) Internal control proportions. An insurance company shall report its internal risk control proportion for investment to the CBIRC within five working days after the proportion is deliberated and approved by the board of directors or a body authorized by the board of directors, and before March 31 each year, report the actual implementation of the proportion to the CBIRC in its report on the implementation of asset allocation in the previous year. 591 Ibid., s.6.

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(4) Information registration. For its investment in a financial product such as a wealth management product of a commercial bank, a credit asset-backed security of a banking financial institution, a trust plan of assembled funds of a trust company, a specific asset management plan of a securities company, or an infrastructure investment plan, real estate investment plan, project asset support plan or asset management product issued by an insurance asset management company, an insurance company shall, within five working days after making actual payment for the investment, file information on the investment contract and the product in which it invests with the information registration platform designated by the CBIRC. Product information shall at least include the name, issuer, issue size, issue period, interest rate, measures for enhancing credit, and underlying assets of the product, among others. (5) Special regulatory measures. In the event of any significant operating problem or significant investment risk, the CBIRC will take measures, including but not limited to increasing the content and frequency of information disclosure. Where the solvency status fails to satisfy the requirements of the CBIRC, the CBIRC will take measures such as restricting the form and proportion of utilization of insurance funds. One that fails to utilize insurance funds pursuant to this Notice and other relevant provisions shall be ordered to take corrective action within a certain time limit and fined by the CBIRC according to the law; if the circumstances are serious, the CBIRC may order a replacement of the person in charge and the relevant management personnel of it, and may restrict its scope of business, order it to stop accepting new business, or revoke its business permit. (6) Adjustment mechanism.The CBIRC will, in light of the actual circumstances of the utilization of insurance funds, deliberate the classification, definitions, instruments, and relevant proportions of insurance assets and make dynamic and prudential adjustments on an annual basis. 12.15. 7 Explanation of some matters592 (1) The term “total assets” as mentioned in this Notice excludes the balance of capital borrowed from bond repurchases and the amount of assets in independent accounts. Assets in independent accounts include but are not limited to investment-linked life insurance products, variable annuity products, entrusted health security management products, entrusted endowment security management products, and nonlife investment-type insurance products with variable return. The total assets of an insurance group (holding) company shall be the total assets of the parent company in the group. Insurance companies shall set the scope of assets in independent accounts and the proportion of investments in them according to contracts. 592 Ibid., s.7.

690

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(2) Insurance companies shall calculate the regulatory proportions of investment in assets in the five categories inside and outside China on a consolidated basis. (3) If there are any provisions different from those in this Notice on the equity investments and overseas investments of insurance group (holding) companies, such other provisions shall apply. 12.15.8 Investment instruments in the five categories of assets593 In accordance with the Insurance Law and the relevant provisions, the investment assets of insurance companies are divided into five categories: liquid assets, fixedincome assets, equity assets, real estate assets, and other financial assets. (a) Liquid assets Instruments inside China mainly include cash; money market funds; demand deposits in banks; call deposits in banks, money market insurance asset management products; and government bonds, quasi-government bonds, and reverse repurchase agreements mature in one year or less. Instruments outside China mainly include demand deposits in banks; money market funds; and commercial papers, bank bills, large-denomination negotiable certificates of deposit, reverse repurchase agreements, short-term government bonds, government-backed bonds, bonds of international financial organizations, corporate bonds, and convertible bonds for overnight lending and mature in one year or less; and other instruments or products as determined by the CBIRC. (b) Fixed-income assets Instruments inside China mainly include term deposits in banks; contracted deposits in banks; bond funds; insurance asset management products with fixed income; financial enterprise (corporate) bonds; non-financial enterprise (corporate) bonds; and government bonds and quasi-government bonds with more than one year to maturity. Instruments outside China mainly include term deposits in banks; structured deposits with principal guaranteed by banks; securities investment funds with fixed income; government bonds, government-backed bonds, bonds of international financial organizations, corporate bonds, and convertible bonds with more than one year to maturity; and other instruments or products as determined by the CBIRC. (c) Equity assets Instruments of domestically listed equity assets mainly include stocks, stock funds, hybrid funds, and equity type of insurance asset management products. Instruments of overseas listed equity assets mainly include common shares, preferred shares, global depository receipts, American depository receipts, equity type of securities investment funds, and other instruments or products as determined by the CBIRC. 593 Ibid., the annex.

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Instruments of unlisted equity assets inside and outside China mainly include unlisted equities of enterprises, equity investment funds, and relevant financial products and other instruments or products as determined by the CBIRC. (d) Real estate assets Instruments inside China mainly include real estate, infrastructure investment plans, real estate investment plans, real estate insurance asset management products, and other real estate-related financial products. Instruments outside China mainly include commercial real estate, office real estate, real estate investment trusts, and other instruments or products as determined by the CBIRC. (e) Other financial assets Instruments inside China mainly include wealth management products of commercial banks, credit asset-backed securities of banking financial institutions, trust plans of assembled funds of trust companies, specific asset management plans of securities companies, project asset support plans of insurance asset management companies, and other insurance asset management products. Instruments outside China mainly include structured deposits without principal guaranteed by banks and other instruments or products as determined by the CBIRC. 12.16 Modes of insurance funds utilization The modes of insurance funds utilization are provided in articles 21 to 31 of the Measures for the Administration of the Utilization of Insurance Funds 2018 (the Measures 2018).594 Basically, there are two modes of insurance funds utilization: self-managed investment of insurance funds and entrusted investment of insurance funds, as provided in art.26 of the Measures 2018, which states that an insurance group (holding) company or an insurance company may, in light of its investment management capability and risk management capability and according to the relevant regulatory provisions, make investment itself or authorize a qualified investment manager to make investment as trustee. “Investment managers” means the insurance asset management institutions, securities companies, securities asset management companies, securities investment fund management companies and other professional investment management institutions which are legally formed and comply with the provisions issued by the CBIRC. The main mode of funds investment is the so called entrusted investment. The Measures 2018 provides general rules for entrusted investment (article 12 to 31 of the Measures). The specific rules in relation to entrusted investment are provided in the Notice of the CIRC on Issuing the Interim Administrative Measures for the Entrusted Investment of Insurance Funds (hereinafter, the Measures of Entrusted Investment 2012), which was issued on 16 July 2012 and became effective on the same day.595 The Measures of Entrusted Investment 2012 are considered in detail 594 The CIRC Order No. 1 [2018]. 595 Bao Jian Fa No. 60 [2012] (see accessed on 16 October 2020.

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in section 12.17. Now we take a look at the general rules for entrusted investment as provided in the Measures 2018. An insurance group (holding) company or an insurance company shall, according to the requirements of “centralized management, unified allocation, and specialized operation,” implement intensive and specialized management of insurance funds. Insurance funds shall be under the unified management and utilization by the corporate institutions, and the branch offices thereof shall not engage in the utilization of insurance funds.596 To carry out utilization of insurance funds, an insurance group (holding) company, an insurance company or an insurance asset management institution shall have the corresponding investment management capability.597 An insurance group (holding) company or an insurance company shall select an eligible commercial bank or other professional institution to conduct third-party custody and oversight of utilization of insurance funds, and the specific measures have been developed by the CIRC.598 The insurance assets under custody shall be independent of the inherent assets of the custodial institution and other assets under custody of the custodial institution. Where a custodial institution is liquidated because it is legally dissolved, revoked, or declared bankrupt or for other reasons, the assets under its custody shall not be included in the liquidation property.599 12.16.1 The duties of a custodial institution The main duties of a custodial institution engaging in the custody of insurance funds shall include600 (1) Custody, clearing and settlement, and asset valuation of insurance funds; (2) Oversight of investments; (3) Disclosure of information to the relevant parties; (4) Keeping trade secrets according to the law; (5) Other duties as prescribed by laws, administrative regulations, the provisions issued by the CBIRC, and the provisions of contracts. 12.16.2 The prohibited conduct of a custodial institution A custodial institution engaging in the custody of insurance funds shall not commit the following conduct: (1) Misappropriating the funds under custody; (2) Mixing the management of funds under custody and its own funds or mixing the management of funds in different custody accounts; (3) Seeking illegal interests by making use of funds under custody and other relevant information; (4) Other illegal conduct.601

596 The Measures for the Administration of the Utilization of Insurance Funds 2018, art.21. 597 Ibid., art.25. 598 Ibid., art.22.The specific measures developed by the CIRC are the Notice of the CIRC on Issuing the Interim Administrative Measures for the Entrusted Investment of Insurance Funds (Bao Jian Fa No. 60 [2012]) and the Notice of the China Insurance Regulatory Commission and the China Banking Regulatory Commission on Regulating the Insurance Asset Custody Business (Bao Jian Fa. No. 84 [2014]). 599 The Measures for the Administration of the Utilization of Insurance Funds 2018, art.22. 600 Ibid., art.23. 601 Ibid., art.24.

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REGULATION OF USE OF INSURANCE FUNDS

12.16.3 The requirements on the insurance companies If an insurance group (holding) company or an insurance company authorizes an investment manager to make investment, the two parties shall enter into a written contract to agree upon the rights and obligations of both parties and ensure that the duties of the client, trustee and custodian are independent of one another.602 An insurance group (holding) company or an insurance company shall perform the duties of developing guidelines for strategic allocation of assets, selecting trustees, overseeing the implementation by trustees, and assessing investment performance of the trustees, among others.603 A trustee shall implement a client’s asset allocation guidelines, build portfolios according to the characteristics of insurance funds, and fairly treat different funds.604 An insurance group (holding) company or an insurance company which authorizes an investment manager to make investment shall not commit the following conduct:605 (1) Obstructing or interfering with the trustee’s normal performance of duties. (2) Requiring the trustee to provide information on other authorizing institutions. (3) Requiring the trustee to guarantee a minimum investment return. (4) Illegally transferring insurance profits or conducting other inappropriate tunnelling. (5) Other illegal conduct. 12.16.4 The prohibited conduct of an investment manager An investment manager which is authorized to manage insurance funds shall not commit the following conduct:606 (1) Making investment in breach of the contract. (2) Unfairly treating different funds. (3) Mixing the management of its own funds and trust funds or the funds of different authorizing institutions. (4) Misappropriating the trust funds. (5) Promising the authorizing institution a minimum investment return. (6) Providing guarantee for others with insurance funds or assets formed from the investment of insurance funds. (7) Transferring the trust funds to another trustee. (8) Providing channel services for the authorizing institutions; (9) Other illegal conduct.

602 603 604 605 606

Ibid., art.27. Ibid. Ibid. Ibid., art.28. Ibid., art.29.

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REGULATION OF USE OF INSURANCE FUNDS

12.16.5 The requirement on an insurance asset management institution An insurance asset management institution may, according to the relevant provisions issued by the CBIRC, conduct insurance asset management product business with the investment instruments within the scope of utilization of insurance funds as the underlying assets.607 Where insurance group (holding) company or an insurance company invests in, through a trustee, or purchases insurance asset management products, the insurance asset management institution shall, as agreed upon in the contract, disclose in a timely manner to the relevant parties the investment directions of funds, investment management, fund custody, risk management, major emergencies, and other information, and ensure the authenticity, accuracy, and completeness of the information disclosed.608 The insurance asset management institution shall, according to the size and category of trust assets, product risk characteristics, investment performance, and other factors, enter into a contract with the authorizing or investing institution to agree on the standards for management fee income and the payment method thereof under the market-oriented principle. The insurance asset management product business means the investment management activities conducted for the benefit of investors where the insurance asset management institution as the issuer and manager issues shares of products to insurance group (holding) companies, insurance companies, insurance asset management institutions and other qualified investors to raise funds and selects a commercial bank or any other professional institution as the custodian.609 An insurance asset management institution shall, when carrying out the business of insurance asset management products, carry out issuance, registration, custody, trading, settlement, information disclosure, relevant credit enhancement, collateral financing and other business in the asset registration platform recognized by the CBIRC.610 Where insurance funds invest in other financial products excluding insurance asset management products, the information on financial products shall be registered and disclosed on the asset registration and trading platform recognized by the CBIRC, and the specific operation shall be governed, mutatis mutandis, by the relevant provisions on insurance asset management products.611 For the purpose of the preceding paragraph, “other financial products” means the financial products that are issued by commercial banks, trust companies, securities companies, securities investment fund management companies and other financial institutions in accordance with the relevant laws and administrative regulations and comply with the provisions of the CBIRC.612

607 608 609 610 611 612

Ibid., art.30. Ibid. Ibid. Ibid., art.31. Ibid. Ibid.

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REGULATION OF USE OF INSURANCE FUNDS

12.17 Entrusted investment of insurance funds To regulate the entrusted investment of insurance funds, prevent investment management risks, guarantee asset safety, and protect the legal rights and interests of parties concerned in the insurance business, the CIRC issued the Notice of the CIRC on Issuing the Interim Administrative Measures for the Entrusted Investment of Insurance Funds 2012.613 When insurance group (holding) companies and insurance companies legally established inside China (hereinafter, insurance companies) entrust insurance funds to qualified investment managers for investment operations such as directional asset management, specific asset management or client-specific asset management, these Measures shall apply.614 The term “investment managers” refers to specialized investment management institutions which are legally formed inside China and conform to the provisions of the CBIRC, such as insurance asset management companies, securities companies, securities asset management companies, securities investment fund management companies and the subsidiary companies thereof (hereinafter, fund management companies). Insurance companies which intend to entrust insurance funds for investment shall establish an asset trust mechanism and select investment managers pursuant to these Measures. Assets generated from investment funds entrusted by insurance companies and the utilization thereof shall be independent from the inherent assets of investment managers and trustees and other assets managed by them. Assets and proceeds obtained by investment managers from the investment, management or disposal of insurance funds shall be attributed to entrusted investment assets. Relevant agencies may not take enforcement measures against the insurance funds entrusted for investment.615 The CBIRC shall be responsible for making policies and provisions on the entrusted investment of insurance funds and shall oversee and regulate the investment behaviours of entrusting parties and entrusted parties.616 12.17.1 Eligibility requirements of an insurance company for entrusting insurance funds To entrust insurance funds for investment, an insurance company shall satisfy the following requirements:617 (1) It has sound corporate governance, decision-making and internal control mechanisms;

613 Bao Jian Fa No. 60 [2012]. If the CBIRC has other provisions on entrusted investment by insurance asset management companies, such provisions shall apply.The Notice on Temporarily Not Allowing to Entrust the Management and Use of Assets to Securities Companies (Bao Jian Fa No. 67 [2000]) was repealed. 614 The Notice of the CIRC on Issuing the Interim Administrative Measures for the Entrusted Investment of Insurance Funds 2012, art.2. 615 Ibid., art.3. 616 Ibid., art.4. 617 Ibid., art.5.

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(2) It has efficient asset management systems and specific asset allocation plans; (3) It has a good financial condition, and its asset allocation capability conforms to the relevant provisions of the CBIRC; (4) It has established the entrusted investment management rules, which include the rules on selection, supervision, assessment and evaluation of investment managers and also cover the entire process of entrusted investment; (5) It has established an asset trusteeship mechanism, and engages in transparent and compliant capital operations; and (6) It has not committed any gross violation of laws or regulations in the last three years. An insurance company shall entrust insurance funds to an investment manager which satisfies the following requirements:618 (1) It has a sound corporate governance, a good reputation in the market, and the asset management qualification ratified by the competent authority of the state; (2) It has sound operating flows, internal control mechanisms and risk management and audit systems, and has established fair trading and risk isolation mechanisms; (3) It has diversified product lines and stable investment performance in the past; (4) It has specialized positions for product development, investment research, investment management, risk control, performance evaluation and consulting service; (5) It has a stable investment management team and has at least 15 professionals with the relevant qualifications and investment experience among whom at least five persons have five or more years of investment experience and at least five persons have three or more years of investment experience; and (6) It has not committed any gross violation of laws or regulations in the last three years. To entrust insurance funds to an insurance asset management company for investment, an insurance company shall select one which also satisfies the following requirements in addition to those as set forth in art. 6 above:619 (1) Its registered capital is not less than ¥100 million yuan; (2) The balance of assets under its management is not less than ¥10 billion yuan; and (3) It has been engaged in entrusted investment for more than one year. For funds entrusted by affiliated institutions, an insurance asset management company is not restricted by Items 2 and 3 of the preceding paragraph. 618 Ibid., art.6. 619 Ibid., art.7.

697

REGULATION OF USE OF INSURANCE FUNDS

To entrust insurance funds to a securities company or a securities asset management company for investment, an insurance company shall select one which also satisfies the following requirements in addition to those as set forth in art.6:620 (1) It has obtained the qualification to manage clients’ assets for three years or more; (2) The balance of assets (including national social security funds and enterprise annuity funds) managed by it under client’s asset management services in the last year is not less than ¥10 billion yuan, or the balance of funds entrusted to it under aggregate asset management services is not less than ¥5 billion yuan; and (3) It accepts inquiries made by the CBIRC on the entrusted investment of insurance funds, and reports the relevant information to the CBIRC. To entrust insurance funds to a fund management company for investment, an insurance company shall select one which also satisfies the following requirements in addition to those as set forth in art.6:621 (1) It has obtained the qualification to manage the assets of specific clients for three years or more; (2) The balance of non-monetary securities investment funds managed by it in the last year is not less than ¥10 billion yuan; and (3) It accepts inquiries made by the CBIRC on the entrusted investment of insurance funds, and reports the relevant information to the CBIRC. 12.17.2 Entrusted insurance funds investment norms The scope of entrusted investment of insurance funds is limited to deposits in the domestic market, bonds and stocks publicly offered and listed for trading by law, securities investment funds, and other financial instruments. The variety and proportion of financial instruments in which insurance funds could be invested shall conform to the CBIRC provisions.622 To engage in entrusted investment, an insurance company shall, according to the relevant provisions and the internal control requirements, improve its decision-making process and authorization system; determine the decision-making and approval powers of the (general) meeting of shareholders, the board of directors, and the management; and assign the ultimate responsibility for entrusted investment to the board of directors.623 To engage in entrusted investment, an insurance company shall make criteria and a process for selecting investment managers; comprehensively consider such factors as risk, cost, and return; and reasonably determine the number of investment managers by the market ways.624

620 621 622 623 624

Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12.

698

REGULATION OF USE OF INSURANCE FUNDS

To engage in entrusted investment, an insurance company shall conclude an entrusted investment management agreement with investment managers specifying matters such as the rights and obligations of both parties, changes in key personnel, handling of conflicts of interest, risk prevention, information disclosure, handling of unusual circumstances, and arrangements on the withdrawal of assets and liabilities.625 An insurance company shall, in light of the risk-return characteristics of insurance funds, prudentially make the entrusted investment guidelines, reasonably determine the scope, objective, term, and restriction of investment, examine the entrusted investment guidelines on a regular basis or from time to time, and make appropriate adjustments.626 An insurance company and its investment managers shall, on the market principles, determine the pricing mechanism for management fees upon negotiations in light of the scale, objective, strategy, and performance of investment; dynamically adjust the level of management fees; and specify such mechanism in the entrusted management agreement.627 Investment managers entrusted to manage insurance funds shall perform the following duties:628 (1) Strictly abiding by the entrusted investment management agreement, the entrusted investment guidelines, and these Measures of Entrusted Investment 2012, making clear investment instructions, scrupulously performing duties, and fulfilling the management obligations of honesty, good faith, prudence and efficiency; (2) Continuously evaluating, analyzing, monitoring, and auditing the appropriation, investment, and trading of insurance funds and ensuring the fair treatment of insurance funds in investment research, investment decisionmaking, and trading; (3) Keeping confidential trade secrets about the investment of insurance funds; disclosing information about the allocation of entrusted funds, price movements, trading records, performance attribution, risk compliance, and investment personnel changes to insurance companies on a regular basis or from time to time; providing convenience and technical support for insurance companies to inquire about the aforesaid information; and (4) Establishing separate accounts and carrying out categorized management for the insurance funds of different insurance companies and different insurance products. If its investment managers are under any of the following circumstances, an insurance company shall dismiss or replace them without delay:629 (1) Violating the entrusted investment management agreement of insurance funds; 625 626 627 628 629

Ibid., art.13. Ibid. Ibid., art.14. Ibid., art.15. Ibid., art.16.

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(2) Using insurance funds to seek illicit profits or to seek illicit profits for others; (3) having a great conflict of interest with insurance funds under their management; (4) Being dissolved, cancelled, declared bankrupt, or taken over of assets; (5) No longer satisfying the eligibility requirements for managing insurance funds for clients; or (6) Any other circumstances as specified by the CBIRC or the entrusted investment management agreement of insurance funds. 12.17.3 Risk control of entrusted insurance funds investment Insurance companies shall, in light of the risk-return characteristics of insurance funds, strengthen management of asset allocation and optimize the structure of investment assets.630 To select investment managers, insurance companies shall make due diligence investigation in a prudential way:631 (1) Fully demonstrating the investment management capability of investment managers regarding personnel arrangement, income level, system configuration and technical support, and fully assessing their capability to manage credit risk, operational risk, moral risk, and legal risk; (2) Carrying out dynamic authorization management or proportional management in light of the previous performance, risk characteristics, and management experience of investment managers; and (3) Analyzing potential conflicts of interest on a regular basis and making contingency management plans. Insurance companies shall assess the management capability, investment performance, and service quality of investment managers on a regular basis, monitor the risk and compliance of various entrusted investment accounts, and issue analysis reports on a regular basis. In the case of any major unexpected event, insurance companies shall immediately take effective measures.632 Insurance companies may, to a predetermined extent, authorize investment managers to use forwards, swaps, options, futures, and other derivatives to manage and hedge investment risks but shall ensure that such derivatives are not used for speculation purposes.633 Insurance companies shall establish sound risk prevention and control mechanisms and be equipped with risk monitoring and information feedback systems that meet their business development needs.634 Insurance companies shall establish an entrusted investment accountability system. Senior managers and major business personnel who fail to perform duties and cause

630 631 632 633 634

Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21.

700

REGULATION OF USE OF INSURANCE FUNDS

losses shall be held accountable. For the fault of the senior managers or major business personnel of non-insurance institutions, insurance companies shall hold them accountable according to the relevant provisions and contractual stipulations.635 Insurance companies engaged in entrusted investment shall establish an investment asset withdrawal mechanism to effectively protect the safety and integrity of insurance assets.636 12.17.4 Supervision and administration of entrusted insurance funds investment An insurance company engaged in entrusted investment shall report to the CBIRC and submit the following materials in writing:637 (1) The resolution made by the (general) meeting of shareholders or board of directors on engaging in entrusted investment; (2) Explanations on the corporate governance, decision-making process, management system, and internal control system of the company; (3) Explanations on the asset management department, the setting of asset management positions, and the qualifications of professionals; (4) Explanations on the entrusted investment management system; (5) An asset allocation plan for entrusted investment; and (6) Explanations on the selection of investment managers and agreements concluded with them. An investment manager entrusted to manage insurance funds shall report to the CBIRC and submit the following materials in writing:638 (1) A decision made by the (general) meeting of shareholders or board of directors on entrusted investment; (2) A feasibility report on the entrusted management of insurance funds; (3) Entrusted investment management systems and risk control systems; explanations on the entrusted investment management department, the setting of asset management positions, and the qualifications of professionals; explanations on the investment management information system; and (4) An asset management business operation permit issued by the competent authority of the state and explanations and certificates on business operations, size of assets under management, and previous performance. The CBIRC will periodically check and monitor the investment management capabilities of insurance companies and their investment managers, and may hire intermediary agencies for assistance if necessary.639 An insurance company engaged in entrusted investment shall, within 30 working days upon the end of each quarter and before 30 April each year, submit a

635 636 637 638 639

Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26.

701

REGULATION OF USE OF INSURANCE FUNDS

quarterly report and an annual report to the CBIRC, respectively. Such a report shall at least cover:640 (1) the insurance company’s continuous monitoring and performance evaluation of investment managers and entrusted assets; (2) risks, investment, compliance, and crisis events of entrusted assets; and (3) other prudential matters as set forth by the CBIRC. If any of the following circumstances occurs, an insurance company shall report it to the CBIRC within five working days:641 (1) Change of investment manager or trustee; (2) Occurrence of a serious administrative punishment, a major litigation, or any other major event in relation to entrusted investment; or (3) Any other circumstances as specified by the CBIRC. An investment manager shall, before 30 April every year, submit an annual report on insurance funds entrusted to it to the CBIRC. Such a report shall at least cover:642 (1) (2) (3) (4) (5)

implementation of the entrusted investment guidelines; investment transactions, capital settlement, and asset trusteeship; major risks and the disposal thereof, asset valuation, and proceeds; information disclosure to the entrusting insurance company; financial reports on the investment of insurance funds which have been audited by specialized agencies; and (6) other prudential matters as set forth by the CBIRC. In addition to the just mentioned items, the investment manager shall also report changes in its investment management capability, regulatory punishments, and legal disputes. If the investment manager is involved in any major lawsuit or receives any major administrative punishment, or any other major event occurs, its investment management capability is obviously weakened, and it shall immediately take effective measures to prevent the relevant risks, guarantee the safety and integrity of insurance assets entrusted to it, and submit a report thereon to the CBIRC within five working days.643 Materials filed with the CBIRC by parties concerned in the entrusted investment of insurance companies shall be veracious, accurate, and complete; shall not contain any false record, misleading statement, or material omission; and must conform to the relevant regulatory provisions.644

640 641 642 643 644

Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid. Ibid., art.30.

702

REGULATION OF USE OF INSURANCE FUNDS

If an insurance company violates these Measures of Entrusted Investment 2012 when engaged in entrusted investment, the CBIRC will impose an administrative punishment according to law. If an investment manager or any other party concerned violates the relevant laws, administrative regulations, or these Measures od Entrusted Investment 2012, the CBIRC will record the bad behaviour; if the circumstances are serious, the CBIRC has the power to order the insurance company concerned to replace it.645 12.18 Regulation of the insurance asset custody business To strengthen the administration of the insurance asset custody business, regulate insurance asset custody acts, and safeguard the safety of insurance assets, the CIRC and CBRC jointly issued the Notice of the CIRC and the CBRC on Regulating the Insurance Asset Custody Business on 24 October 2014, which came into force on the same day.646 Insurance group (holding) companies and insurance companies (hereinafter, insurance institutions) shall establish and improve the insurance asset custody mechanism, select qualified professional institutions such as commercial banks (hereinafter, custody institutions), and place all investment assets formed from the use of insurance funds under the custody and supervision of a third party so as to effectively enhance the transparency of investment operations and prevent the operational risks in fund use.647 A custody institution shall, at the minimum, perform the following functions:648 (1) Safekeeping of the insurance assets under custody. (2) Opening of the custody fund account and securities account on behalf of an insurance institution or assistance in the opening of the aforesaid accounts as agreed upon in the custody contract. (3) Handling of fund transfer, clearing, and settlement in a timely manner according to the valid instructions of an insurance institution or a professional investment management institution. (4) Valuation and financial accounting of insurance assets under custody. (5) Provision of reports on assets under custody and the relevant data, statements, and information to an insurance institution as agreed upon in the custody contract. (6) Preservation of complete records, account books, statements, and other relevant materials of insurance asset custody business activities for at least 15 years from the date of termination of the contract. 645 Ibid., art.31. 646 Bao Jian Fa No. 84 [2014] (see accessed on 16 October 2020. This Notice also applies, by reference, to the custody of all assets of insurance asset management institutions formed in the investment with their own funds or the funds raised through the issuance of asset management products. 647 The Notice of the CIRC and the CBRC on Regulating the Insurance Asset Custody Business 2014, s.1. 648 Ibid., s.2.

703

REGULATION OF USE OF INSURANCE FUNDS

(7) The obligation to keep confidential the information on investment in the insurance assets under custody and the relevant materials and non-disclosure of any of the aforesaid information and materials to any other commercial institution or individual without approval. (8) Supervision of the investment operation of insurance assets under custody in accordance with laws, regulations, and the relevant provisions on the use of insurance funds; submission of supervision reports and the relevant data and statements to the CBIRC; and assistance to the CBIRC in supervising and inspecting the investment operation of insurance institutions. An insurance institution shall ensure that the activities relating to revenues and expenditures on the use of insurance funds (excluding cost expenditures) are conducted mainly through the custody fund account, and a custody institution shall handle fund receipts and payments in strict accordance with the valid instructions of an insurance institution or a professional investment management institution and ensure that the activities relating to the revenues and expenditures of insurance assets under custody (excluding cost expenditures) are conducted mainly through the custody fund account.649 A custody institution shall, in accordance with the Accounting Standards for Business Enterprises and as agreed upon in the custody contract, conduct valuation and accounting of insurance assets under custody, check accounts with insurance institutions on a periodical basis in a timely manner, conduct periodical assessment of the methods for the valuation of all kinds of financial assets, and offer suggestions on the scientificity, reasonableness, and fairness of valuation and accounting.650 A custody institution shall effectively perform the functions of supervising the investment of insurance assets under custody, update investment supervision rules and procedures in a timely manner according to the relevant provisions on the use of insurance funds, and conduct regulatory compliance supervision of the investment scope, investment varieties, investment proportion, investment limit, and prohibited acts in respect of insurance assets under custody after the custody contract comes into force.651 Where a custody institution finds that any insurance institution or professional investment management institution violates any law, regulation, or the relevant provisions on the use of insurance funds, it shall immediately notify the insurance institution or the professional investment management institution and report to the CBIRC at the same time. The custody institution shall, in a timely manner, track the rectification of the use of insurance funds by the insurance institution or the professional investment management institution in violation of any provision and report the rectification result to the CBIRC in a timely manner.652 An insurance institution shall assist the custody institution in performing investment supervision functions and provide the data and information relating to

649 650 651 652

Ibid., s.3. Ibid., s.4. Ibid., s.5. Ibid., s.6.

704

REGULATION OF USE OF INSURANCE FUNDS

investment supervision to the custody institution in a timely, accurate, and complete manner, including but not limited to:653 (1) (2) (3) (4)

financial data required for investment supervision; modification of the person authorized to send the money transfer order; information on the affiliates of the insurance institution; and information on the affiliates of the professional investment management institution.

Where an insurance institution fails to implement the aforesaid provisions, which leads to the custody institution’s failure to effectively perform investment supervision functions, the insurance institution shall assume the relevant liability. A custody institution that engages in the insurance asset custody business shall not:654 (1) link the insurance asset custody business with the insurance product sales business; (2) conduct unfair competition by monopolizing the market by illegal means; (3) misappropriate the insurance assets under custody; (4) mix the management of assets under custody and its own assets or mix the management of funds in different custody accounts; (5) entrust any other party with the custody of the insurance assets in breach of the contract (except for entrusting an overseas custody agent with the custody of the insurance assets in the case of overseas investment); (6) provide guarantee for any other party with the insurance assets under custody; (7) seek illegal benefits by making use of the investment information on the insurance assets under custody and the relevant materials; or (8) disclose the investment information on the insurance assets under custody and the relevant materials in violation of any provision. An insurance institution that conducts the asset custody business shall not link the insurance asset custody business with the insurance product sales business and shall not terminate the custody cooperation relationship with the custody institution for the latter’s rejection to implement the money transfer order in violation of the provisions on the use of insurance funds or strict performance of investment supervision functions.655 An insurance institution shall submit the insurance asset custody business implementation plan to the CBIRC within one month after the issuance of this Notice. Any insurance institution that fails to conduct the insurance asset custody business as required shall be punished by the CBIRC in accordance with law.656 The CBIRC shall, under the principles of independence, objectivity, and continual improvement, prepare and adjust at appropriate time the Scoring Standards 653 654 655 656

Ibid., s.7. Ibid., s.8. Ibid. Ibid., s.9.

705

REGULATION OF USE OF INSURANCE FUNDS

for the Evaluation of Regulatory Compliance Operation of Custody Institutions to conduct follow-up evaluation on the regulatory compliance operation of custody institutions on a periodical basis. The evaluation of regulatory compliance operation of custody institutions shall mainly cover the submission of data on insurance assets under custody, the performance of investment supervision functions, and other information on regulatory compliance operation, among others.657 The CBIRC shall give evaluation scores on the regulatory compliance operation of custody institutions in the previous year in the first quarter each year and notify evaluation scores to custody institutions in writing. The CBIRC may notify the matters on the operation of custody institutions in violation of any provision to the insurance industry on a periodical basis or from time to time. Where a custody institution has any objection to the evaluation score, it may submit a written statement to the CBIRC within five working days of receipt of the notice. The CBIRC shall give a reply within ten working days after receiving the statement of the custody institution.658 Where the evaluation score of a custody institution in terms of regulatory compliance operation is lower than 80 or there is any risk in the performance of insurance asset custody functions, the CBIRC will order the custody institution to make rectification and submit a rectification report. The CBIRC shall, according to the actual rectification result, warn the relevant insurance institution of risks in the custody institution’s performance of functions, and if the continual performance of insurance asset custody functions by the custody institution will result in high risks in the use of funds and then affect the solvency of the insurance institution, the CBIRC will order the insurance institution to replace the custody institution.659 12.19 Decision-making operating mechanisms for insurance funds utilization The mechanisms of decision-making for insurance funds utilization are stipulated in articles 32 to 46 of the Measures for the Administration of the Utilization of Insurance Funds 2018 (the Measures 2018). 12.19.1 Organizational structure and duties An insurance group (holding) company or an insurance company shall establish and improve corporate governance; specify in its by-laws and the relevant rules the duties of the shareholders’ meeting, the board of directors, the board of supervisors, and the management in respect of utilization of insurance funds; and achieve the separation and checks among the decision-making power, operation power, and oversight power in the utilization of insurance funds.660

657 658 659 660

Ibid., s.10. Ibid., s.11. Ibid., s.12. The Measures for the Administration of the Utilization of Insurance Funds 2018, art.32.

706

REGULATION OF USE OF INSURANCE FUNDS

The board of directors’ responsibility system shall be applied to the utilization of insurance funds. The board of directors of an insurance company shall assume the ultimate responsibility for asset allocation, investment policies, risk control, and compliance management, mainly performing the following duties:661 (1) Examining and finalizing the management rules for the utilization of insurance funds. (2) Determining the management manners of utilization of insurance funds. (3) Examining and finalizing the investment decision-making procedures and authorization mechanism. (4) Examining and finalizing the strategic allocation plan of assets, annual asset allocation plan, and relevant adjustment proposal. (5) Deciding on significant investment issues. (6) Examining and finalizing the investment strategies and operating proposals for new investment instruments. (7) Establishing a performance evaluation system for fund utilization. (8) Other relevant duties. The board of directors shall set up special committees with corresponding functions such as investment decision-making, asset and liability management, and risk management. Decisions of an insurance group (holding) company, or an insurance company on investment through a trustee, investment in unsecured bonds, stocks, equities, and real estate, and other major issues related to the utilization of insurance funds, shall be deliberated and adopted by the board of directors.662 The management of an insurance group (holding) company or an insurance company shall perform the following duties as authorized by the board of directors:663 (1) Taking charge of the daily operation and management of the utilization of insurance funds. (2) Establishing a communication and consultation mechanism between the insurance fund utilization department and the financial, actuarial, product, risk control, and other departments. (3) Deliberating the strategic allocation plan of insurance assets, annual asset allocation plan, and relevant adjustment proposal drafted by the asset management department and submitting them to the board of directors for examination and finalization. (4) Organizing the implementation of the strategic allocation plan of assets and annual asset allocation plan finalized by the board of directors. (5) Controlling and managing risks in the utilization of insurance funds. (6) Other relevant duties. An insurance group (holding) company or an insurance company shall establish a special department of insurance asset management, which shall be independent of 661 Ibid., art.33. 662 Ibid., art.34. 663 Ibid., art.35.

707

REGULATION OF USE OF INSURANCE FUNDS

the financial, actuarial, risk control, and other operating departments and perform the following duties:664 (1) Drafting the management rules for the utilization of insurance funds. (2) Drafting the strategic allocation plan of assets, annual asset allocation plan, and relevant adjustment proposal. (3) Implementing the strategic allocation plan of assets and annual asset allocation plan. (4) Implementing the risk management measures for the utilization of insurance funds. (5) Other relevant functions. Where an insurance group (holding) company or an insurance company makes investment itself, the insurance asset management department shall be responsible for the daily investment and transaction management; where it invests through a trustee, the insurance asset management department shall perform the duties of overseeing investment and evaluating investment performance and other duties of a client.665 The insurance asset management department of an insurance group (holding) company or an insurance company shall have posts on, among others, investment research, asset liquidation, risk control, performance evaluation, and relevant safeguards; establish a firewall system; and achieve specialized and standardized operation under prescribed procedures. Where an insurance group (holding) company or an insurance company makes investment itself, its insurance asset management department shall have posts directly related to the fund utilization business such as investment and transaction posts.666 The risk management department or a department with corresponding management functions of an insurance group (holding) company or an insurance company shall perform the following duties:667 (1) Drafting the risk management rules for the utilization of insurance funds. (2) Reviewing and monitoring the legality and compliance of the utilization of insurance funds. (3) Identifying, assessing, tracking, controlling, and managing the risks in the utilization of insurance funds. (4) Reporting, on a regular basis, the management of risks in insurance fund utilization. (5) Other relevant functions. An insurance asset management institution shall have a chief risk management officer. The chief risk management officer shall be a senior executive of the company who is responsible for organizing and directing the risk management of the insurance asset management institution with his or her duties covering all business 664 665 666 667

Ibid., art.36. Ibid. Ibid., art.37. Ibid., art.38.

708

REGULATION OF USE OF INSURANCE FUNDS

processes of the insurance asset management institution; and the chief risk management officer shall independently report the relevant information, and submit recommendations for preventing and resolving significant risks, to the board of directors and the CBIRC. The chief risk management officer shall not take charge of investment management. If it is necessary to replace the chief risk management officer, a written statement on the reasons for the replacement of the chief risk management officer and his or her performance of duties shall be submitted to the CBIRC at least five working days before the replacement.668 12.19.2 Fund utilization processes An insurance group (holding) company or an insurance company shall establish and improve the management rules and internal control mechanism for the utilization of insurance funds, specifying the connecting manners and operating standards for all processes and relevant posts and strictly separating the responsibilities of posts in the front, middle, and back offices, and on a regular basis, inspect and assess the implementation thereof to ensure clear powers and responsibilities, relative independence, and mutual checks and balances.The relevant rules shall include but not be limited to:669 (1) (2) (3) (4) (5) (6)

The The The The The The

relevant asset allocation rules; rules for investment research, decision-making, and authorization; transaction and settlement management rules; performance evaluation and assessment rules; information system management rules; and risk management rules.

An insurance group (holding) company or an insurance company shall, on the level of independent juridical person, make general arrangements for both the domestic and the overseas markets; analyze the cost of insurance funds, cash flow, duration, and other debt indicators by comprehensively taking into account the solvency constraint, external environment, risk appetite, regulatory requirements, and other factors; and choose and allocate assets with corresponding risk return characteristics, duration, and liquidity.670 An insurance group (holding) company or an insurance company shall establish a specialized analysis platform, research and develop models and rules covering the management of counterparties and selection of investment instruments by making use of external research results, and conduct real-time tracking and analysis of changes in the market to provide the basis for the decision-making in the utilization of insurance funds.671 An insurance group (holding) company or an insurance company shall establish and improve the rules for relatively centralized and hierarchical investment 668 669 670 671

Ibid., art.39. Ibid., art.40. Ibid., art.41. Ibid., art.42.

709

REGULATION OF USE OF INSURANCE FUNDS

decision-making and authorization with a unity of powers and responsibilities, specifying the authorization manners, extents, standards, procedures, time limitations, and accountability and inspect authorization and enforce accountability at each level.672 An insurance group (holding) company or an insurance company shall establish and improve an arm’s length mechanism to effectively control the operational and moral risks associated with the relevant personnel, prevent the technical safety loopholes in the trading system, and ensure the compliance, fairness, and effectiveness of the trading activities. The arm’s length mechanism shall, at a minimum, include:673 (1) implementing the centralized trading system and strictly separating investment decision-making from execution of transactions; (2) establishing the centralized trading monitoring system, warning system, and feedback system meeting the relevant requirements; (3) establishing an adequate trading record system; and (4) fairly treating different funds in account setting, research support, resource allocation, and personnel management, among others. Insurance group (holding) companies and insurance companies carrying out securities investment business shall comply with the relevant laws and regulations on the securities industry, establish and improve the risk isolation mechanisms, implement the rules for the reporting of information on investment by relevant employees themselves and their direct relatives, and effectively prevent insider trading, utilization of undisclosed information for transaction, tunnelling, and other violations of laws and regulations.674 An insurance group (holding) company or an insurance company shall establish a performance evaluation system and evaluation criteria focusing on asset and liability management, conduct performance evaluation and attribution analysis of utilization of insurance funds on a regular basis, and promote long-term investment, value investment, and diversified investment to achieve the overall objectives of utilization of insurance funds.675 An insurance group (holding) company or an insurance company shall establish an information management system for the utilization of insurance funds to reduce or eliminate artificial manipulation factors; automatically identify, warn of, report, manage, and control risks in asset management; and ensure the understanding of the risk status in real time.676 The information management system shall set thresholds of compliance and risk indicators and solidify all the elements of risk monitoring into the relevant information technology systems to reduce operational risks and prevent moral risks.677 The information management system shall have a comprehensive risk management database, collect and integrate the basic data of the market, record the original 672 673 674 675 676 677

Ibid., art.43. Ibid., art.44. Ibid. Ibid., art.45. Ibid., art.46. Ibid.

710

REGULATION OF USE OF INSURANCE FUNDS

data on insurance fund management and investment transactions, and ensure the sharing of the information platform.678 12.20 Risk management and control for insurance funds utilization An insurance group (holding) company or an insurance company shall establish an organizational system and operating mechanisms for risk management in the utilization of insurance funds featuring full coverage, full monitoring, and participation by all staff; improve risk management technology and information technology systems; and classify, identify, quantify, and evaluate all kinds of risks through the management system and by auditing and other means to prevent and resolve risks.679 An insurance group (holding) company or an insurance company shall manage and control the risks of asset-liability mismatch; strengthen the cost-benefit management, duration management, and risk budget on the basis of solvency constraint and liability features of insurance products; determine risk limits for the utilization of insurance funds; and assess and manage the risks of asset mismatch by gap analysis, sensitivity, scenario testing, and other approaches.680 An insurance group (holding) company or an insurance company shall manage and control liquidity risks, test the bearable level of liquidity risks and its own risk tolerance under different conditions according to the characteristics of the insurance business and its risk appetite, and develop the management strategies, policies, and procedures for liquidity risks to prevent liquidity risks.681 An insurance group (holding) company or an insurance company shall manage and control market risks, assess and manage interest rate risks, exchange rate risks and volatility risks in the financial market, establish effective market risk assessment and management mechanisms, and implement the market risk limits management.682 An insurance group (holding) company or an insurance company shall manage and control credit risks, establish credit risk management rules, track and assess credit risks in a timely manner, track and analyze the credit instruments held and the counterparties, and on a regular basis, organize back-testing.683 An insurance group (holding) company or an insurance company shall strengthen the management of interbank borrowing, bond repurchase, margin trading, and short selling; strictly control the financing scale and use of leverage; and refrain from speculation or investing short-term borrowings in assets with high risk and poor liquidity. Insurance funds may participate in trading in derivatives only for hedging of risks and shall not be used for speculation, and the specific measures shall be developed by the CBIRC.684

678 679 680 681 682 683 684

Ibid. The Measures for the Administration of the Utilization of Insurance Funds 2018, art.47. Ibid., art.48. Ibid., art.49. Ibid., art.50. Ibid., art.51. Ibid., art.52.

711

REGULATION OF USE OF INSURANCE FUNDS

An insurance group (holding) company, an insurance company, or an insurance asset management institution carrying out investment business or business of asset management products shall establish a management system for persons who are responsible for risks and shall make it clear who are the persons responsible for risks. The specific measures shall be developed by the CBIRC.685 Insurance group (holding) companies and insurance companies shall develop internal audit and external audit rules. An insurance group (holding) company or an insurance company shall conduct an internal audit of the utilization of insurance funds once a year at a minimum. An insurance group (holding) company or an insurance company shall retain a qualified external professional audit institution to conduct an annual special audit on the internal control of insurance funds. The results of the aforesaid internal audit and annual audit shall be reported to the CBIRC. The specific measures shall be developed by the CBIRC.686 The senior executive in charge of investment, the head of the insurance fund utilization department, and persons at important posts of an insurance group (holding) company or an insurance company shall undergo departure audit before leaving their posts, and the audit results shall be reported to the CBIRC.687 An insurance group (holding) company or an insurance company shall establish a risk disposal mechanism for the utilization of insurance funds and prepare contingency plans to control and resolve hidden risks in a timely manner. In the case of substantial depreciation of investment assets or the failure of satisfaction of claims, it shall prepare a disposal plan and report to the CBIRC in a timely manner.688 An insurance group (holding) company or an insurance company shall ensure that the relevant risk control posts and personnel have the rights to information and inquiry necessary for performing their duties and are entitled to consult and inquire about all the data, information, and details relevant to the utilization of insurance funds and that they can observe meetings relevant to the utilization of insurance funds.689 The utilization of insurance funds of an insurance group (holding) company or an insurance company involving affiliated transactions shall comply with the laws, administrative regulations, national accounting rules, and the relevant regulatory provisions of the CBIRC.690 12.21 Supervision and administration for insurance funds utilization The CBIRC shall regulate the utilization of insurance funds through a combination of on-site inspection and off-site monitoring. The CBIRC may authorize its local offices to exercise the supervisory authority for the utilization of insurance funds.691 685 686 687 688 689 690 691

Ibid., art.53. Ibid., art.54. Ibid., art.55. Ibid., art.56. Ibid., art.57. Ibid., art.58. Ibid., art.59.

712

REGULATION OF USE OF INSURANCE FUNDS

The CBIRC shall, in light of the corporate governance structure, solvency, investment management capability, and risk management capability, and according to the internal control and compliance scoring and other relevant supervisory rules, conduct categorized supervision, ongoing supervision, risk monitoring, and dynamic assessment of the utilization of insurance funds by insurance group (holding) companies and insurance companies. The CBIRC shall strengthen the capital constraint of insurance companies, determine the risk supervision indicator system of the utilization of insurance funds, and take corresponding regulatory measures according to the assessment results to prevent and resolve risks.692 The senior executive in charge of investment of an insurance group (holding) company or an insurance company and the directors, supervisors, and senior executives of an insurance asset management company shall obtain the office qualification confirmation granted by the CBIRC before taking offices.693 The chief investment officer of an insurance group (holding) company or an insurance company shall be a senior executive in charge of investment.694 The appointment of the chief investment officer and the primary person in charge of the asset management department of an insurance group (holding) company or an insurance company shall, within ten working days after the appointment, be reported to the CBIRC by the employer.695 The major equity investments of insurance group (holding) companies and insurance companies shall be reported to the CBIRC for confirmation. The specific measures for major equity investment shall be separately developed by the CBIRC.696 The insurance asset management products issued by or launched through promotion by insurance asset management institutions shall be subject to confirmation, recordation, or registration management. Registration makes no material judgment on the investment value or risks of insurance asset management products.697 The CBIRC shall have the authority to require insurance group (holding) companies and insurance companies to provide reports, statements, documents, and materials. The reports, statements, documents, and materials shall be submitted in a timely, authentic, accurate, and complete manner.698 An insurance group (holding) company or an insurance company shall disclose the relevant information on the utilization of insurance funds according to the law. The major investment resolutions of the shareholders’ meeting and the board of directors of an insurance group (holding) company or an insurance company shall be reported to the CBIRC within five working days after the resolutions are made, except as otherwise specified by the CBIRC.699 692 693 694 695 696 697 698 699

Ibid., art.60. Ibid., art.61. Ibid. Ibid. Ibid., art.62. Ibid., art.63. Ibid., art.64. Ibid., art.65.

713

REGULATION OF USE OF INSURANCE FUNDS

The CBIRC shall have the authority to require insurance group (holding) companies and insurance companies to dynamically link the relevant data on utilization of insurance funds with the regulatory information system of the CBIRC.700 An insurance group (holding) company or an insurance company shall, according to the provisions of the CBIRC, submit relevant data to the regulatory information system of the CIRC in a timely, accurate, and complete manner.701 Where an insurance group (holding) company or an insurance company falls under one of the following circumstances in violation of the provisions of these Measures 2018, the CBIRC may restrict the forms and ratios of its utilization of insurance funds:702 (1) Its solvency fails to satisfy the requirements of the CBIRC. (2) There is serious risk in its corporate governance. (3) The utilization of funds violates the relevant provisions on affiliated transactions. Where an insurance group (holding) company or an insurance company violates the relevant provisions on the forms and ratios of utilization of funds, the CBIRC shall order it to take corrective action within a prescribed time limit.703 The CBIRC shall have the authority to hold regulatory interviews with the directors, supervisors, and senior executives of an insurance group (holding) company or an insurance company and the person in charge of the insurance asset management department thereof, requiring them to provide explanations on the utilization of insurance funds, risk control, internal management, and other relevant major issues.704 Where an insurance group (holding) company or an insurance company seriously violates the relevant provisions on utilization of funds, the CBIRC may order adjustment of the person in charge and the relevant executives.705 Where an insurance group (holding) company or an insurance company which has seriously violated the relevant provisions on utilization of insurance funds is ordered to take corrective action within a prescribed time limit but fails to do so, the CBIRC may decide to appoint relevant personnel to an overhaul team to overhaul the company.706 An insurance group (holding) company or an insurance company utilizing insurance funds in violation of the provisions of these Measures 2018 shall be subject to fine, restriction of the business scope, ordering cessation of new business or revocation of business permits and other administrative penalties by the CBIRC, and the relevant responsible personnel shall be subject to warning, fine, revocation of office qualifications, prohibition from entering the insurance sector, and other administrative penalties according to the law. Where an administrative penalty is 700 701 702 703 704 705 706

Ibid., art.66. Ibid. Ibid., art.67. Ibid., art.68. Ibid., art.69. Ibid., art.70. Ibid., art.71.

714

REGULATION OF USE OF INSURANCE FUNDS

imposed, an insurance group (holding) company or an insurance company shall hold the relevant liable persons accountable.707 Where any other party to the utilization of insurance funds violates the relevant laws and administrative regulations and these Measures 2018 in participating in the utilization of insurance funds, the CBIRC shall record its misconduct and notify the industry authority of the violation, and if the circumstances are serious, the CBIRC may notify insurance group (holding) companies and insurance companies that they may not conduct relevant business with the violator for a period of three years and impose administrative punishment on it according to the law after consultation with the relevant regulators.708 Where any staff member of the CBIRC abuses power, neglects duties, or divulges trade secrets of the relevant entities or personnel to which he or she has access, the staff member shall be held liable according to the law.709 12.22 Overseas investment with insurance funds At the end of 2017, the total insurance assets in China reached ¥16,750 billion yuan. The insurance funds overseas investment balance was about US$70 billion, accounting for approximately 3% of the total insurance assets.710 The overseas investment of insurance funds is governed by the Interim Measures for the Administration of Overseas Investment with Insurance Funds (hereinafter, the Measures 2007),711 the Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds (hereinafter, the Detailed Rules 2012),712 and the Notice of the CIRC on Adjusting the Policies Relating to Overseas Investment with Insurance Funds (hereinafter, the Notice 2015).713 In this section, we consider these three pieces of regulations.

707 Ibid., art.72. 708 Ibid., art.73. 709 Ibid., art.74. 710 Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Science Press, Beijing, China) pp. 147–49. 711 The Interim Measures for the Administration of Overseas Investment with Insurance Funds (the CIRC Order No.2 [2007]) jointly developed by the CIRC, the People’s Bank of China, and the State Administration of Foreign Exchange were issued on 28 June 2007 and came into force on the same day. See accessed in 12 September 2020. Where any rules of the CBIRC provide otherwise for the formation of overseas institutions in the insurance category with insurance funds, such provisions shall prevail. Investment in the Hong Kong Special Administrative Region and the Macao Special Administrative Region with insurance funds shall be governed by these Measures, except as otherwise specified by the CBIRC.The use of insurance funds to purchase financial products which are denominated in RMB or a foreign currency and issued within China but invested in financial instruments or any other assets overseas shall be governed by these Measures except as otherwise specified by the CBIRC. 712 The Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds (Bao Jian Fa No. 93 [2012]) were issued on 12 October 2012 and came into force on the date of issuance. See accessed on 16 October 2020. 713 The Notice of the CIRC on Adjusting the Policies Relating to Overseas Investment with Insurance Funds (Bao Jian Fa No. 33 [2015]) was issued on 27 March 2015 and came into force on the date of issuance.

715

REGULATION OF USE OF INSURANCE FUNDS

12.22.1 The Interim Measures for the Administration of Overseas Investment with Insurance Funds These Measures 2007 were developed in accordance with the Insurance Law, the Regulation of China on Foreign Exchange Administration, and other laws and administrative regulations for the purposes of strengthening the administration of overseas investment with insurance funds, preventing risks, protect the lawful rights and interests of the insured and the parties to overseas investment with insurance funds.714 The term of “parties to overseas investment with insurance funds” means the client, trustees, and custodian. “Client” means an insurance company, an insurance group company, an insurance holding company, or any other insurance institution legally formed in the territory of China. “Trustees” includes the domestic trustee and the overseas trustee. A domestic trustee shall be an insurance asset management company legally formed in the territory of the China or any other professional investment management institution in the territory of China which meets the conditions prescribed by the CBIRC. An overseas trustee shall be a professional investment management institution legally formed outside the territory of China and meeting the conditions prescribed by the CBIRC. “Custodian” means a commercial bank or any another financial institution legally formed in the territory of China and meeting the conditions prescribed by the CBIRC. Commercial banks serving as custodians include Chinese-funded banks, Chinese-foreign equity joint venture banks, wholly foreign-funded banks, and branches of foreign banks.715 For the purposes of these Measures, “insurance funds” means a client’s own foreign exchange funds, foreign exchange funds purchased with Renminbi (RMB), and assets formed from overseas investment with the aforesaid funds.716 Except as otherwise specified by the CBIRC and the State Administration of Foreign Exchange (SAFE), to engage in overseas investment with insurance funds, a client shall enter into agreements with the trustees and custodian in accordance with the provisions of these Measures 2007, and the trustees and custodian shall be responsible for the investment operations and custodial supervision of the insurance funds respectively under the agreements.717 The insurance funds trusted for investment or under custody shall be separate from the assets owned by the trustee or custodian, and may not be included in the trustee’s or custodian’s own assets or any other assets under the management of the trustee or custodian. Except under the statutory circumstances such as debts

See accessed on 16 October 2020. 714 The Interim Measures for the Administration of Overseas Investment with Insurance Funds 2007, art.1. 715 Ibid., art.2. 716 Ibid., art.3. 717 Ibid., art.4.

716

REGULATION OF USE OF INSURANCE FUNDS

incurred from overseas investment with insurance funds, no enforcement may be conducted against the insurance funds trusted for investment or under custody.718 A client shall, under the principles of security, fluidity, profitability, and matching of assets and liabilities, prudently make investment decisions and assume investment risks. The trustees, custodian, and other natural persons, legal persons, or organizations providing services for overseas investment with insurance funds shall, as agreed upon, provide the relevant services and strictly perform their duties of honesty and trustworthiness, prudence, and diligence.719 The parties to overseas investment with insurance funds shall abide by the relevant laws and administrative regulations of China, these Measures 2007, and the relevant foreign laws and provisions.720 The CBIRC is responsible for developing the policies for the administration of overseas investment with insurance funds, and according to the law, supervises and administers activities of overseas investment with insurance funds. The SAFE, according to the law, administers quotas for foreign exchange payments, remittance of foreign exchange for settlement, and other foreign exchange matters related to overseas investment with insurance funds.721 (a) Qualifications and conditions To engage in overseas investment with insurance funds, a client shall meet the following conditions: (1) It has established a sound corporate governance structure and a complete asset management system, and its internal management rules and risk control rules comply with the provisions of the Guidelines for the Risk Control in the Use of Insurance Funds (Trial Implementation) 2004.722 (2) It has a relatively strong investment management capability, risk evaluation capability, and investment performance assessment capability; (3) It has specific policies and strategies for allocation of assets and conducts rigorous management of the matching of assets and liabilities; (4) The operations of its investment management team are well regulated, and its senior executive in charge of investment has ten years or more of experience in the financial or other economic fields; (5) It has stable finances and a good credit standing, its solvency adequacy ratio and risk monitoring indicators satisfy the relevant requirements of the CBIRC, and it has no record of any gross violation of laws and regulations in the last three years; (6) It has a permit for engaging in the foreign exchange business; (7) Other conditions as set out by the CBIRC.723 To provide trust services for overseas investment with insurance funds, a domestic trustee shall meet the following conditions: (1) It is qualified to engage in the insurance asset management business; (2) It has established a sound corporate governance structure and effective internal management rules; (3) It has established 718 719 720 721 722 723 art.9.

Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8. Bao Jian Fa No. 43 [2004]. The Interim Measures for the Administration of Overseas Investment with Insurance Funds 2007,

717

REGULATION OF USE OF INSURANCE FUNDS

a rigorous risk control mechanism, has a capability of effective risk management of overseas investment, and has secure and efficient transaction management and financial management systems; (4) It has an experienced management team which specializes in the management of overseas investment and insurance assets, has a certain number of investment professionals, and the company’s senior executive in charge of investment has ten years or more of experience in the financial or other economic fields; (5) Both the paid-in capital and the net assets of the company are not less than ¥100 million or an equivalent in a convertible currency, and its capital scale and the scale of trusted assets under its management satisfy the requirements of the CBIRC; (6) It has stable finances and a good credit standing, its risk monitoring indicators satisfy the relevant requirements of the CBIRC, and it has no record of any gross violation of laws and regulations in the last three years; (7) Other conditions as set out by the CBIRC.724 To provide trust services for overseas investment with insurance funds, an overseas trustee shall meet the following conditions: (1) It has an independent legal person status, and is qualified to engage in the asset management business under the laws of the country or region where it is located; (2) It has established a sound corporate governance structure, and implements effective internal management rules; (3) It has established a rigorous risk control mechanism and secure and efficient transaction management and financial management systems, and has a capacity of comprehensive risk management; (4) It has an experienced management team which specializes in the insurance asset management business, and has a certain number of investment professionals with professional investment experience of ten years or more on average; (5) It has stable finances and a good credit standing, its risk monitoring indicators comply with the laws of the country or region where it is located and the relevant rules of the regulatory authorities, and it has no record of any gross violation of laws and regulations in the last three years; (6) Its capital scale and the scale of assets under its management satisfy the requirements of the CBIRC; (7) It has purchased the relevant liability insurance consistent with the scale of assets under its management; (8) The country or region where it is located has a sound financial regulatory system, and the financial regulatory authorities in such a country or region have signed regulatory cooperation documents with the financial regulatory authorities of China and maintain an effective regulatory cooperation relationship with the financial regulatory authorities of China; (9) Other conditions as set out by the CBIRC.725 To provide custodial services for overseas investment with insurance funds, a custodian shall meet the following conditions: (1) It has established a sound corporate governance structure and implements effective internal management rules; (2) It has established a rigorous risk control mechanism, strict segregation rules for assets under custody, and secure and efficient custodial and disaster disposal systems; (3) It has an experienced management team, has established a specialized custodial department, and has a certain number of custodial business personnel; (4) Its capital adequacy ratio and core capital adequacy ratio reached 10% and 8% 724 Ibid., art.10. 725 Ibid., art.11.

718

REGULATION OF USE OF INSURANCE FUNDS

at the end of the prior year respectively, it has stable finances and a good credit standing, its risk monitoring indicators satisfy the relevant requirements, and it has no record of any gross violation of laws and regulations in the last three years; (5) Its capital scale and the scale of assets under its custody satisfy the requirements of the CBIRC; (6) It is qualified to engage in the settlement and sale of foreign exchange; (7) Other conditions as set out by the CBIRC and the SAFE.726 A custodian may, with the consent of a client, select a commercial bank or a professional custodial institution which meets the following conditions as its custodial agent: (1) It is permitted to engage in the custodial business under the laws of the country or region where it is located and maintains a good cooperative relationship with the custodian; (2) It has established a sound corporate governance structure and implements effective internal management rules; (3) It has established a rigorous risk control mechanism, effective segregation rules for assets under custody, and secure and efficient custodial and disaster disposal systems; (4) It has an experienced management team and a certain number of professional custodial personnel who are familiar with the custodial business in the country or region where it is located; (5) It has stable finances and a good credit standing, its risk monitoring indicators comply with the laws of the country or region where it is located and the relevant rules of the regulatory authorities, and it has no record of any gross violation of laws and regulations in the last three years; (6) Its capital scale and the scale of assets under its custody satisfy the requirements of the CBIRC; (7) The country or region where it is located has a sound financial regulatory system, and the financial regulatory authorities in such a country or region have signed regulatory cooperation documents with the financial regulatory authorities of China and maintain an effective regulatory cooperation relationship with the financial regulatory authorities of China; (8) Conditions in the custodial agreement; (9) Other conditions as set out by the CBIRC and the SAFE.727 None of the following circumstances may exist between a client and a custodian or between a client and a custodial agent: (1) The shares held by either of them in the other exceeds the proportion prescribed by the CBIRC; (2) Any other circumstances which affect a custodian’s or a custodian agent’s performance of custodial obligations as determined by the CBIRC. A client shall undertake that none of the circumstances as described in the preceding paragraph exists among the trustee, custodian, and custodial agent.728 (b) Application management To engage in overseas investment with insurance funds, a client shall file an application with the CBIRC and submit the following written materials in triplicate:729 (1) An application of the client for engaging in overseas investment with insurance funds and a letter of commitment which satisfies the requirements of the CBIRC. 726 727 728 729

Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15.

719

REGULATION OF USE OF INSURANCE FUNDS

(2) A resolution of the shareholders’ meeting or the board of directors of the client on consenting to the client’s overseas investment with insurance funds. (3) The client’s strategic allocation plan, investment management rules, and risk management rules for overseas investment with insurance funds. (4) A statement on the client’s management capability, risk evaluation capability, and performance assessment capability for overseas investment with insurance funds. (5) An introduction to the client’s internal asset management department and the major managerial personnel thereof. (6) The client’s financial statements and solvency reports which satisfy the requirements of the CBIRC and the explanations thereof. (7) A photocopy of the client’s permit for engaging in the foreign exchange business. (8) Reconciliation statements of the client’s foreign exchange bank account. (9) A statement on the selection of the trustees and custodian and the draft of the agreements to be signed. (10) Other materials as set out by the CBIRC. The CBIRC shall, within 20 days of accepting the application, make a decision to approve or disapprove the application. In the case of approval, the CBIRC shall issue a written decision; in the case of disapproval, the CBIRC shall inform the applicant of the decision in writing and provide an explanation of the reasons for the disapproval. At the same time, a copy of the written decision of approval or disapproval shall be sent to the SAFE. A client which has been granted approval by the CBIRC to engage in overseas investment with insurance funds shall file an application with the SAFE for a foreign exchange payment quota for overseas investment within the extent of the approved investment ratio and submit the following written materials in triplicate:730 (1) An application for a foreign exchange payment quota for the investment, including the basic information on the applicant, the intended foreign exchange payment quota for the investment, and a statement on the source of capital. (2) A written decision of the CBIRC to approve the applicant’s overseas investment with insurance funds. (3) The company’s financial statements for the prior year. (4) Documents issued by the CBIRC to certify that the trustees and custodian may provide trust or custodial services for overseas investment with insurance funds. (5) A photocopy of the client’s permit for engaging in the foreign exchange business. (6) Reconciliation statements of the client’s foreign exchange bank account. (7) Other materials as set out by the SAFE.

730 Ibid., art.16.

720

REGULATION OF USE OF INSURANCE FUNDS

The SAFE shall, within 20 days of accepting the application, make a decision to approve or disapprove the application. In the case of approval, the SAFE shall inform the applicant in writing of the foreign exchange payment quota of the investment; in the case of disapproval, the SAFE shall inform the applicant in writing of the decision and provide an explanation of the reasons for the disapproval. At the same time, a copy of the written decision of approval or disapproval shall be sent to the CBIRC. To provide trust services for overseas investment with insurance funds, a domestic trustee shall submit to the CBIRC the following written materials in triplicate:731 (1) (2) (3) (4) (5) (6) (7) (8) (9)

An application for providing trust services. A letter of intent to provide trust services. A letter of commitment which satisfies the requirements of the CBIRC. A certificate of its qualification to engage in the insurance asset management business. Its management rules and risk control rules for overseas investment with insurance funds. A statement on its management capability, risk management capability, and management system for overseas investment with insurance funds. A statement on its departments and investment management professionals. The company’s financial statements and internal control audit reports which satisfy the requirements of the CBIRC. Other materials as set out by the CBIRC.

A domestic trustee which is an insurance asset management company may be exempt from submitting the materials in items (2) and (4) as mentioned earlier. The CBIRC shall, within 20 days of accepting an application, make a decision to approve or disapprove the application. If the case of approval, the CBIRC shall issue a written decision; in the case of disapproval, the CBIRC shall inform the applicant in writing of the decision and provide an explanation of the reasons for the disapproval. A domestic trustee which is any other professional investment management institution may be exempt from submitting the material in item (1) as mentioned earlier. The CBIRC shall prudently assess the institution in accordance with the provisions of these Measures and within 20 days of receipt of all the materials issue a letter of opinion. To provide trust services for overseas investment with insurance funds, an overseas trustee shall submit to the CBIRC the following written materials in triplicate:732 (1) A letter of intent to provide trust services and a letter of commitment which satisfies the requirements of the CBIRC. (2) A photocopy of documents certifying its lawful operations. (3) Its management rules and risk control rules for overseas investment with insurance funds. 731 Ibid., art.17. 732 Ibid., art.18.

721

REGULATION OF USE OF INSURANCE FUNDS

(4) A statement on its management capability, risk management capability, and management system for overseas investment with insurance funds. (5) A statement on its departments and investment management professionals. (6) The company’s financial statements and internal control audit reports which satisfy the requirements of the CBIRC. (7) A photocopy of its liability insurance policies. (8) The opinion issued by the regulatory authority of the place where it is located to certify that the overseas trustee has no record of any gross violation of laws and regulations in the last three years; if the regulatory authority is unable to issue a opinion, a corresponding written statement of the overseas trustee. (9) Other materials as set out by the CBIRC. The CBIRC shall prudently assess the overseas trustee in accordance with the provisions of these Measures and within 20 days of receipt of all the materials shall issue a letter of opinion. To provide custodial services for overseas investment with insurance funds, a custodian shall submit to the CBIRC the following materials in triplicate:733 (1) A letter of intent to provide custodial services for overseas investment with insurance funds and a letter of commitment which satisfies the requirements of the CBIRC. (2) Its independent custody rules and risk control rules and the specific operating processes. (3) A statement on its global custodial capability and risk management capability and the global custody network. (4) A statement on its internal custodial department and custodial service professionals. (5) The company’s financial statements and internal control audit reports which satisfy the requirements of the CBIRC. (6) The opinion issued by the regulatory authority of the place where it is located to certify that the custodian has no record of any gross violation of laws and regulations in the last three years or a corresponding written statement issued by the shareholders’ meeting or the board of directors of the custodian. (7) Other materials as set out by the CBIRC. The CBIRC shall prudently assess the custodian in accordance with the provisions of these Measures 2007 and within 20 days of receipt of all the materials issue a letter of opinion. (c) Account management A client shall, with the approval of the regulatory authorities, enter into a custodial agreement with the custodian and open a domestic custody account with the custodian for overseas investment (hereinafter referred to as the “domestic custody 733 Ibid., art.19.

722

REGULATION OF USE OF INSURANCE FUNDS

account”). A custodian shall maintain different accounts for and apply categorized management to different trustees, different insurance products, and insurance funds of different natures.734 A custodian shall, according to the custodial agreement entered into with a client, open an overseas investment settlement account and a securities custody account for the client for the fund settlement and securities custody of overseas investment. A custodian or a custodial agent shall open different accounts for different clients and apply categorized management to such accounts.735 Where a client is listed overseas by the offering of shares, it shall transfer the insurance funds raised from the overseas listing back to China within the prescribed period according to the relevant provisions. Where, after the overseas listing of a client by the offering of shares, it is granted approval to engage in overseas investment with insurance funds, it shall transfer the insurance funds raised from the overseas listing back to its domestic custody account within 30 days of the CBIRC’s approval of overseas investment.736 The following receipts shall be within the scope of receipts in the domestic custody account of a client:737 (1) The insurance funds transferred into the account. (2) The principal amounts invested, returns on investment, dividends, bonuses, and interest remitted into the account. (3) Other receipts that may be transferred into the account according to the law. The following expenditures shall be within the scope of expenditures in the domestic custody account of a client:738 (1) The funds transferred into the client’s overseas investment settlement account. (2) The principal amounts invested out of the account. (3) The funds transferred back to the client’s foreign exchange account. (4) The applicable taxes and fees paid. (5) Other expenditures which may be transferred out of the account according to the law. The following receipts shall be within the scope of receipts of the overseas investment settlement account of a client:739 (1) The funds transferred into the account from the client’s domestic custody account. (2) The funds obtained from the selling of overseas securities assets.

734 735 736 737 738 739

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25.

723

REGULATION OF USE OF INSURANCE FUNDS

(3) The dividend and bonus income and interest income from overseas investment. (4) Other receipts which may be transferred into the account according to the law. The following expenditures shall be within the scope of expenditures of the overseas investment settlement account of a client:740 (1) (2) (3) (4)

The funds transferred into the client’s domestic custody account. The funds for purchasing overseas securities assets. The applicable taxes and fees paid. Other expenditures which may be transferred out of the account according to the law.

Where a client purchases foreign exchange for overseas investment with insurance funds, the principal amounts invested and returns on investment transferred back to China may undergo the settlement of foreign exchange or be retained in the form of foreign exchange. If settlement of foreign exchange is conducted, the client shall undergo the relevant formalities based on its certificate of purchase of foreign exchange. The principal amounts invested and returns on investment transferred back to China by a client in the case of overseas investment with the client’s own foreign exchange capital shall be retained in the form of foreign exchange except as otherwise specified by the regulatory authorities.741 A client and the trustees shall undergo the relevant formalities for the purchase, payment, and settlement, among others, of foreign exchange according to the approval document issued by the SAFE for a foreign exchange payment quota for investment. The custodian shall undergo the relevant fund transfer formalities according to the approval document issued by the SAFE for a foreign exchange payment quota for investment and the instructions from the client or the trustees.742 (d) Investment management A client engaging in overseas investment with insurance funds shall prudently develop a strategic asset allocation plan and overseas investment guidelines as required by the matching management of assets and liabilities, properly arrange the terms of investment and the currencies of investment, and check them on a regular basis.743 Insurance funds shall be invested globally in mature capital markets and in currencies of major countries or regions.744 Overseas investment with insurance funds shall be limited to the following forms of investment or investment instruments:745

740 741 742 743 744 745

Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31.

724

REGULATION OF USE OF INSURANCE FUNDS

(1) Money market instruments, such as commercial paper, large-denomination negotiable certificates of deposit, repurchase and reverse repurchase agreements, and money market funds. (2) Fixed-income instruments, such as bank deposits, structural deposits, bonds, convertible bonds, bond funds, securitization products, and trust products. (3) Equity instruments, such as stocks, stock funds, equity, and equity products. (4) Other forms of investment or investment instruments as set out in the Insurance Law or prescribed by the State Council. The measures for the specific management of the forms of investment and investment instruments shall be developed by the CBIRC additionally. A client may, as needed for asset allocation and risk management, independently determine the proportion of overseas investment within the specific investment ratio approved by the CBIRC but shall satisfy the following requirements:746 (1) The total amount of investment shall not exceed 15% of the total assets of the client at the end of the prior year. (2) The total amount of actual investment shall not exceed the foreign exchange payment quota for investment approved by the SAFE. (3) The proportion of investment in a single investee shall comply with the rules of the CBIRC. (4) To modify the approved specific investment ratio, investment forms, or investment instruments, a client shall file an application with the CBIRC for modification and obtain an approval from the CBIRC. (5) Any major equity investment shall be subject to the approval of the CBIRC. (e) Risk management The parties to overseas investment with insurance funds shall legally engage in the relevant business, conduct comprehensive risk management, and strengthen information exchange to ensure the security of overseas investment with insurance funds.747 A client shall enter into written agreements with the trustees and custodian on the rights and obligations of each party and the obligations of the trustees and custodian to submit reports to the regulatory authorities as required by these Measures. The written agreements shall be precise in text and include all required elements.748 A client as a body corporate engaging in overseas investment with insurance funds shall conduct strategic asset allocation in a unified manner, and the internal asset management department of the client shall be responsible for the specific matters on the funds trusted for investment. No branch of a client may engage in overseas investment with insurance funds.749 746 747 748 749

Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35.

725

REGULATION OF USE OF INSURANCE FUNDS

A client shall fully study the feasibility of overseas investment with insurance funds and carefully evaluate market risks, country risks, exchange risks, credit risks, fluidity risks, operational risks, moral risks, and legal risks in view of market conditions, technical conditions, risk control, staffing, and cost and benefit, among others.750 A client shall, in accordance with the Guidelines for the Risk Control in the Use of Insurance Funds (for Trial Implementation), establish a centralized decisionmaking system, determine the duties of each post, and standardize the processes of investment operations.751 A client shall develop the criteria and procedures for the selection of trustees and custodians; select trustees and custodians in an open, fair, and just manner; and conduct effective oversight. A client may select two or more trustees but shall rationally determine the number of trustees as actually needed, and a client may select one custodian only, which shall take custody of all the insurance funds of the client used for overseas investment.752 A client shall, on a regular basis, evaluate the risk status of the trusted insurance funds, the management capabilities and investment performance of the trustees, the custodian’s performance of duties, and service capability.753 A client shall implement business credit management or proportional management in view of the risk features of overseas investment with insurance funds and the credit rating, market reputation, scale of assets under management, performance in investment management, and management experience in the sector, among others, of the counterparty to a transaction.754 A trustee providing trust services for overseas investment with insurance funds shall comply with the following provisions:755 (1) It shall manage different trusted funds in a fair and just manner, establish asset segregation rules, and strictly prevent risks in affiliated transactions. (2) It shall strictly comply with the provisions of the trust agreement, the investment guidelines of a client, and these Measures, and based on indicators such as credit rating, nature of risks, profitability, information transparency, and fluidity, shall prudently select the counterparty to a transaction and control the scope and proportion of investment. (3) It shall establish a transaction monitoring system, a pre-warning system, and an information feedback system. (4) It shall use risk measurement indicators to identify and measure the risks associated with different investment instruments and assets under its management, track or adjust risk exposures, and adopt various measures to ensure the security of investment.

750 751 752 753 754 755

Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid., art.41.

726

REGULATION OF USE OF INSURANCE FUNDS

(5) It shall enhance internal risk management, check operating processes on a regular basis, and establish an information exchange mechanism to ensure compliance with laws and regulations in the use of funds. Where an asset management company formed overseas by a domestic insurance institution with the approval of the CBIRC serves as an overseas trustee, it shall be subject to the oversight and management by the domestic holding insurance institution and report in a timely manner its management of overseas investment.756 A custodian providing custodial services for overseas investment with insurance funds shall comply with the following provisions:757 (1) It shall take custody of insurance funds in a fair and just manner and effectively segregate the trusted assets of different clients. (2) It shall, jointly with a custodial agent, oversee the activities of overseas investment of a client and trustees, and upon discovery of any violations of laws and regulations, notify the client and trustees in a timely manner and report to the CBIRC. (3) It shall, jointly with a custodial agent, be responsible for the settlement and delivery of insurance funds under its custody, check assets in a timely and accurate manner, and oversee the custodial agent to ensure the security of insurance funds under its custody. The parties to overseas investment with insurance funds shall standardize their respective decision-making and operating processes, implement segregation rules for different professional positions, establish internal control and audit mechanisms, and prevent operational and other risks to ensure the methodical operation of overseas investment with insurance funds.758 The parties to overseas investment with insurance funds shall establish a major emergency response mechanism to prevent and dissolve major emergency risks.759 The parties to overseas investment with insurance funds shall adopt advanced risk management techniques to strictly control various investment risks. A client may authorize the trustees to conduct risk hedging management through financial derivatives such as forward, swaps, options, and futures. Financial derivatives may be used only for the avoidance of investment risks and may not be used for speculation or amplification of transactions. The measures for the administration of financial derivatives shall be developed by the CBIRC additionally.760 (f) Information disclosure and reporting The parties to overseas investment with insurance funds shall, in accordance with the rules of the CBIRC, disclose the following information in a true, accurate, and

756 757 758 759 760

Ibid., art.42. Ibid., art.43. Ibid., art.44. Ibid., art.45. Ibid., art.46.

727

REGULATION OF USE OF INSURANCE FUNDS

complete manner to the relevant parties, without any major omission, false statement, misrepresentation, or denigrating statement:761 (1) Strategic allocation of overseas investment and investment decision-making. (2) Execution of transactions, settlement of funds, and custody of assets in overseas investment. (3) Risk status, compliance monitoring, major crises, and other important matters on overseas investment. A party shall have a legal obligation to keep confidential all the trade secrets of any other party known by it in the process of overseas investment with insurance funds.762 A party to overseas investment with insurance funds shall ensure that the other parties may consult or copy the relevant materials in accordance with the provisions of contracts.763 A client shall, within five days of occurrence of any of the following circumstances, report to the CBIRC and the SAFE:764 (1) (2) (3) (4)

Modification of a trustee, a custodian, or a custodial agent. Modification of the registered capital. Major modification of the structure of shareholders. Receipt of any major administrative punishment, involvement in any major litigation, or any other major incident. (5) Other circumstances as set out by the CBIRC and the SAFE. Where a trustee is involved in any major litigation, receives any major administrative punishment, or is involved in any other major event, it shall report to the CBIRC within five days of filing the suit or being sued, receipt of the punishment decision, or occurrence of the major event. In addition to the reporting obligation in the preceding paragraph, a trustee shall, in accordance with the rules of the CBIRC, submit its financial statements, internal audit reports, trust management performance reports, risk evaluation reports, and other relevant materials.765 A custodian shall submit the relevant reports according to the following requirements:766 (1) Within five days of opening a domestic custody account, an overseas investment settlement account, or a securities custody account for a client, it shall submit to the CBIRC and the SAFE a report on the account opened. (2) Where the registered capital or a shareholder of the custodian is modified, it shall report the modification to the CBIRC and the SAFE within five days of the modification. 761 762 763 764 765 766

Ibid., art.47. Ibid., art.48. Ibid., art.49. Ibid., art.50. Ibid., art.51. Ibid., art.52.

728

REGULATION OF USE OF INSURANCE FUNDS

(3) Where the custodian is involved in any major litigation, receives any major administrative punishment, or is involved in any other major event, it shall report the litigation, punishment, or other major event to the CBIRC and the SAFE within five days of filing the suit or being sued, receipt of the punishment decision, or occurrence of the major event. (4) It shall report a client’s purchase, settlement, and outbound or inbound remittance of the principal amount of investment and return on investment and the receipts and expenditures in a domestic custody account in accordance with the rules of the CBIRC and the SAFE. (5) It shall submit statements on overseas investment with insurance funds and its financial statements and internal audit reports in accordance with the rules of the CBIRC. (6) It shall declare to the SAFE the balance-of-payments statistics and foreign exchange settlement and sale statistics in compliance with the relevant provisions. (7) Other reports as set out by the CBIRC and the SAFE. (g) Supervision and administration In overseas investment with insurance funds, a client may not:767 (1) Provide security for any other organization or individual with insurance funds invested overseas; (2) Buy or sell foreign exchange for speculation; (3) Commit money laundering; (4) Seek any illegal interest in collusion with any other organization or individual by taking advantage of overseas investment with insurance funds; or (5) Conduct any other activity prohibited by the domestic or foreign applicable laws and provisions. The parties to overseas investment with insurance funds shall retain intermediary institutions which meet the conditions prescribed by the CBIRC to conduct evaluation and audit of overseas investment with insurance funds.768 The CBIRC shall have the authority to adjust the policies and rules for overseas investment with insurance funds.769 The CBIRC shall, based on regulatory needs, have the authority to conduct inspection and annual review of overseas investment made by a client and its domestic trustees with insurance funds. The SAFE may conduct inspection of a client’s foreign exchange payment quota for overseas investment, remittance of foreign exchange for settlement, and other foreign exchange administration matters. The CBIRC and the SAFE may retain intermediary institutions to assist in such inspections.770 767 768 769 770

Ibid., art.53. Ibid., art.54. Ibid., art.55. Ibid., art.56.

729

REGULATION OF USE OF INSURANCE FUNDS

Where a client violates these Measures 2007, the CBIRC may hold regulatory interviews with its senior executives, require them to provide relevant explanations, and according to the circumstances, order the client to take corrective action during a specified period; if the client shall be punished in accordance with the provisions of laws, administrative regulations, and rules of the CBIRC, the CBIRC shall impose administrative punishment on it according to the law.771 Where a trustee or a custodian violates these Measures 2007 or any other provisions on foreign exchange administration, the CBIRC, or the relevant regulatory authority shall impose administrative punishment on it according to its powers and regulatory duties.772 Where a trustee or a custodian violates these Measures 2007 or any other provisions on the use of insurance funds, the CBIRC shall record its misconduct, and according to the circumstances, require it to submit a written explanation, and if the circumstances are serious, the CBIRC may order the insurance company to replace the trustee or custodian.773 12.22.2 The Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds In addition to the Measures 2007, the CIRC formulated further detailed rules for overseas investment with insurance funds in the Notice of the CIRC on Issuing the Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds on 12 October 2012.774 The issuance of the Detailed Rules 2012 is to regulate overseas investment with insurance funds, prevent investment management risks, and realize value preservation and increment of insurance assets. The parties to overseas investment with insurance funds shall, in accordance with the provisions of the Measures 2007 and these Detailed Rules 2012, sufficiently research and determine the political, economic, legal, and other risks in the country or region where the investment is to be made and make overseas investment in a prudential manner.775 The CBIRC shall, in accordance with law, conduct continuous evaluation and supervision regarding the management capacity of the parties to overseas investment with insurance funds.776

771 Ibid., art.57. 772 Ibid., art.58. 773 Ibid., art.59. 774 Bao Jian Fa No. 93 [2012]. These Detailed Rules apply to investment of insurance funds in a financial product which is denominated in RMB and issued overseas and a financial instrument which is denominated in RMB or any other foreign currency and issued within China but with overseas financial instruments or other assets as its investment targets. 775 The Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds 2012, art.2. 776 Ibid., art.3.

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(a) Qualification requirements The client777 shall satisfy all of the following requirements in addition to the provisions of art. 9 of the Measures 2007:778 (1) It has established relevant posts on overseas investment with no fewer than three professionals in overseas investment, including no fewer than two professionals each having three or more years of experience in managing investment in overseas securities markets. (2) Its solvency adequacy ratio at the end of the previous quarter is not less than 120% at the time of making investment. (3) Its investment management capacity shall comply with relevant provisions if it invests overseas in equities of unlisted enterprises, real estate, and relevant financial products. A domestic trustee779 shall satisfy all of the following requirements in addition to the provisions of art.10 of the Measures 2007:780 (1) It has three or more years of experience in managing insurance assets. (2) The amount of entrusted assets under its management in the last accounting year is not less than ¥10 billion yuan. (3) It has no fewer than five professionals in overseas investment, including no fewer than three professionals, each having five or more years of experience in managing investment in overseas securities markets, and no fewer than two professionals, each having three or more years of experience in managing investment in overseas securities markets. A domestic trustee may only invest with insurance funds under its management in the Hong Kong market. An overseas trustee781 shall satisfy all of the following requirements in addition to the provisions of art.11 of the Measures 2007:782 (1) It has five or more years of international asset management experience and three or more years of pension or insurance asset management experience. (2) The amount of its paid-in capital or net assets in the last accounting year is not less than 30 million U.S. dollars or an equivalent in convertible currencies. 777 An insurance company, an insurance group company, an insurance holding company, or any other insurance institution legally formed in the territory of China. 778 The Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds 2012, art.4. 779 A domestic trustee is an insurance asset management company legally formed in the territory of the China or any other professional investment management institution in the territory of China which meets the conditions prescribed by the CBIRC. 780 The Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds 2012, art.5. 781 An overseas trustee is a professional investment management institution legally formed outside the territory of China and meeting the conditions prescribed by the CBIRC. 782 The Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds 2012, art.6.

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(3) The average amount of assets under its management in the last year is not less than 30 billion U.S. dollars or an equivalent in convertible currencies, and the amount of assets of non-affiliated parties under its management is not less than 50% of the total amount of assets under its management or not less than 30 billion U.S. dollars or an equivalent in convertible currency. (4) Its investment teams satisfy the practicing qualification requirements of the countries or regions where they are located, with an average of five or more years of practicing experience, and its major investment managers each have eight or more years of practicing experience. (5) It has good performance in previous investment. The amount of assets managed by the trustee’s parent company or managed by the asset management institution to which the trustee belongs in a group may be calculated on a consolidated basis, however, excluding the assets managed or involved by investment consultants and investment banks, among others. Where the trustee engages in specific asset management and satisfies all of the following requirements, the restrictions on the amount of assets under its management in item (3) of paragraph 1 hereof may be lifted; (i) The amount of assets under its management is not less than five billion U.S. dollars or an equivalent in convertible currencies; (ii) The amount of specific assets under its management is not less than 70% of the total amount of assets under its management; (iii) It has a professional reputation and assessment recognized by the market, and its management teams have outstanding performance in the field of specific asset management. Where the asset management institution established in Hong Kong by a domestic insurance institution fails to meet the provisions of this article, the domestic insurance funds managed in trust shall only be invested in the Hong Kong market. Where insurance funds are invested in an equity investment fund, the equity investment institution which promotes and manages the fund shall satisfy both of the following requirements:783 (1) The amount of its paid-in capital or net assets is not less than 15 million U.S. dollars or an equivalent in convertible currencies. (2) The amount of accumulative assets under its management is not less than one billion U.S. dollars or an equivalent in convertible currencies, and it has outstanding previous performance and a good business reputation. A custodian784 shall satisfy the following requirements in addition to the provisions of art.12 of the Measures 2007:785

783 Ibid., art.7. 784 “Custodian” means a commercial bank or any another financial institution legally formed in the territory of China and meeting the conditions prescribed by the CBIRC. Commercial banks serving as custodians include Chinese-funded banks, Chinese-foreign equity joint venture banks, wholly foreignfunded banks, and branches of foreign banks. 785 The Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds 2012, art.8.

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(1) The amount of its paid-in capital or net assets at the end of the last accounting year is not less than ¥30 billion yuan, and the amount of assets under its custody is not less than ¥200 billion yuan. (2) If the custodian is a wholly foreign-owned bank or a branch of a foreign bank and its parent company (headquarters) meets the conditions in item (1) hereof and is able to assume joint and several liability for the custodian’s performance of the custody agreement, the amount of paid-in capital or net assets and the amount of assets under custody may be calculated on the basis of those of its parent company (headquarters). (3) It has a long-term credit rating of A or equivalent to A or above; and the capital adequacy ratio, core capital adequacy ratio, and credit rating of a branch of a foreign bank shall be calculated on the basis of those of its parent company (headquarters). (4) It has no fewer than six professionals engaging in the insurance asset custody business. Where a commercial bank has any of the following relationships with a client, the commercial bank shall not serve as a custodian or a custody agent of the client:786 (1) One party directly or indirectly holds more than 10% of all shares of the other party. (2) The same party directly or indirectly holds more than 10% of all shares of both parties respectively. (3) Any other affiliation as determined by the CBIRC. Where a custodian (or custody agent) has any of the relationships as mentioned in the preceding paragraph with a trustee, the custodian shall establish an effective risk isolation mechanism and shall not conduct insider trading or illegal conveyance of interests. To apply for conducting relevant business, the parties to overseas investment with insurance funds shall report to the CBIRC and make a commitment to accepting inquiries from the CIRC regarding overseas investment with insurance funds. Where a client modifies the trustee or custodian, the client shall submit relevant materials again.787 (b) Investment rules Overseas investment with insurance funds shall be made in the financial markets of the countries or regions listed in Annex 1 of the Detailed Rules 2012788 and in the following categories of products:789 (1) Money market. Money market instruments or products include commercial paper, bank bills, large-denomination negotiable certificates of deposit, 786 Ibid., art.9. 787 Ibid., art.10. 788 Annex 1 of the Detailed Rules 2012 lists 45 countries or regions which are allowed to invest insurance funds, of which 25 are developed markets and 20 are emerging markets. 789 The Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds 2012, art.11.

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reverse repurchase agreements, short-term government bonds, and overnight lendings, with a term of not more than one year, among others. The issuers of money market instruments (including securities as collateral under reverse repurchase agreements) shall have a credit rating of A or equivalent to A or above. (2) Fixed income. Fixed-income products include bank deposits, government bonds, government-backed bonds, bonds of international financial organizations, corporate bonds, and convertible bonds, among others. Bonds shall be denominated in major international currencies in circulation, and the issuer and debts shall all have been rated BBB or an equivalent to BBB or above by an internationally recognized rating institution. Where credit rating is not required according to the relevant provisions, the issuer shall have a credit level not lower than that required for the bonds. For bonds issued overseas by the Chinese Government, the restrictions on credit rating may be lifted. Convertible bonds shall be listed and traded on the main-board markets of stock exchanges of the countries or regions listed in Annex 1 of the Detailed Rules 2012. (3) Equity. Equity instruments or products include common shares, preference shares, global depository receipts, American depository receipts, and equities of unlisted enterprises, among others. Stocks and depository receipts shall be listed and traded on the main-board markets of stock exchanges of the countries or regions listed in Annex 1 of the Detailed Rules 2012. Equities of non-listed enterprises in which investment is directly made shall be limited to equities of enterprises in such fields as finance, endowment, medical services, energy, resources, automobile services, and modern agriculture. (4) Real estate. Real estate in which investment is directly made shall be limited to mature commercial real estate and office real estate with stable income located at the core sections of the major cities in the developed markets listed in Annex 1 of the Detailed Rules 2012. An overseas fund in which insurance funds are invested shall satisfy the following requirements:790 (1) Securities investment fund. A securities investment fund shall be recognized or registered by the securities regulatory authority of a country or region listed in Annex 1 of the Detailed Rules 2012; the fund management institution shall meet the provisions of art.6 of the detailed Rules 2012; previous performance may be traced back for no fewer than three years; the structure of the fund is simple and clear, and the underlying assets are clear and comply with the provisions of items (1), (2), and (3) of art.11 of the Detailed Rules 2012; and a money market fund shall have a AAA rating or a rating equivalent to AAA.

790 Ibid., art.12.

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(2) Equity investment fund. An investment target is in the growing or maturity stage or has a higher value of merger or acquisition and is not limited to the countries or regions listed in Annex 1; the amount of subscription funds is not less than 300 million U.S. dollars or an equivalent in convertible currencies, and the paid-in capital has been in place in proportion to the amount of subscription funds. The fund has ten or more professionals with equity investment and related experience; and among its senior managers, there are no fewer than two, each having eight or more years of relevant experience, and the fund has complete experience in fundraising, management, and exit, and has dominated and exited no fewer than five projects (excluding FOF).791 The fund has at least three major professionals who have worked together for three years. The fund has a sound governance structure and effective incentive, restraint, and interest protection mechanisms. A key-man clause is included to ensure the exclusiveness of the management team. Insurance funds may be invested in FOFs which target equity investment funds complying with the preceding paragraph. The trading structure of an FOF shall be simple and clear and shall not include another FOF. Financial institutions and their subsidiaries shall not actually control the management and operation of an equity investment fund in which insurance funds are invested and shall not hold any general partner’s interest in the fund. (3) Real estate investment trusts (REITs). REITs shall be listed and traded on the exchanges of the countries or regions listed in Annex 1 of the detailed Rules 2012. The credit rating of an investment target which has received credit ratings from two or more credit rating agencies during the same accounting period shall be the lower or lowest of the ratings.792 The balance of overseas investment made by an insurance institution shall not exceed 15% of its total assets at the end of the previous year, and its balance of investment in emerging markets listed in Annex 1 shall not exceed 10% of its total assets at the end of the previous year. An insurance institution shall calculate the ratios of all kinds of domestic and overseas investment products on a consolidated basis, and a single investment ratio shall be calculated by reference to the same kind of domestic products.793 Short-term lending or borrowing of funds shall be controlled in overseas investment with insurance funds, and the following provisions shall be complied with:794 (1) The funds involved in reverse repurchase transactions and overnight lendings shall not exceed 1% of total assets at the end of the previous year. 791 A fund of funds (FOF) is a pooled fund that invests in other funds. FOFs usually invest in other hedge funds or mutual funds. The FOF strategy aims to achieve broad diversification and minimal risk. FOFs tend to have higher expense ratios than regular mutual funds. 792 The Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds 2012, art.13. 793 Ibid., art.14. 794 Ibid., art.15.

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(2) The funds borrowed for transaction settlement purposes shall not exceed 1% of total assets at the end of the previous year, and the term of such funds shall not exceed five working days. The following conduct shall be prohibited in overseas investment with insurance funds:795 (1) Investment in commodities in kind, precious metals, receipts representing precious metals, and commodity derivatives. (2) By margin trading through securities trading institutions, purchasing securities and participating in short-selling transactions without holding any underlying assets. (3) Borrowing funds in any form not for transaction settlement purposes. (c) Risk control A client shall establish an information management system covering both domestic and overseas markets; conduct real-time monitoring of the investment market, investment varieties, investment ratios, counterparty concentration ratio, risk exposures of derivative products, and other indicators; and ensure compliance in operations with laws and regulations.796 Where the solvency adequacy ratio of a client at the end of the previous quarter is lower than the regulatory requirement, the client shall adjust its overseas investment strategies in a timely manner and shall not continue to invest in or increase its holding of unsecured bonds, equity instruments, real estate, or related financial products.797 A client shall conduct due diligence regarding the trustee and custodian by itself or through an employed investment consultant, gather sufficient information on the custody agent selected by the custodian, and pay attention to relevant risks.798 A client shall, in accordance with the Measures 2007, these Detailed Rules 2012, and the investment management agreement, evaluate the trustee and custodian on a regular basis and examine investment guidelines once a year at a minimum.799 Where a trustee delivers insurance funds to any other professional institution controlled by its parent company for investment management, the trustee shall obtain consent of the client and assume the final responsibility for such re-entrustment. Other than the aforesaid manner, a trustee shall not re-entrust the entrusted assets in any name or any manner.800 A trustee shall make adjustments within three months where its investment fails to comply with the provisions of the Measures 2007 or these Detailed Rules 2012 due to factors such as market fluctuation and credit rating adjustment.801 A trustee shall develop and implement criteria for counterparty selection, which shall be recognized by the client. Except for delivery versus payment (DVP) 795 796 797 798 799 800 801

Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

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transactions, a trustee shall select an institution which has a credit rating of A or equivalent to A or above. A trustee shall, in the best interests of a client, select an overseas securities service institution which operates in compliance with laws and regulations and has a good reputation to conduct securities trading on behalf of the client, reasonably allocate insurance funds for securities trading, ensure trading quality, control trading cost, and disclose to the client the service charges collected by securities trading institutions and securities brokerage agencies or refund names as well as receipt and payment method.802 A custodian shall reasonably charge custody fees on the basis of the category and size of assets under custody and the services provided. Where any loss is caused to overseas investment with insurance funds by a custody agent’s own fault or negligence or any other reason during the custody agent’s performance of duties, the custodian shall assume corresponding liability.803 A custodian or a custody agent shall properly preserve the originals of documents on titles to assets under custody or originals of documents on full ownership, except as otherwise provided for by any law or regulation of the place where investment is made.804 The agreements signed by a client with the trustee and custodian shall comply with regulatory requirements and general practices, be governed by the laws of China or the Hong Kong Special Administrative Region, and be subject to arbitration by an arbitral institution within the territory of China or the Hong Kong Special Administrative Region. Regarding the “agreements” in the preceding paragraph, a legal opinion shall be issued by a professional lawyer with three or more years of relevant practicing experience in a law firm.805 The parties to overseas investment with insurance funds shall not conduct any conveyance of interests other than lawful commissions, taxes, and fees and shall not obtain any improper benefits by using insurance funds.806 Overseas investment with insurance funds in real estate and equities of unlisted enterprises shall be made by reference to the relevant regulatory provisions on the same kind of domestic products so as to standardize investment activities, strengthen follow-up management, and prevent investment risks, operating risks, and market risks.807 For overseas investment with insurance funds, derivatives such as interest rate forward, interest rate swap, interest rate futures, foreign exchange forward, foreign exchange swap, stock index futures, and purchased stock index options may be used to evade investment risks, and the following provisions shall be complied with:808 (1) Speculation shall be prohibited, and the total value of the subject matters of derivative contracts shall not exceed 102% of the underlying assets for which risk hedging is needed. 802 803 804 805 806 807 808

Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29.

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(2) The total value of all expenses, option premiums, and margins paid for using financial derivatives shall not exceed 10% of all underlying assets for which risk hedging is needed. (3) Over-the-counter transaction contracts shall be valued on each working day, and the market-to-market exposure to any over-the-counter transaction counterparty shall not exceed 1% of total assets at the end of the previous year. (4) An over-the-counter transaction counterparty has signed an ISDA Master Agreement with the trustee,809 which has been recognized and authorized by the client. Interest rate futures, stock index futures, and purchased stock index options shall only be listed and traded on the exchanges listed in Annex 2 of the Detailed Rules 2012. Investment guidelines shall specify the scope and types of derivative product transactions, requirements for risk limits, selection of counterparties, approval of particular matters, provision of information, reporting, and other matters. (d) Supervision and administration A client shall report the following matters to the CBIRC in accordance with relevant provisions:810 (1) Major reports. A client shall file a report within five working days after signing an asset management trust agreement and a custody agreement or signing or adjusting investment guidelines, and where any major emergency occurs to the trustee or custodian or any major emergency affecting the safety of insurance assets or investment performance occurs in a market of investment, a client shall file a report within three working days, and the report shall, at a minimum, include asset preservation and risk prevention measures. (2) Quarterly reports. A client shall, within 30 working days after the end of each quarter, file a report on overseas investment, risk assessment reports, balance and income and expenditures of its overseas investment settlement account, and affiliated transactions. (3) Annual report. A client shall, before 30 April each year, file an evaluation report on the management of insurance funds by the trustee and custodian in the previous year. (4) Other matters prescribed by the CBIRC. Insurance institutions conducting overseas investment in equities and real estate shall perform their obligations of confirmation or reporting by reference to relevant provisions on domestic investment.811

809 ISDA Master Agreements is used to document transactions between parties in different jurisdictions and/or transactions involving different currencies. For more, see accessed on 18 June 2020. 810 The Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds 2012, art.30. 811 Ibid., art.31.

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A custodian shall report the following matters to the CBIRC in accordance with relevant provisions:812 (1) Major reports. A custodian shall file a report within five working days after modifying an overseas custody agent. (2) Monthly reports. A custodian shall report the monthly custody of overseas investment with insurance funds within ten working days after the end of each month. (3) Annual report. A custodian shall, before 30 April each year, file the company’s financial report and internal control audit report for the previous year issued by an accounting firm. The trustee and custodian shall, in accordance with the provisions of relevant agreements, sufficiently disclose relevant information to the client, and the information disclosed shall not be less than the information required by the relevant provisions of these Detailed Rules 2012 and shall not contain any false records, misleading statements, or major omissions. For the purposes of these Detailed Rules 2012, “accounting firm” means an accounting firm which has audit experience in relevant domestic and overseas industries, has a good reputation, and is widely recognized. Where any party to overseas investment with insurance funds violates any law or administrative regulation or these Detailed Rules 2012, the CBIRC shall punish the institution and relevant personnel in accordance with law.813 12.22.3 Further rules relating to overseas investment with insurance funds To strengthen the supervision of overseas investment with insurance funds, further expand the space for the international allocation of insurance assets, optimize the allocation structure, prevent risks in the utilization of funds, and at the same time, adapt to the change of the policies on foreign exchange administration in the relevant insurance business, the CIRC decided to adjust the provisions on overseas investment with insurance funds and issued the Notice on Adjusting the Policies Relating to Overseas Investment with Insurance Funds on 27 March 2015, which became effective on the same day.814 The requirements for the number and qualification of professionals of an insurance group (holding) company or insurance company (hereinafter, insurance institution) that make overseas investment are adjusted to at least two persons responsible for overseas investment, including administrative responsible persons and professional responsible persons, and the Notice on Matters concerning the Persons Responsible for the Investment Risks of Insurance Institutions 2013,815 and the relevant provisions shall apply, by reference, to their responsibilities, qualifications, performance

812 Ibid., art.32. 813 Ibid., art.33. 814 Bao Jian Fa No. 33 [2015] (see accessed on 16 October 2020). 815 Bao Jian Fa No.28 [2013].

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of functions and training requirements, information reporting, and punishment matters, among others.816 Where an insurance asset management company, insurance institution, or an asset management institution formed by an insurance asset management company in Hong Kong makes overseas investment with the insurance funds of an insurance institution in the group, which are entrusted for management, the investment market shall be expanded from the Hong Kong market to the financial markets of the countries or regions as listed in Annex 1 to the Detailed Rules for the Implementation of the Interim Measures for the Administration of Overseas Investment with Insurance Funds 2012.817 When investment is made with insurance funds in fixed-income products such as overseas government bonds, government-backed bonds, bonds of international financial organizations, corporate bonds, and convertible bonds, among others, the money of account shall not be limited to major international currencies in circulation, and the required credit rating shall be adjusted from “the issuer and debts all have been rated BBB or an equivalent to BBB or above by an internationally recognized rating institution” to “debts have been rated BBB – or an equivalent to BBB – or above by an internationally recognized rating institution.”818 The overseas stocks invested in by insurance institutions shall expand from the stocks listed and traded on the main-board markets of stock exchanges of the countries or regions listed in Annex 1 to the Detailed Rules 2012 to the stocks listed and traded on the aforesaid main-board markets and the Hong Kong Growth Enterprise Market.819 The condition that shall be met by an insurance institution that applies for the qualification as an overseas investment client, that is, “having a business license for conducting the foreign exchange business” shall be adjusted to “having the relevant qualification for engaging in the foreign exchange insurance business,” and the relevant materials “photocopy of the license for conducting the foreign exchange business” that shall be submitted in the application for the qualification as an overseas investment client shall be adjusted to “the relevant certification materials for conducting the foreign exchange insurance business.”820 The Measures 2007, the Detailed Rules 2012, and the relevant provisions of this Notice shall apply, by reference, to overseas investment made with the self-owned funds of insurance asset management companies.821 12.23 Administration of insurance asset management companies In the 1995 version of the Insurance Law, there was no provision as to insurance asset management companies. Insurance companies were then allowed to set up 816 The Notice of the CIRC on Adjusting the Policies Relating to Overseas Investment with Insurance Funds 2015, s.1. 817 Ibid., s.2. 818 Ibid., s.3. 819 Ibid., s.4. 820 Ibid., s.5. 821 Ibid., s.6.

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specialized internal departments to manage insurance assets. With the rapid development of the insurance industry and fast accumulation of insurance funds, that pattern of insurance funds management by international departments of insurance companies was no longer meeting the requirements for the management of insurance funds. In order to facilitate the use of the insurance funds, the 2002 version of the Insurance Law introduced a new provision which allows an insurance company to set up insurance asset management companies. Article 107 of the Insurance Law provides that upon the approval of the insurance regulatory authority under the State Council in conjunction with the securities regulatory authority under the State Council, insurance companies may set up insurance asset management companies. Insurance asset management companies shall conduct securities investment activities according to the Securities Law of China822 and other relevant laws and administrative regulations. The measures for the administration of insurance asset management companies shall be formulated by the insurance supervision and regulation authority in conjunction with other relevant departments under the State Council. In accordance with the Insurance Law and the Company Law for the purpose of strengthening supervision over the insurance asset management companies, preventing the risk for the use of insurance capital, and protecting the legal rights and interests of the insurance companies and the insurance asset management companies, the Interim Provisions for the Administration of Insurance Asset Management Companies was formulated by the CIRC on 21 April 2004,823 came into force on 1 June 2004, and was amended on 7 April 2011 (hereinafter, the Interim Provisions 2011).824 The Interim Provisions 2011 consists of 53 articles in five chapters. Now we consider the Provisions in detail. 12.23.1 The general requirements An insurance asset management company is a financial institution which is lawfully registered and manages insurance capital on commission upon the approval of the CBIRC and other relevant departments. The insurance capital refers to the various insurance reserves, capital funds, working capital, accumulation funds, undistributed profits, and other liabilities of an insurance company and the various assets formed by the preceding capital.825

822 It was adopted at the 30th Meeting of the Standing Committee of the Seventh National People’s Congress on February 22, 1993, promulgated by Order No. 68 of the President of the People’s Republic of China, and became effective as of 22 February 1993. See accessed in 16 October 2020. 823 The CIRC Order No.2 [2004]. 824 The Notice of CIRC on Amending Some Provisions of the Interim Provisions on the Administration of Insurance Asset Management Companies (Bao Jian Fa No. 19 [2011]) (see accessed on 16 October 2020). 825 The Interim Provisions for the Administration of Insurance Asset Management Companies 2011, art.3.

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Where an insurance company entrusts an insurance asset management company to manage insurance capital, it shall observe the Insurance Law and the relevant provisions of the CBIRC; follow the principle of voluntariness, fairness, and good faith; and shall not do harm to the national interests and public interests.826 Where an insurance asset management company manages insurance capital, it shall abide by the Insurance Law and the relevant Provisions of the CBIRC and perform duties of good faith and due diligence. 12.23.2 Establishment, alteration, and termination (a) Establishment The establishment of an insurance asset management company shall be approved by the CBIRC together with the relevant departments.827 An insurance asset management company takes the following forms of organization: a limited liability company or a joint-stock limited company.828 To establish an insurance asset management company, the principal promoter shall be an insurance group (holding) company or insurance company which meets the following conditions:829 (1) It has been an operating insurance business for at least five years; (2) It has no record of administrative punishment for violation of the provisions on capital arrangement in the past three years; (3) Its solvency shall be at least 150%, its total assets shall amount to at least ¥10 billion yuan, and the total assets of the insurance group (holding) company shall reach at least ¥15 billion yuan; (4) It meets the requirements for solvency as prescribed by the CBIRC; (5) It has a perfect corporate governance structure and an internal control system; (6) It has established the corresponding departments for asset and liability management and risk control, and it has a perfect investment information management system; (7) The proportion of assets used and managed in a centralized way by the departments of capital arrangement shall be no less than 50% of the total assets of the company, of which such proportion of an insurance company that has life insurance business shall be no less than 80% of the total assets of the company; and (8) Other conditions as prescribed by the CBIRC. The total share of insurance asset management companies held by a domestic insurance company shall be no less than 75%. The domestic insurance company refers to the insurance company or insurance shareholding (group) company with 826 827 828 829

Ibid., art.4 Ibid., art.6. Ibid., art.7. Ibid., art.8.

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legal person status, which is approved by the CBIRC and registered according to law.830 The minimum registered capital of an insurance asset management company shall be ¥100 million yuan or a convertible currency in equivalence, and the registered capital shall be paid-in monetary capital.831 When establishing an insurance asset management company, an applicant shall file a written application to the CBIRC and submit the following documents:832 (1) Application letter for the establishment; (2) Feasibility study report and plans of preparation for the establishment of the planned company; (3) Basic information of shareholders, including the name or title of shareholders, legal representative, forms of organization, registered capital, business scope, qualification certificate documents and the balance sheet and statements of profits and losses in the last year, which are audited by the accountant firms; (4) The certificate documents of the shareholders who meet the conditions as prescribed in article 8 of the Interim Provisions 2011 and the balance sheet and statements of profits and losses in the past three years, which are audited by the accountant firms; (5) Name list and resume of the person responsible for preparation of the establishment of the planned company; (6) Letter of investment intent of the contributors or the share subscription agreement; and (7) Other documents as prescribed by the CBIRC. The CBIRC shall, together with the relevant departments of the State Council, make preliminary examination on the application for establishment of insurance asset management companies, and make decisions on whether to approve the preparation for the establishment or not within three months from the date of receiving the complete set of application documents. If the CBIRC determines not to grant approval, it shall notify the applicant in writing and explain the reason.833 The applicants shall complete the preparatory work for the establishment within six months from the date of receiving the documents of approval of the CBIRC for the preparation. If they fail to complete the preparatory work for the establishment within the prescribed time limit, they may apply for extending the time limit for the preparatory work for three months upon the approval of the CBIRC. If they still fail to complete the preparatory work for the establishment at the expiry of the term, the original documents of approval for the preparation shall be invalidated automatically. No preparatory institution may undertake any business activity during the preparation for the establishment.834

830 831 832 833 834

Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13.

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After completing the preparatory work for the establishment, the applicant shall file an application for starting business to the CBIRC and submit the following documents:835 (1) Report on application for starting business; (2) Certificate of capital verification issued by the legal capital verification institutions and photocopy of the certificate on entering of capital funds into an account; (3) Name list and resumes of the senior management personnel and the main practitioners; (4) Certificate documents of the ownership or use right of the place of business; (5) Articles of association of the company and the internal management systems; (6) Documents concerning the information management system, equipment for transaction of capital arrangement, and the safety precautions and establishments; and (7) Other documents as prescribed by the CBIRC. The CBIRC shall, within 20 working days from the date of receiving the complete set of business-starting application documents for the establishment of the insurance asset management company, make decisions on whether to approve the application or not. If it decides to grant approval, it shall issue the License on Undertaking Insurance Asset Management Business; if it does not approve the application, it shall notify the applicant in writing and explain the reason.836 Where an insurance asset management company establishes branches, it shall file an application to the CBIRC and submit the following documents:837 (1) Application letter for the establishment; (2) Business scope of the planned institutions; (3) Business plans and market analysis of the planned institutions in the coming three years; (4) The resumes of the persons responsible for the preparation of the establishment of the planned institutions and the relevant certificate documents; and (5) Documents concerning the information management system, capital use and transaction equipment, and safety protection facilities. The CBIRC shall make preliminary examination on the application for the establishment of branches of insurance asset management companies and make decisions on whether to approve the preparation for the establishment or not within 20 working days after receiving all of the application documents. If the CBIRC

835 Ibid., art.14. 836 Ibid., art.15. 837 Ibid., art.16.

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REGULATION OF USE OF INSURANCE FUNDS

decides not to grant approval, it shall notify the insurance asset management companies in writing and explain the reason.838 An insurance asset management company shall complete the preparatory work for the establishment of branches within three months from the date of receiving the documents of approval of the CBIRC for the preparatory work for establishment of branches. If it fails to complete the preparatory work within the prescribed time limit, the original documents of approval for the preparation shall be invalidated automatically. No preparatory institution may undertake any business activity during the preparation for the establishment.839 After completing the preparatory work for the establishment of branches, an insurance asset management company shall file an application for starting business to the CBIRC and submit the following documents:840 (1) (2) (3) (4)

Application letter for starting business; Report on completion of the preparatory work for the establishment; Scope of business operation; Resumes of the persons responsible for the planned institutions and the relevant certificate documents; (5) Certificate documents of the use right or ownership of the place of business; (6) Documents concerning the information management system, capital use and transaction equipment and safety protection facilities; and (7) Establishment of internal organizations and the information on the practitioners. The CBIRC shall, within 20 working days from the date of receiving the complete set of business-starting application documents for the previously mentioned branches, make decisions on whether to approve the application or not. If the CBIRC decides to approve it, it shall issue the License on Undertaking Insurance Asset Management Business; if it decides not to grant approval, it shall notify the applicant in writing and explain the reason.841 The insurance asset management companies and branches thereof, which start business upon approval, shall go through registration formalities at the administrative departments for industry and commerce upon the strength of the approval documents and the License on Undertaking Insurance Asset Management Business and may make business operation after receiving the business license.842 The CBIRC shall design, publish, issue, withhold, write off or revoke the License on Undertaking Insurance Asset Management Business uniformly. No other entity or individual may design, publish, issue, withhold, or revoke the License on Undertaking Insurance Asset Management Business.843

838 839 840 841 842 843

Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

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REGULATION OF USE OF INSURANCE FUNDS

The senior management personnel of the insurance asset management company shall meet the following conditions:844 (1) Having an undergraduate education background or above; (2) Having the experience of engaging in economic work for over ten years or having the experience of practicing in finance, insurance, and securities for over five years; (3) Having no records of any criminal punishment or any administrative punishment for undertaking economic activities; and (4) Other conditions as prescribed by the CBIRC. The senior management personnel of an insurance asset management company shall not hold a part-time position in other profit-making business institutions, except when there are other different provisions by the CBIRC. (b) Alteration In case an insurance asset management company has any of the following circumstances, it shall report to the CBIRC for approval:845 (1) Alteration of Articles of Association of the company; (2) Alteration of the contributors or the shareholders with over 10% of the shares of the company; (3) Adjustment of business scope; (4) Withdrawing of branches; (5) Alteration of business places; or (6) Alteration of senior management personnel. (c) Dissolution In case an insurance asset management company dissolves or is revoked according to law, or terminates due to adjudication of bankruptcy, the insurance capital it manages by entrustment shall not fall within the liquidation property.846 In case an insurance asset management company dissolves according to law, it shall set up a liquidation group. And the liquidation work shall be done under the supervision and guidance of the CBIRC. Where an insurance asset management company is revoked according to law, the CBIRC shall organize the shareholders, the relevant departments, and the relevant professionals to set up a liquidation group in a timely manner. Where an insurance asset management company is adjudicated bankruptcy according to law, the people’s courts shall organize the liquidation group according to law.847 The liquidation group shall notify the creditors within ten working days after its establishment and shall make a public announcement at least three times within 60 days on the newspapers designated by the CBIRC. The contents of the public 844 845 846 847

Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26.

746

REGULATION OF USE OF INSURANCE FUNDS

announcement shall be approved by the CBIRC.The liquidation group shall entrust the account firms with good credit standing and other professional intermediary institutions to make appraisal on the creditor’s rights and debts and assets of the company.848 In case an insurance asset management company dissolves, is revoked according to law or adjudicated bankruptcy, its property liquidation and handling of creditor’s rights and debts shall be carried out in accordance with the provisions of relevant laws and regulations.849 12.23.3 Scope of business and rules for business operation (a) Business scope The business scope of an insurance asset management company shall include all or some of the following businesses:850 (1) Managing clients’ Renminbi (RMB)851 and foreign currency capital on commission; (2) Managing and using self-owned RMB and foreign currency capital; (3) Operating insurance asset management products; (4) Other businesses approved by the CBIRC; and (5) Business approved by other departments of the State Council. The management and arrangement of insurance capital are limited to bank deposits, buying and selling of government bonds, financial bonds, and other forms of capital arrangement as prescribed by the State Council.852 Where an insurance asset management company carries out the business of using foreign exchange capital and other foreign exchange business, it shall be approved by the department of foreign exchange control of the state.853 (b) Operational rules The proportion of the total investment of the self-owned capital and capital managed by entrustment of an insurance asset management company in the same investment channel shall be accounted separately. The proportion of the investment of the selfowned capital and capital managed by entrustment of an insurance asset management company in a single investment object shall also be accounted separately. The proportion of the total investment of the capital of an insurance company used by others upon its entrustment and the capital managed and arranged by itself in the same investment channel shall be accounted in a consolidated way. The proportion of investment of the capital of an insurance company used by 848 Ibid., art.27. 849 Ibid., art.28. 850 Ibid., art.29. 851 Chinese currency. 852 The Interim Provisions for the Administration of Insurance Asset Management Companies 2011, art.30. 853 Ibid., art.31.

747

REGULATION OF USE OF INSURANCE FUNDS

others upon its entrustment and the capital managed and arranged by itself in a single investment object shall also be accounted in a consolidated way.854 An insurance company and the insurance asset management company entrusted by it shall stipulate an independent trustee. The trustee shall be a commercial bank or other professional financial institutions meeting the requirements of the CBIRC.855 Where an insurance asset management company manages the following funds, it shall fairly treat the different insurance capitals it manages, keep separate accounts, and assign different investment personnel to manage the funds respectively: (1) Self-owned insurance capital and entrusted insurance capital; and (2) different kinds of insurance capital of a same client.856 Properties obtained by an insurance asset management company due to management and use or handling of insurance capital or other circumstances shall be brought into the insurance capital. In addition to obtaining remuneration according to the stipulations of the contract, where an insurance asset management company seeks for private interests by using the insurance capital it manages by entrustment, the interest gained shall be brought into the insurance capital it manages by entrustment.857 Where an insurance asset management company manages or arranges insurance capital by entrustment, or a trustee manages insurance capital by entrustment, written contracts shall be concluded. The CBIRC shall additionally formulate the guidance for the contents and format of the written contract.858 Where an insurance asset management company obtains asset management fees as stipulated in the contract, it shall report to the CBIRC the conditions concerning the collection of asset management fees. The rate of asset management fees shall be determined according to the principle of fairness and reasonableness. The CBIRC may formulate the standards for the rate of insurance asset management fees.859 Where an insurance asset management company violates the relevant state provisions or the stipulations of contract, which leads to the loss of insurance capital, the insurance asset management company shall compensate for the losses and shall not get remuneration before making compensation for the losses.860 The complete set of records on the business of management and arrangement of insurance capital by an insurance asset management company and the text of contract on the arrangement of insurance capital by entrustment shall be kept for at least 15 years.861 An insurance asset management company shall report the conditions regarding the management and arrangement, handling, and income and expenses of the insurance capital by entrustment periodically or according to the stipulations of 854 855 856 857 858 859 860 861

Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36. Ibid., art.37. Ibid., art.39. Ibid., art.40.

748

REGULATION OF USE OF INSURANCE FUNDS

the contract. The clients shall have the right to consult, copy down, or reproduce the accounts and other documents in relation to the insurance capital they entrust and shall have the right to require the trustee to give explanations.862 The year-end financial statements of an insurance asset management company on its self-owned capital and insurance capital managed by entrustment shall be audited by an accountant firm.863 The insurance companies and the trustees of insurance capital shall have the duty to keep confidential the clients and the conditions concerning the use of insurance capital and the relevant documents.864 (c) Prohibited conduct No insurance asset management company may have any of the following acts:865 (1) Providing guarantee; (2) Promising that the capital it manages by entrustment will not suffer any loss or ensuring the minimum benefits; (3) Transferring the entrustment on the management of insurance capital it has to others; (4) Seeking interests for the third party other than the clients by using the entrusted insurance capital; (5) Making mutual transactions on capital arrangement with shareholders or the insurance company which entrusts it to manage and use the insurance capital or through manipulating the entrusted capital from different resources; (6) Colluding with the clients to obtain illegal interests in the name of asset management fees or by other means; or (7) Other acts as prohibited by the relevant state laws, regulations, or by the supervisory departments. An insurance asset management company shall not set off the debts arising from the self-owned property of the insurance asset management company with the creditor’s rights arising from its management and arrangement or handling of the entrusted capital as a trustee. An insurance asset management company shall not set off the creditor’s rights and debts arising from its management and arrangement or handling of the property of different clients as a trustee. Where an insurance asset management company has any civil disputes with other public organizations or individuals, it shall not use the insurance capital it manages by entrustment for seizure, freezing, compensation, and so on.866

862 863 864 865 866

Ibid., art.41. Ibid., art.42. Ibid., art.43. Ibid., art.38. Ibid., art.44.

749

REGULATION OF USE OF INSURANCE FUNDS

12.23.4 Risk control and supervision An insurance asset management company shall establish a perfect corporate governance structure and an effective internal control system, establish investment decision-making departments and risk control departments, and establish a restriction mechanism for mutual supervision.867 An insurance asset management company shall strengthen information construction and establish a perfect information management system for investment decision-making, capital arrangement, and financial accounting. An insurance asset management company shall have safeguard measures relating to the business operation.868 An insurance asset management company shall establish the supervisory board according to the relevant provisions. The clients may accredit supervisors to the insurance asset management company which is entrusted to manage the insurance capital. The supervisors shall supervise the performance of the contract of the insurance asset management company on behalf of the clients but shall not interfere in the ordinary operation of the insurance asset management company.869 An insurance asset management company shall have the right to attend the relevant meeting of the department for assets and liability management of the insurance company as a non-voting delegate.870 An insurance asset management company shall, within 20 working days from the date of signing the contract on management of insurance capital by entrustment and the entrustment contract, submit a photocopy of the contracts to the CBIRC.871 An insurance asset management company shall submit the balance sheet, statement of profits and losses, business statistics, financial analysis report, and the relevant statements and other documents in accordance with the provisions of the CBIRC. The contents and format of the statements submitted by insurance asset management companies shall be issued by the CBIRC separately.872 The CBIRC shall make supervision over and inspection on insurance asset management companies by ways of on-site supervision in combination with the supervision not on the site. The CBIRC may entrust the accountant firms and other professional intermediary institutions to make inspection on insurance asset management companies.873 In case an insurance company or insurance asset management company violates the present Provisions and the relevant laws and regulations, the CBIRC shall impose an administrative punishment on the insurance company, insurance asset management company, and the senior management personnel and the person directly liable in accordance with the Insurance Law and the relevant administrative regulations.874 867 868 869 870 871 872 873 874

Ibid., art.45. Ibid., art.46. Ibid., art.47. Ibid., art.48. Ibid., art.49. Ibid., art.50. Ibid., art.51. Ibid., art.52.

750

REGULATION OF USE OF INSURANCE FUNDS

12.23.5 Emergency response management in the insurance asset management In order to strengthen the management of major emergencies in insurance asset management, establish and enhance the comprehensive risk management system of insurance assets, and maintain the safety of insurance assets, in accordance with the Provisions on the Major Emergency Response in the Insurance Industry 2003 (hereinafter, the Response Provisions 2003),875 and the Emergency Response Plan in the Insurance Industry (ERP Rules), the CIRC formulated the Guidelines for the Major Emergency Response Management in the Insurance Asset Management 2007 (hereinafter, the Guidelines 2007).876 A major emergency in insurance asset management in these Guidelines 2007 refers to a major event which takes place suddenly in an insurance institution, has caused or is likely to cause a substantial loss of insurance capital, and compromises the normal operation of insurance asset management.877 An insurance institution as used in these Guidelines 2007 refers to an insurance group (holding) company, an insurance company, an insurance asset management company, and so on.878 An insurance institution shall establish a monitoring and precaution mechanism for major emergencies in insurance asset management on the principle of “prevention as the core, and active response” in cooperation with the relevant bodies and include response management as an integral part of its daily management and corporate culture and in the comprehensive risk management of insurance assets.879 The CBIRC shall legally supervise the major emergency response management organizational system and plan management, monitoring, and precaution, and emergency responses, in insurance asset management.880 (a) Emergency In addition to the circumstance as described in art.10(7) of the Response Provisions 2003,881 an insurance institution shall report to the CBIRC a major emergency resulting from any of the following circumstances which caused or is likely to cause a substantial loss of insurance assets:882

875 The Provisions on the Major Emergency Response in the Insurance Industry (the CIRC Order No. 3 [2003]) was issued on 18 December 2003 and came into force on 1 February 2004. 876 The Notice of the CIRC on Issuing the Guidelines for the Major Emergency Response Management in the Insurance Asset Management (Bao Jian Fa No. 42 [2007]) was issued on 30 May 2007 and came into force on the date of issuance. See accessed on 16 October 2020. 877 Ibid., art.2. 878 Ibid., art.3. 879 Ibid., art.4. 880 Ibid., art.5. 881 Article 10(7) the Provisions on the Major Emergency Response in the Insurance Industry 2003 provides that where an insurance company has committed serious violations of laws and regulations in the process of underwriting or capital use, and are widely concerned by the news media and the public, it must report to the CBIRC. 882 The Notice of the CIRC on Issuing the Guidelines for the Major Emergency Response Management in the Insurance Asset Management 2007, art.6.

751

REGULATION OF USE OF INSURANCE FUNDS

(1) An unpredictable event such as intense fluctuation in the financial markets; (2) A change of the market environment and related policies or the relevant influence by any other emergency; (3) The bankruptcy of a transaction counterparty, relevant intermediary or debtor of an insurance institution or occurrence of any other risk; (4) The illegal invasion of insurance capital of an insurance institution as a result of any insider control, affiliated transaction, or external guaranty; (5) The serious damage to the business operation of an insurance institution as a result of any major violation of law or regulation in the asset management of the insurance institution; (6) The application of insurance capital in violation of the management procedures by a senior management officer or a staff member at a key post of an insurance institution; (7) The suspected money laundering, embezzlement, bribery or application of insurance capital for illegal interest by a senior management officer or relevant person of an insurance institution; (8) An investment transaction system failure or a loss of business data as a result of information management miscarriage or any other information safety event of an insurance institution; or (9) A circumstance likely to cause a substantial loss of insurance assets. An insurance institution shall implement the graded management of major emergencies in insurance asset management. In accordance with the relevant standards for the division of emergency grades in the ERP Rules and comprehensively considering its capital strength, solvency, asset-liability structure, and risk resistance degree, an insurance institution shall formulate the quality and quantity standards, which shall be reported to the CBIRC for archiving.883 After a major emergency in insurance asset management takes place in an insurance institution, the insurance institution shall send to the CBIRC a timely report on a major emergency that has caused or is likely to cause a loss of insurance assets exceeding ¥50 million yuan or exceeding 0.1% of the total assets of this institution based on the initial prediction and appraisal results. The amount of loss caused by the emergency shall be reported on the principle of adopting the lowest value. An insurance institution shall also send a timely report on a major emergency that has caused or is likely to cause a loss of the insurance assets with an amount of loss lower than that set forth previously but of a serious nature or with a great impact to the CBIRC.884 (b) Organizational management In accordance with the Response Provisions 2003 and ERP Rules, the organizational management of major emergencies in insurance asset management shall be

883 Ibid., art.7. 884 Ibid., art.8.

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REGULATION OF USE OF INSURANCE FUNDS

included in the uniform organizational system of response management of an insurance institution.885 The board of directors of an insurance institution shall be finally responsible for the response management of a major emergency in insurance asset management. In the absence of a board of directors in an insurance institution, the management shall be finally responsible.886 The asset management department of an insurance group (holding) company or an insurance company shall be specifically responsible for the ERP management of major emergencies in insurance asset management and implement the response management jointly with other departments. The asset management department of an insurance group (holding) company or an insurance company that delegates the asset management shall conduct coordination with the insurance asset management company or any other trustee and do a good job together in the response management of major emergencies in insurance asset management.887 As required by a delegating institution such as an insurance group (holding) company or an insurance company, an insurance asset management company shall establish a trust asset response management system and designate a relevant department that is responsible for assisting the delegating institution to perform the relevant duties well in the response management of major emergencies in insurance asset management.888 (c) Plan management Based on the ERP Rules and appraisal of risks in insurance asset management, an insurance institution shall establish a ERP on major emergencies in insurance asset management, include it in the overall ERP of the company, and implement the plan management. Based on the overall ERP of the company and practical needs, a branch of an insurance asset management company shall establish a graded ERP.889 An insurance institution shall appraise the asset management risks and regularly submit to the board of directors or management an appraisal report on the asset management risks, and this report shall include at least the following:890 (1) The major emergencies that have taken place and the changes of risks during the period of report; (2) The prediction of emergencies that have not taken place during the period of report but are likely to take place in the future; (3) The effects of major emergencies that have taken place or are likely to take place in the future on the insurance assets; (4) The appraisal of asset management risks; (5) The plan on making the ERP and the response measures; and (6) Other content as required by the CBIRC. 885 886 887 888 889 890

Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14.

753

REGULATION OF USE OF INSURANCE FUNDS

An insurance institution shall make the ERP on major emergencies in insurance asset management, and this plan shall include at least the following:891 (1) The basis for the targets of compilation of the ERP, grading of major emergencies, quality and quantity standards, applicable scope, and response principles; (2) The organizational system of response management and the responsibilities for response management of the leading office, working bodies, responsible departments, and personnel; (3) The list and contact information of responders, chart of ERP framework, response flowchart, catalogue of graded plans, and so on; (4) The disposal scheme and response measures for a major emergency resulting from any of the circumstances set forth in art.6 of these Guidelines; (5) The monitoring extent, variances, and indicators of a major emergency that has taken place; (6) The monitoring alert line, precaution measures, precaution report system, and so on, for a major emergency that is likely to take place in the future; (7) The content of the response report, report frequency, manner of report, and so on; (8) The risk dissolution and follow-up appraisal after the end of a major emergency; (9) The related management rules on the response safeguards, drilling under the ERP, publicity and training, establishment of liability, rewarding and punishment measures, and so on; and (10) Other content as required by the CBIRC. An insurance institution shall in a timely manner amend and supplement the original plan or make a new plan to increase the operability of the plan based on the previously stated content and risk changes. An insurance institution shall submit the asset management ERP to the CBIRC for archiving. An insurance asset management company shall make a special ERP for the assets under the trust management and submit it to the delegating institution for examination and to the CBIRC for archiving.892 (d) Monitoring and precaution An insurance institution shall establish a monitoring and precaution mechanism for major emergencies in insurance asset management; make a plan on asset management monitoring; scientifically set the monitoring variances, indications, alert lines, and so on; and comprehensively appraise the monitoring data.893 The content of the monitoring and precaution shall mainly include the categories of major emergencies in insurance asset management, grades of precaution, commencement time, precaution matters, extent of effects, precaution measures, and precaution report system.894 891 892 893 894

Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18.

754

REGULATION OF USE OF INSURANCE FUNDS

An insurance institution shall, based on the monitoring information, analyze the extent of damages and trend of development, make a precaution in a timely manner, and submit a report, as required by the organizational management rules, to the superior institutions, the competent business authorities, and the CBIRC. Any person who finds that the responsibility for monitoring and precaution is not performed or is not performed as required has the right to report to the superior institutions, the competent business authorities, and the CBIRC. In case of an emergency, such a person may report without regard to the hierarchy.895 (e) Emergency response An insurance institution shall standardize the flow of major emergency response in the asset management in accordance with the relevant provisions of the Response Provisions 2003 and ERP Rules. The flow of major emergency response shall mainly cover such stages as response, information report, real-time monitoring, emergent disposal, information disclosure, and follow-up disposal.896 Where a major emergency in insurance asset management takes place in an insurance institution, the insurance institution shall immediately take the following measures:897 (1) Promptly activating the ERP, forming an emergency response commanding body, organizing the relevant departments to verify, confirm, analyze, and appraise the emergency; (2) The responsible entity and person shall immediately organize the on-site investigation within two hours and report to the superior institutions, the competent business authorities, and the CBIRC level by level. In case of an emergency, they may report without regard to the hierarchy; (3) Monitoring in real time the spread speed, predicting the extent of losses, analyzing the trend of changes, organizing the relevant experts to seek the causes, appraising the extent of losses and coverage, and forming a report on the trend of development of the emergency. (4) Implementing the emergency response, based on the developments of the emergency, pursuant to the response measures and disposal scheme in the ERP or graded ERP; (5) Disclosing externally the relevant information, pursuant to the provisions of the ERP and the relevant information disclosure rules of the company; and (6) Other necessary response management measures. The major emergency response in insurance asset management shall terminate under any of the following circumstances:898 (1) For changes in the financial market environment, related policies, or other contingent factors, the middle- and long-term effects of the emergency on insurance asset management tend to be reasonable; 895 896 897 898

Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

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REGULATION OF USE OF INSURANCE FUNDS

(2) Ensuring that the emergency will not continue or take place again within a short period of time by taking the relevant preventative measures, changing the transaction counterparty, selling assets, adding security, making up losses, and so on, to control the loss of assets; (3) Ensuring that the emergency will not continue or take place again within a short period of time by reinforcing the internal controls of the company, standardizing the operating flow, strengthening the personnel management, enhancing the transaction system, and so on in order to control the trend of development of the emergency and the loss of assets; or (4) Any other circumstance as provided for by the CBIRC. After the termination of a major emergency in insurance asset management, an insurance institution shall analyze the causes for the emergency, appraise the extent of losses and potential effects, follow up the dissolution of asset risks, and amend and enhance the corporate risk management system in respect of the relevant management problems.899 (f) Report system Pursuant to the relevant provisions of the Response Provisions 2003 and ERP Rules, an insurance institution shall establish a report system for a major emergency in insurance asset management. The principal person in charge of an insurance institution shall be the person in charge of reporting. The insurance institution shall honestly report a major emergency in insurance asset management and shall not conceal anything in the report, make any false report, or delay any report.900 The report on a major emergency in insurance asset management shall be divided into an initial report, continued report, and result report. The initial report shall be made within two hours after the emergency takes place and mainly includes the preliminary causes for the major emergency, basic situations, estimated extent of losses, initial response measures, and so on. The initial report may be directly made over the telephone, in writing, or by other means. The continued report shall be made as per the frequency provided for in the ERP on a continuous basis and mainly includes the principal causes for the emergency, asset loss data, continuity and development, measures taken and effects, and so on. The continued report may be made over the electronic network or in writing. The result report shall be made after the termination of the emergency and mainly includes the analysis of the causes for the emergency, major measures taken, process of emergency response, final results, and potential or likely indirect damages, social effects, and problems left after the termination of the emergency. The result report shall be made in writing.901 Where a major emergency in insurance asset management takes place in an insurance institution, the insurance institution shall have a spokesperson or designate a news medium to exclusively disclose information pursuant to the relevant

899 Ibid., art.23. 900 Ibid., art.24. 901 Ibid., art.25.

756

REGULATION OF USE OF INSURANCE FUNDS

provisions. Without approval, no one shall disclose information externally. The information disclosed shall be true, accurate, and free of misrepresentations. After activating an ERP, an insurance institution shall adopt a round-the-clock on-duty system to ensure smooth information communication until the termination of the emergency.902 (g) Supervision The CBIRC shall conduct on-site and off-site inspections to the response management of major emergencies in insurance asset management, in accordance with the Response Provisions 2003, ERP Rules and these Guidelines 2007. The CBIRC shall keep informed about or require an insurance institution to submit information on the process of major emergency response in insurance asset management, the relevant measures taken, the phase result of disposal and asset preservation, and the insurance institution shall actively assist and shall not refuse a request to help.903 Where an insurance institution and its relevant liable person violate these Guidelines 2007, the CBIRC shall hold regulatory talks with the relevant persons or take other administrative punishment measures in accordance with the Response provisions 2003 and ERP Rules.904 12.24 Insurance asset allocation management For the purposes of strengthening the asset allocation management of insurance companies, preventing the risks of mismatch of insurance assets, and protecting the lawful rights and interests of parties to insurance, the CIRC formulated the Notice on Issuing the Interim Measures for the Insurance Asset Allocation Management on 16 July 2012 which came into force on the same day (hereinafter, the Measures 2012).905 The Measures 2012 shall apply to insurance companies and insurance group (holding) companies legally formed within the territory of China.906 The term “insurance asset allocation management” means an insurance company’s mechanisms and activities of formulation, implementation, monitoring, and adjustment of asset allocation policies as an independent legal person on the basis of insurance products, according to the economic and environmental changes and its development strategies and in comprehensive consideration of its solvency status, capital allocation, overall risk tolerance, and relevant constraint factors.907 The asset allocation of insurance companies must be solid; comply with the requirements of security, liquidity, and profitability; and follow the principles of

902 Ibid., art.26. 903 Ibid., art.27. 904 Ibid., art.28. 905 Bao Jian Fa No. 61 [2012] (see accessed on 16 October 2020). 906 The Interim Measures for the Insurance Asset Allocation Management 2012, art.2. 907 Ibid., art.3.

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REGULATION OF USE OF INSURANCE FUNDS

solvency constraint, asset and liability management, overall risk management, and independent account management.908 An insurance company shall independently make decisions, allocate assets, and assume risks. The CBIRC shall conduct supervision and administration of insurance asset allocation in accordance with law.909 12.24.1 Asset allocation management capability An insurance company shall establish management rules regarding asset allocation decision-making, implementation, and supervision, mainly including asset allocation organizational structure, decision-making, and authorization; asset allocation management procedures; asset allocation risk management; asset allocation information management and reporting; and asset allocation performance evaluation and appraisal rules.910 An insurance company shall, in accordance with the Measures 2012 for the Administration of Utilization of Insurance Funds and relevant legal provisions, specify the duties of the board of directors, the management, and the relevant operation departments in the management of insurance asset allocation.911 The board of directors of an insurance company shall be responsible for examining and approving the rules and policies on insurance asset allocation management and assume the ultimate responsibility for the asset allocation policies, procedures, and risk management. The asset and liability management committee or a professional committee with corresponding functions (hereinafter, the “professional committee”) established by the board of directors shall, as authorized by the board of directors, assist the board of directors in deliberating asset allocation policies and assessing the overall risk status of the company and the cumulative level of all kinds of risk exposures. The members of the professional committee shall have the relevant expertise, experience, and capabilities required for performing the duties of asset allocation management.912 The management of an insurance company shall, as authorized by the board of directors, be responsible for drafting a strategic asset allocation plan and an annual asset allocation plan and for organizing the implementation of asset allocation policies approved by the board of directors and, based on the implementation, offering proposals on asset allocation adjustment to the professional committee. The management shall strengthen the asset allocation coordination; establish mechanisms for communication and consultation between the asset management department and the actuarial, financial, product development, marketing, risk management, and other departments; and regulate the overall operation processes and specify their respective management responsibilities to improve the management efficiency

908 909 910 911 912

Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8.

758

REGULATION OF USE OF INSURANCE FUNDS

of asset allocation and prevent the pricing and asset mismatch risks in insurance products.913 The asset management department of an insurance company shall set up fulltime positions to offer, as authorized, asset allocation policies and adjustment proposals and coordinate and implement the approved asset allocation policies. For an insurance company with total assets of more than ¥100 billion yuan, its asset management department shall have no fewer than five professionals with relevant experience in asset allocation, of whom no less than three have three or more years of relevant experience.914 Insurance companies shall accumulate business data on assets and liabilities, build databases and information platforms, and realize the sharing of asset management, actuarial, financial, and other data to provide data support and technical assurance for the analysis and assessment of asset allocation.915 12.24.2 Classification of accounts and assets An insurance company shall, according to the characteristics of the insurance businesses and funds, set up “general accounts” and “independent accounts” to conduct the separate account management of asset allocation. General accounts are the capital accounts for which an insurance company assumes part or all investment risks. The capital of an insurance company shall be managed by reference to the general accounts. Independent accounts are the capital accounts which are independent from the general accounts and all the investment returns from which are directly enjoyed by the insurance applicants or beneficiaries.916 An insurance company’s allocation of assets in general accounts shall strictly comply with the relevant provisions of the CBIRC on investment ratios. In the calculation of investment ratios of various assets in general accounts, the balance of capital borrowed from bond repurchase and the amount of assets in independent accounts shall be excluded from the base of calculation.917 An insurance company shall, in accordance with its own investment management capability and risk management capability, manage the assets in independent accounts for the benefits of the insurance applicants or beneficiaries under the principles of independence, transparency, and standardization. The investment scope of assets in independent accounts shall be governed by art.18 of these Measures 2012. An insurance company shall agree with the insurance applicants or beneficiaries in written contracts upon the investment ratios of various assets.918 An insurance company shall strictly distinguish between assets in general accounts and assets in independent accounts. Unless it is otherwise provided for by the CBIRC, any sale, exchange, or transfer between assets in general accounts and

913 914 915 916 917 918

Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14.

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REGULATION OF USE OF INSURANCE FUNDS

assets in independent accounts or between assets in independent accounts shall be prohibited.919 An insurance company shall select a bank qualified as a custodian to take custody of various accounts. The custodian bank shall ensure the independence, clearness, and completeness of assets in general accounts and assets in independent accounts in such aspects as account settings, fund settlement, accounting, and account records.920 An insurance company shall analyze the risk return characteristics of assets in all types of accounts and reasonably arrange the allocation ratios of various types of assets in accordance with the asset allocation policies or relevant contracts.921 In accordance with the Insurance Law and other relevant provisions, the allocated assets in various types of accounts of an insurance company shall mainly be divided into liquid assets, fixed-income assets, equity assets, alternative, and other investment assets.922 12.24.3 Allocation management of general accounts An insurance company shall, in accordance with the liability characteristics of the insurance businesses, subdivide general accounts, comprehensively analyze the relationships among all general accounts and the asset and liability relationship of general accounts, determine the goals of expected return and the risk indicators of various types of accounts, and develop and implement asset allocation policies. The main procedures shall include:923 (1) (2) (3) (4) (5) (6)

analysis of assets and liabilities; drafting of asset allocation policies; asset allocation decision-making; implementation of asset allocation policies; testing on a regular basis; and assessment and adjustment of asset allocation.

An insurance company shall, in accordance with the requirements of the management of assets and liabilities, adopt cash flow, maturity, cost rate, effective duration, convexity, and other indicators to conduct quantitative assessment of the liability characteristics, stock assets, and asset-liability gap of varies types of general accounts. Operation departments and relevant institutions of an insurance company shall provide the liability information, financial data, asset data, new product information, and relevant analytical materials regarding general accounts.924 The asset management department of an insurance company shall, on the basis of the asset and liability analysis and in light of the macro analysis, market analysis, and scenario assumptions, fully adopt the opinions of all operation departments 919 920 921 922 923 924

Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20.

760

REGULATION OF USE OF INSURANCE FUNDS

in drafting asset allocation policies. Asset allocation policies shall mainly include a strategic asset allocation plan and an annual asset allocation plan.925 The strategic asset allocation plan means the medium- and long-term strategic arrangements for asset allocation. The term of the plan shall last for no fewer than three years, and a rolling assessment shall be conducted at least once each year. The plan shall mainly include:926 (1) macroeconomic trends, characteristics of the insurance businesses and liabilities, risk return characteristics of various types of assets, long-term development plan of the company, overall risk tolerance, and other decisionmaking bases; (2) long-term goals of return and long-term performance comparison benchmarks; (3) allocation ratios of assets in various currencies, regions, and markets; (4) criteria for allowed, restricted, and prohibited assets in allocation; (5) liquidity, maturity structure, and reinvestment plans; and (6) accounting classification principles, performance evaluation mechanisms, and so on. The annual asset allocation plan means the one-year asset allocation strategy formulated according to the strategic asset allocation plan and in light of the analysis of conditions of the insurance market and capital market. The plan shall mainly include:927 (1) annual economic situation analysis, analysis of various markets, changes in liability characteristics, risk return expectations of various types of assets, and other decision-making bases; (2) condition of assets and liabilities; (3) target asset allocation ratios and floating ranges; (4) annual goals of return and performance comparison benchmarks; and (5) risk status of assets, analysis of stress testing results, and so on. When developing its strategic asset allocation plan and annual asset allocation plan, an insurance company shall, under the principle of asset and liability management, adopt the indicator of absolute rate of return or relative rate of return to set performance comparison benchmarks, clarify performance attribution, evaluate asset allocation results, and establish appropriate evaluation mechanisms to achieve the performance goals of asset allocation.928 The asset management department of an insurance company shall, according to the macroeconomic situation, changes in market conditions, and other factors, offer proposals on adjustment of asset allocation policies jointly with the relevant operation departments in a timely manner, which shall be reported to the management

925 926 927 928

Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24.

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REGULATION OF USE OF INSURANCE FUNDS

and the professional committee for deliberation and be submitted by the professional committee to the board of directors for approval.929 12.24.4 Allocation management of independent accounts An insurance company which develops investment-linked life insurance products, variable annuity products, products of entrusted management of endowment guarantee, and non-life investment-type insurance products with variable return shall, in accordance with the relevant provisions of the CBIRC, set up independent accounts. An insurance company shall, in accordance with the asset allocation scope and ratios as agreed upon in the contract, clarify the style of independent accounts, optimize the risk-adjusted return in a timely manner, and make investment decisions and management independently.930 An insurance company which applies for setting up independent accounts shall, in accordance with the relevant provisions of the CBIRC, prepare descriptions of investment accounts, and the part involving investment management shall include:931 (1) investment goals, investment manners, and investment strategies, explaining the basis and procedures for decision-making, the adoption of independent investment or investment entrusted to a third party, the investment portfolio management methods and performance comparison benchmarks, the asset allocation scope and ratios, and so on; (2) valuation of investment accounts and calculation methods for the rate of return; (3) an explanation on custody; (4) an explanation on the segregation and fair trading of assets in investment accounts and prevention of illegal conveyance of interest; and (5) basic information on investment managers and their management of other accounts. The specific valuation methods for investment accounts shall be governed by the relevant provisions of the CBIRC. An insurance company which has set up independent accounts shall, in accordance with the relevant provisions of the CBIRC, disclose information on investment accounts on a regular basis and ensure the veracity, accuracy, and integrity of the information disclosed. Information disclosure related to investment management shall include:932 (1) the unit price of investment accounts at the end of the reporting period; (2) the investment portfolio of investment accounts at the end of the reporting period; and (3) the rate of return of investment accounts at the end of the reporting period.

929 930 931 932

Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28.

762

REGULATION OF USE OF INSURANCE FUNDS

Where an insurance company changes the custodian bank or the investment manager of independent accounts, it shall disclose the changes to the insurance applicants or beneficiaries in a timely manner.933 12.24.5 Risk management An insurance company shall, according to the requirements of overall risk management, develop asset allocation compliance and risk management rules to identify, measure, report, and control risks associated with asset allocation in a timely manner.934 An insurance company shall create an asset allocation risk management department independent from the department implementing asset allocation policies. The functions of the asset allocation risk management department shall include:935 (1) supervising the implementation of asset allocation policies and recording and reporting violations in asset allocation; (2) assessing the rationality of asset-liability positions and various kinds of limits on asset allocation; (3) reporting the risk exposures associated with asset allocation to the management and the professional committee on a regular basis; (4) offering disposal opinions and plans for risk control; and (5) other functions. An insurance company shall, in accordance with its own solvency, strengthen risk budgeting management and, in consideration of qualitative and quantitative analysis, determine the company’s overall risk limits, identify various sources of risks, measure and dissolve risks, and conduct dynamic monitoring and adjustment of asset allocation according to the changes in risks.936 An insurance company shall develop assessment standards for risks associated with asset allocation, establish a system of technical indicators, conduct quantitative assessment of risk indicators on a regular basis, prepare a risk assessment report, and submit the report to the management and the professional committee.937 An insurance company shall, in consideration of its actual circumstances, establish a stress-testing model for asset allocation and conduct sensitivity testing and scenario testing to test the changes in assets and returns and changes in solvency under specific scenarios and various adverse scenarios and assess potential risk factors and overall risk tolerance. The relevant departments of the insurance company shall, according to the testing results, offer asset allocation management opinions, provide feedback to the relevant departments, and report such opinions to the management and the professional committee.938

933 934 935 936 937 938

Ibid. Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid., art.32. Ibid., art.33.

763

REGULATION OF USE OF INSURANCE FUNDS

12.24.6 Supervision and administration The CBIRC shall, in accordance with the relevant legal provisions and the Measures 2012, supervise the effectiveness of asset allocation management of insurance companies through off-site and on-site inspections.939 The CBIRC may, in accordance with the asset allocation management condition of insurance companies, adjust the asset allocation management capability standards and conduct dynamic assessment and categorized supervision.940 An insurance company shall, prior to 30 March of each year, submit a report on the implementation of asset allocation in the previous year to the CBIRC, which shall mainly include:941 (1) (2) (3) (4)

an analysis of relevant market operation; capital inflows and outflows and their impacts on various accounts; asset allocation ratios and changes thereof; differences between the actual asset allocation ratios and target ratios and the reasons for such differences; (5) differences between the overall rate of return and the expected rate of return and the reasons for such differences; (6) the asset risk condition and their potential impacts on the company’s profitability and solvency; and (7) others as prescribed by the CBIRC. An insurance company shall report its asset allocation management rules and implementation of asset allocation in the previous year to the CBIRC in a timely manner and properly maintain the originals of relevant materials.942 Where an insurance company violates the provisions of the Measures 2012, the CBIRC shall, in accordance with the relevant provisions of the Insurance Law and the Measures for the Administration of Utilization of Insurance Funds, take corresponding regulatory measures against it.943 12.25 Internal control of insurance funds The internal control of insurance funds is regulated by the Notice of the CIRC on Issuing the Guideline for the Internal Control of Insurance Funds and the Application Guidelines 2015:944 (1) Guideline for the Internal Control of Insurance Funds (GICIF); (2) Application Guideline No.1 for the Internal Control of Insurance Funds – Bank Deposits, (3) Application Guideline No. 2 for the Internal Control of Insurance Funds – Fixed Return Investment, and 939 Ibid., art.34. 940 Ibid., art.35. 941 Ibid., art.36. 942 Ibid., art.37. 943 Ibid., art.38. 944 Bao Jian Fa No. 114 [2015] (see accessed on 16 October 2020). The Guideline for the Risk Control of Insurance Funds (for Trial Implementation) (Bao Jian Fa No. 43 [2004]) issued on 28 April 2004 by the CIRC was abolished.

764

REGULATION OF USE OF INSURANCE FUNDS

(4) Application Guideline No. 3 for the Internal Control of Insurance Funds – Stock and stock Funds. These Guidelines (No 1 to 4) were issued by the CIRC on 7 December 2015 and came into force on 1 January 2016 for the purpose of further strengthening the construction of the internal control of insurance funds, enhancing the insurance institutions’ management capability of internal control of insurance funds, and effectively preventing and resolving risks. Internal control of insurance funds is an important foundation of insurance institutions for carrying out compliance operations and guaranteeing the safety of insurance funds. Insurance institutions shall, according to the requirements of the GICIF and the Application Guidelines, establish and improve the rules on internal control of insurance funds and organize the implementation thereof.945 While hiring an independent third-party audit institution to conduct an annual external audit, an insurance institution shall conduct a special audit of internal control of insurance funds and submit a special audit report of the previous year to the CBIRC before 30 April each year.946 Third-party audit institutions shall, under the requirements of the GICIF and the Application Guidelines, conduct an audit of internal control of insurance funds and accept the inquiry and inspection of the CBIRC concerning the audit business. Third-party audit institutions shall abide by the audit code of ethics, be honest, trustworthy, diligent, and duteous and comply with the rules of relevant insurance industry associations.947 The CBIRC shall, according to the needs of the market and supervision, enrich and improve the system and standards on internal control of insurance funds. It shall also intensify the supervision efforts, fully maximize the role of the third-party audit. The CBIRC shall regard the audit results as the grading and evaluation items for the essential conditions of the insurance institutions’ investment management capability, prudential conditions for the pilot projects of innovative application of funds and internal control and compliance of insurance funds use. 12.25.1 Guideline for the internal control of insurance funds (GICIF) (a) General requirements These Guidelines are applicable to insurance group (holding) companies, insurance companies, and insurance asset management companies formed according to the law within the territory of China (hereinafter collectively referred to as insurance institutions).948 Internal control of insurance funds means a management system formed by an insurance institution for preventing and resolving capital application risks and guaranteeing that the operation of insurance funds complies with the development 945 The Notice of the CIRC on Issuing the Guideline for the Internal Control of Insurance Funds and the Application Guidelines 2015, s.1. 946 Ibid., s.2. 947 Ibid., s.3. 948 The Guideline for the Internal Control of Insurance Funds 2015, art.2.

765

REGULATION OF USE OF INSURANCE FUNDS

plan of the insurance institution, on the basis of fully considering the internal and external environments, and through establishing the organization mechanism, utilizing management methods, and implementing the operating procedures and control measures.949 The objectives of internal control of insurance funds include:950 (1) Behaviour compliance.The operating management behaviour of an insurance institution shall be guaranteed to comply with the laws and regulations, supervision requirements, industry standards, internal management rules, and integrity standards of the company. (2) Effectiveness of operation. The efficiency and effectiveness of the application of insurance funds shall be improved, and the safety and reliability of insurance funds and the company’s assets shall be guaranteed. (3) Facticity of information.The facticity, accuracy, and completeness of financial reports and business and financial management information on the application of insurance funds shall be guaranteed. Internal control of insurance funds shall adhere to the following principles:951 (1) Principle of safety. The application of insurance funds shall be stable, conform to the supervision requirements for solvency, implement asset and liability management and overall risk management according to the nature of insurance funds, and achieve intensiveness, specialization, standardization, and marketization. (2) Principle of comprehensiveness. Internal control shall cover various varieties of business of application of insurance funds, all departments or institutions, and personnel at all levels, as well as all the links, including decisionmaking, implementation, supervision, feedback, prevention of management loopholes, and so on. (3) Principle of validity. Appropriate internal control procedures shall be established on the basis of scientific internal control systems and methods so as to ensure the valid implementation of all rules on internal control of insurance funds. (4) Principle of independence. The responsibilities of the head offices, branches, departments, and posts of insurance institutions participating in the application and management of funds shall be relatively independent, clearly specified, and checked and balanced. (5) Cost-effective principle. Insurance institutions shall, according to their risks, take appropriate internal control measures to cope with the risks during the process of application of funds and reduce the costs of internal control under the premise of effective control.

949 Ibid., art.3. 950 Ibid., art.4. 951 Ibid., art.5.

766

REGULATION OF USE OF INSURANCE FUNDS

Internal control of insurance funds shall include the following elements:952 (1) Control environment.The control environment is the basis for internal control of insurance funds, generally including governance structure, institutional setting, assignment of responsibilities, human resource policies, and corporate culture, among others. (2) Risk evaluation. Risk evaluation means that an insurance institution conducts timely identification and systematic analysis of risks in the application of insurance funds relevant to the realization of internal control objectives and reasonably determines the countermeasures of risks. (3) Control activity. Control activity means that an insurance institution takes corresponding control measures according to the risk evaluation results to control the risks concerning the application of funds within the tolerance level. (4) Information and communication. Information and communication means that an insurance institution accurately collects in a timely manner and transfers information on internal control of insurance funds so as to ensure effective communication of information internally and externally. (5) Internal supervision. Internal supervision means that an insurance institution conducts supervision and inspection of the establishment and implementation of internal control, evaluates the effectiveness of internal control, finds internal control deficiencies, and improves them in a timely manner. An insurance institution shall, according to the requirements of the GICIF and the supporting Application Guidelines, develop rules on internal control of funds and organize the implementation thereof.953 An insurance institution shall establish an incentive and restraint mechanism for internal control of funds, incorporate the information on the implementation of internal control of insurance funds by all responsible entities and relevant staff members for the application of funds into the performance evaluation system, and promote the effective implementation of internal control.954 (b) Control environment An insurance institution shall establish an organizational system of internal control with clear division of work, clear routes, mutual cooperation, and highly efficient execution in which the board of directors shall bear the final responsibility, the management shall directly lead, the risk management or internal control functional department shall be responsible for overall planning and coordination, the internal audit department shall be responsible for inspection and supervision, and the business entity shall take the primary responsibility.955 An insurance institution shall establish and improve the corporate governance structure; establish an internal control mechanism with clear framework and 952 953 954 955

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9.

767

REGULATION OF USE OF INSURANCE FUNDS

effective control; develop comprehensive and feasible internal control rules; expressly provide for the responsibilities of the general meeting of shareholders, the board of directors, and its professional committees, the board of supervisors, and the operation management for the application of insurance funds; fully maximize the supervision function of the board of directors and the board of supervisors; prevent illegal affiliate transactions, tunnelling, and insider control; and protect the interests of investors and the lawful rights and interest of the institution.956 An insurance institution shall, in combination with the characteristics of insurance funds and the requirements of internal control, establish internal department and posts, specify the link-up methods and operating standards for all links and the relevant posts in the application of insurance funds, and strictly separate the post responsibilities of the front, middle, and back offices from each other to ensure clear powers and responsibilities, relative independence, and checks and balances. Important business departments and posts shall be effectively isolated.957 In carrying out relevant investment management business, an insurance institution shall strengthen investment management capacity building and appoint qualified persons responsible for risks as required. Persons responsible for risks include administrative responsible persons and professional responsible persons. Administrative responsible persons shall assume primary liability for the legitimacy and compliance of the investment capacity and specific investment business, and professional responsible persons shall assume primary responsibilities for the effectiveness of investment capacity and the timeliness and adequacy of the risk disclosure for specific investment business.958 An insurance institution shall, in light of the characteristics of the application of its own funds, establish three monitoring defence lines that are progressive in sequence, match power with responsibility, and are strict and effective:959 (1) It shall establish the first monitoring defence line on the basis of self-control, self-management, and self-restraint of the staff members of front-line departments and posts.Two-person, double-post, and double-responsibility review rules shall be implemented for the business aspects with high operating risks. A corresponding follow-up supervision mechanism shall be established for business handled by a single person at a single post. (2) It shall establish the second monitoring defence line that enables mutual supervision and monitoring between relevant departments and posts and maximizes the risk-monitoring functions of the legal, compliance, risk management, finance, and other departments during the whole process of investment with insurance funds. The insurance institution shall establish a channel for smooth transmission of important business handling vouchers between relevant departments and posts, and relevant departments and posts shall respectively assume their own responsibilities within their scope of authority. 956 957 958 959

Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13.

768

REGULATION OF USE OF INSURANCE FUNDS

(3) It shall establish the third monitoring defensive line under which internal audit departments implement supervision and feedback of all posts, departments, institutions, and business. The internal audit department shall be independent of other departments and business activities and implement strict inspection and feedback of the implementation of the internal control rules. An insurance institution shall establish an effective human resources management system, improve the incentive and restraint mechanism, and give comprehensive consideration to whether members of the institution meet the job requirements in respect of professional ethics and competence.960 The management of an insurance institution shall establish the concept of giving priority to internal control and risk management, cultivate the risk prevention awareness of relevant staff members for the application of insurance funds, and create a cultural atmosphere of internal control. The insurance institution shall regularly provide training on the management of risks in the application of insurance funds, internal control, and operation compliance; ensure that relevant staff members for the application of insurance funds understand the laws and regulations of the state and the rules and regulations of the institution in a timely manner; and ensure the staff members of all departments, posts, and links of the institution have risk awareness.961 An insurance institution shall establish and improve the management system of insurance funds; implement standard management during all the processes of the application of insurance funds, including asset allocation, investment research, decision-making and authorization, transaction and settlement management, postinvestment management, risk control, information disclosure, performance assessment and evaluation, information system management, administrative management, and other work relevant to the application of insurance funds; and regularly check and evaluate the implementation of the rules.962 An insurance institution shall, from business, compliance, risk, and other respects, comprehensively and scientifically set evaluation objectives for non-insurance subsidiaries with the function of the application of insurance funds; strengthen the supervision of subsidiaries and their senior executives; and strictly implement the accountability system so as to ensure operation in compliance with laws and regulations.963 (c) Risk evaluation An insurance institution shall establish a vertical management system, with the risk management committee or corresponding professional functional committee, risk management department, and risk management post as the principals; establish a risk management and control framework with all parties for the application of insurance funds; and specify the communication mechanism and the supervisory 960 961 962 963

Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17.

769

REGULATION OF USE OF INSURANCE FUNDS

management mechanism for all parties. The risk management departments shall maintain independence in their performance of duties and shall not be intervened by the investment management and investment decision-making departments.964 An insurance institution shall establish a comprehensive risk management policy, specify the company’s risk preferences, standardize all business processes of the application of funds within the scope of the company’s risk preferences, and effectively prevent risks in respect of asset-liability management, market, credit, operations, strategy, reputation, liquidity, and so on.965 An insurance institution shall, according to the status quo of risks of assets, classify the insurance assets into different categories; reveal the actual value and risk degree of insurance assets; reflect the quality of assets in a complete, authentic, and dynamic manner; and strengthen the risk management in the application of insurance funds.966 An insurance institution shall, in light of the risk characteristics, identify, evaluate, and quantify all risks encountered in the process of investment operation from multiple levels and multiple angles, including internal and external risks, inherent risks, and residual risks; analyze and evaluate risks already identified; evaluate the possibility of various risks and the extent of their impact on the company’s operation objectives; and form the basis of risk management and response.967 An insurance institution shall, according to different forms of investment products, establish an improved risk early warning system, monitor risk changes through the risk limits and key risk indicator system, and carry out continuous risk management on the basis of risk tolerance. Risk indicators may include qualitative and quantitative indicators. An insurance institution shall establish a stress-test model for asset allocation; carry out sensitivity tests and scenarios tests; test changes in assets, proceeds, and solvency under specific circumstances and various adverse circumstances; and evaluate the potential risk factors and overall risk tolerance. Relevant departments of the insurance institution shall, according to the results of tests, give advice on management of asset allocation, send feedback to relevant departments, and report to the operation management and the professional committees.968 An insurance institution shall establish a major emergency response mechanism. The emergency response mechanism includes, but is not limited to, the risk situation, emergency plans, job objectives, reporting path, operating process, and handling measures, among others. If necessary, the emergency response mechanism shall be launched in a timely manner to control and reduce losses to the minimum.969 An insurance institution shall, according to its business nature, scale, and complexity, develop appropriate risk quantification technology, improve the risk quantification model and risk indicator system, apply advanced and sophisticated risk management strategies, realize the organic combination of the quantitative and

964 965 966 967 968 969

Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23.

770

REGULATION OF USE OF INSURANCE FUNDS

qualitative methods, and effectively connect risk management with solvency management and capital management.970 (d) Control activity An insurance institution shall, in light of different forms of investment business, accurately identify the risks relevant to all investment business processes and capital application objectives and take appropriate control measures by combining manual control and automatic control, as well as preventive control and detective control, to control risks within the degree of tolerance.971 In carrying out all forms of investment business, an insurance institution shall, under the GICIF and the Application Guidelines, carry out internal control activities.972 (I) MANAGEMENT AND CONTROL OF AUTHORIZATION AND ENTRUSTMENTBASED RELATIONSHIP

An insurance institution may, according to its investment management and risk management capabilities, make investment on its own or entrust the investment managers of qualified insurance funds to make investment. Where an insurance institution makes entrusted investment with insurance funds, the insurance institution is a client, the insurance funds investment manager is a trustee, and the custody institution is a custodian.973 To make entrusted investment with insurance funds, an insurance institution shall establish an asset custody mechanism and entrusted investment management system; form a perfect asset management system and specific asset allocation plan;, give comprehensive consideration to risks, costs, benefits, and other factors; reasonably determine the number of investment managers according to the marketization ways; and make due diligence investigations.974 The scope and way of entrusted investment with insurance funds shall conform to the relevant provisions of the CBIRC.975 The application of funds sourced from the investment-linked insurance products and non-life insurance type of investment insurance products with variable return shall be independent of the application of funds of other insurance products in asset segregation, asset allocation, investment management, and other links.976 An insurance institution shall establish rules on the recruitment, supervision, evaluation, and assessment, among others, of investment managers and cover the entire process of entrusted investment. Entrusted investment managers shall have the qualifications for asset management business recognized by relevant departments of the state; have sound operating procedures, internal control mechanism, risk management, and audit system; establish a fair trading and risk isolation 970 971 972 973 974 975 976

Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30.

771

REGULATION OF USE OF INSURANCE FUNDS

mechanism; and set up professional departments and posts corresponding to the entrusted management business.977 As the client, an insurance institution shall implement the board of directors’ responsibility system for the utilization of insurance funds:978 (1) The board of directors of the insurance institution as a client or the professional committee authorized by the board of directors shall mainly perform the following functions and duties: examining and approving the management system for the application of insurance funds; determining the management methods for the application of insurance funds; examining and approving the strategic allocation plan of assets, annual investment plan and investment guidelines, and the relevant adjustment plans; deciding major investment issues; and establishing a performance evaluation system for fund utilization; among others. (2) The decisions of the insurance institution on entrusted investment, investment in unsecured bonds, shares, equities, real estate, other financial products, financial derivatives, overseas investment, and other major issues concerning the application of insurance funds shall be subject to the deliberation and approval of the board of directors or the professional committee authorized by the board of directors, under relevant provisions. And the board of directors shall assume the ultimate responsibility for entrusted investment. (3) The client shall establish an asset and liability management committee or a committee with corresponding functions (hereinafter referred to as the “investment decision-making committee”), with the authorization of the board of directors and according to the accumulative level of the company’s overall risk status and various risk exposures. The committee shall assist the board of directors in the deliberation of asset allocation policy and offer adjustment and guidance opinions. Assets generated from investment funds entrusted by an insurance institution and the application thereof shall be independent from the inherent assets of investment managers and custodians and other assets managed by them. An insurance institution shall establish a perfect asset isolation system and implement independent operation and separate accounting of the entrusted management capital and selfowned capital in the different accounts of insurance companies and the entrusted management institution of insurance funds as well as the assets of different clients of the entrusted management institution of insurance fund.979 An insurance institution, as a client, shall set up a special insurance asset management department:980 (1) The insurance asset management department shall be independent from financial, actuarial, risk control, and other business departments. 977 978 979 980

Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34.

772

REGULATION OF USE OF INSURANCE FUNDS

(2) The insurance asset management department shall perform the client’s functions and the functions of supervising investments, evaluating investment performance, and so on, including drafting the management system for the utilization of insurance funds, developing the strategic allocation plan of assets and annual asset allocation strategies, drafting the adjustment plan for strategic allocation of assets, executing the annual asset allocation plan, implementing the risk management measures for the utilization of insurance funds, and performing other functions and duties. (3) The insurance asset management department shall set up posts for investment research, asset liquidation, risk control, performance evaluation, relevant guarantee, and so on, and establish a firewall system and achieve specialized, standard, and procedural operation. To make entrusted investment, an insurance institution shall conclude an entrusted investment management agreement with investment managers, specifying matters such as the rights and obligations of both parties; changes in key personnel; handling of conflicts of interest, risk prevention, information disclosure; handling of abnormal circumstances, arrangements on the withdrawal of assets, and accountabilities. An insurance institution shall, under the market principle, determine the pricing mechanism for management fees upon negotiations in light of the scale, objective, strategy, and performance of investment and other factors; dynamically adjust the level of management fees; and specify such mechanism in the entrusted management agreement.981 An insurance institution shall, in light of the risk-return characteristics of insurance funds, prudentially develop guidelines for entrusted investment; reasonably determine the scope, objective, term, and restriction of investment and other factors; examine the guidelines for entrusted investment on a regular basis or from time to time; and make appropriate adjustments. An investment manager shall implement the guidelines on allocation of the insurance institution’s assets, build portfolios according to the characteristics of insurance funds, and fairly treat different funds.982 The operations of an investment manager as the trustee shall conform to the supervision provisions and contractual stipulations:983 (1) It shall set up a firewall between entrusted accounts and between entrusted accounts and self-owned accounts and develop rules and norms on preventing tunnelling between accounts. (2) It shall designate an account investment manager, determine the account management mode and process, formulate investment plans, and carry out specific investment business. (3) Its investment managers for accounts of different nature shall not be overlapping if there exist conflicts of interest. (4) Where an investment manager makes investment in violation of the contract, unfairly treats different funds, misappropriates the entrusted funds, 981 Ibid., art.35. 982 Ibid., art.36. 983 Ibid., art.37.

773

REGULATION OF USE OF INSURANCE FUNDS

illegally makes a commitment to provide a minimum investment return to the authorizing institution, provides guarantee for others with the insurance funds or the assets formed from the investment with investment funds, or commits other illegal acts, the insurance company shall dismiss or replace the investment manager in a timely manner. An insurance institution shall assess the management capability, investment performance, service quality, and other factors of investment managers on a regular basis; monitor the risk and compliance of various entrusted investment accounts; and issue analysis reports on a regular basis. In the case of any major unexpected event, it shall immediately take effective measures. An insurance institution engaged in entrusted investment shall establish an investment asset withdrawal mechanism to effectively protect the safety and integrity of insurance assets.984 An insurance institution shall, according to the characteristics of the insurance business and funds, set up “general accounts” and “independent accounts” to conduct separate account management of asset allocation and ensure the independence, clearness, and completeness in capital clearing, accounting, and account records.985 An insurance institution shall establish and improve the insurance asset custody mechanism, select qualified professional institutions such as commercial banks as custody institutions, and place all investment assets formed from the use of insurance funds under the custody and supervision of the third party. A custody institution shall handle fund receipts and payments in strict accordance with the valid instructions of an insurance institution or a professional investment management institution and ensure that the receipts and payments of insurance assets under custody are made through the custodian account.986 With regard to the delivery of information and documents relevant to bank accounts, and certificate of the ownership of the assets, and so on, it shall clearly specify the routine communication ways, instruction transmission modes, and connection information system for the client, the trustee, and the custodian so as to facilitate all parties’ performance of their respective duties.987 Report and communication:988 (1) An insurance institution shall provide relevant information and data on the entrusted assets to the trustee and the custodian in a timely manner and update the investment guidelines, and so on. (2) For entrusted investment or issuing insurance asset management products, an investment manager shall, according to the contract, disclose the use of funds, investment management, funds custody, risk management, major emergencies, and other information to relevant parties; ensure that the information disclosed is true, accurate, and complete;

984 985 986 987 988

Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid., art.41. Ibid., art.42.

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REGULATION OF USE OF INSURANCE FUNDS

and provide convenience and technical support for an insurance institution’s inquiry about the aforesaid information. (3) The trustee shall promptly report the information on the investment risks to the client and the custodian. (4) A communication and coordination mechanism for major and urgent matters among the client, trustee, and custodian of insurance funds shall be established to appropriately resolve the specific problems in the management and application of entrusted assets. (II) CONTROL OF INVESTMENT DECISION-MAKING An insurance institution shall establish and improve an investment decision-making and authorization system which is characterized by relative centralization, multilevel management, and matching authority and responsibilities; formulate clear decisionmaking procedures; and specify the methods, standards, procedures, time limit, and responsibilities.989 (1) It shall develop democratic and transparent decision-making procedures, promulgate rules of procedure for management, and establish efficient and rigid business implementation systems as well as a sound and effective internal monitoring and feedback system. (2) It shall establish a decision-making system adapting to all kinds of capital sources, all investment varieties, and the company’s internal work needs and ensure that the procedures for the application of funds conform to the requirements of relevant laws and regulations and the operating instructions of the management. It shall also ensure that each work of the handler is carried out within the scope of authority for business. (3) It shall establish clear and appropriate decision-making levels and create a mutually independent top-down decision-making system with clear order, key decision-making levels, and a withdrawal mechanism. (4) It shall establish and improve an investment authorization system; specify the authorization process, authorization adjustment process, sublicense process, and authorization standards; and give decision-making authority for corresponding investment types to all authorization levels in accordance with the responsibilities, including but not limited to the form of authorization, the scope of investment, the investment amount, and the investment direction, among others. (5) Authorization of an insurance institution for major business of application of funds shall be made in writing, and the content and time limit of authorization shall be specified in the letter of authorization. (6) The decision-making system shall be adjusted in a timely manner in light of the changes in the company’s business development, organizational structure, and departmental responsibilities.

989 Ibid., art.43.

775

REGULATION OF USE OF INSURANCE FUNDS

(7) It shall develop specific decision-making procedures, rules of procedure, and a withdrawal mechanism and specify the factors to be concerned, such as asset-liability matching, review of compliance, and whether associated transactions are involved, among others. An insurance institution shall specify a sufficient basis for important decisions.990 (1) It shall, on the basis of sufficient research, develop standards for the selection of investment varieties, such as establishing database of bonds, database of stocks, and database of funds, among others, and develop corresponding standards for entries to the database. (2) It shall determine the decision-making level for important investment decisions, ensure that important investment decisions are made collectively, and ensure the independence and objectivity during the decision-makers’ decision-making process. (3) For different investment varieties and decision-making matters, the company shall specify the essential elements for making decisions on different investment varieties. (4) It shall specify that relevant written records such as meeting minutes, final investment decisions, and so on, must be kept for important investment decisions so as to ensure that the materials on which the investment decisions are based have been prudently considered and are confirmed in the final investment resolution. (5) It shall employ an informationized and automatic flowchart for decisionmaking to realize automatic control of the investment decision-making process and sequential order through information systems. (6) It shall ensure the completeness of the decision-making records. To make investment, an insurance institution shall, according to the strategic allocation plan of assets and the annual allocation strategies, comply with the requirements of security, liquidity, and profitability; analyze the cost of insurance funds, cash flow, duration, and other debt indicators by taking into overall account the solvency constraint, external environment, risk preferences, regulatory requirements, and other factors; and choose to allocate the investment varieties with corresponding risk return characteristics, duration, and liquidity.991 An insurance institution shall standardize the procedures of investment research, specify the scope for the collection of decision-making information, and ensure independence, objectivity, and accuracy in investment research.992 (1) It shall establish a specialized analysis platform, hire professional investment analysts, research and formulate the models and systems covering the management of counterparties and selection of investment varieties, and provide a basis for the decision-making of utilization of insurance funds. 990 Ibid., art.44. 991 Ibid., art.45. 992 Ibid., art.46.

776

REGULATION OF USE OF INSURANCE FUNDS

(2) It shall establish an external research resources management and evaluation system by using external research results. An insurance institution shall establish a sound and independent credit risk management and control system and provide effective support to the investment decision-making of credit investment products.993 (1) It shall establish an internal credit rating system, set up special departments or posts, appoint professional management personnel, and ensure the independence of credit rating and investment trading in department, post, and staffing. (2) It shall establish a credit evaluation model and rating system that meets the needs of the company and meets the investment needs. (3) It shall establish and improve the credit risk management system and regularly evaluate and continuously monitor all the varieties of the credit products and the overall credit risks to provide support and early warning for further investment decision-making of the company. (4) It shall specify the credit rating procedures, including information collection, research interviews, preliminary evaluation, submission of reports, track rating, and other contents. (5) It shall establish an appropriate information review mechanism to ensure the authenticity and accuracy in the acquisition of information. (6) It shall use audited credit rating reports as the basis for investment decisionmaking of credit products. (III) CONTROL OF TRANSACTION BEHAVIOUR An insurance institution shall review the investment instructions and shall only implement them after confirming their legitimacy, compliance, and completeness. It shall establish a comprehensive and centralized transaction management system, including but not limited to the implementation of the centralized trading system, the establishment of a centralized trading room, the implementation of access control management, fair treatment of different sources of funds, and filing and review of various trading receipts generated during the trading process in a timely manner, among others.994 An insurance institution shall develop a standard capital management system, specify the fund transfer procedures, strictly implement the rules on the authorization and approval of capital business, establish major emergency response plans, and ensure the safety of the company’s funds.995 An insurance institution shall establish a corporate behaviour management system; track, collect, and review the information relevant to such corporate behaviours as the maturity day, interest payment day, and ex-dividend day of the investment

993 Ibid., art.47. 994 Ibid., art.48. 995 Ibid., art.49.

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REGULATION OF USE OF INSURANCE FUNDS

products held thereby; and send important prompt messages affecting corporate behaviours to investors in a timely manner.996 An insurance institution shall, under the relevant provisions of the supervision institution on various investment transactions, submit reports, statements, documents, and materials to the supervision institution in a timely, authentic, accurate, and complete manner.997 (IV) CONTROL OF FINANCIAL ACCOUNTING An insurance institution shall set down relevant financial rules and accounting procedures according to relevant state laws and regulations and determine rigid accounting system control in view of various risk control points. An insurance institution shall develop strict rules and standardize the accounting of the application of insurance funds.998 (1) It shall specify the agreement and accounting requirements on the collection of all kinds of expenses and remuneration for investment management and other items and issue corresponding invoices and payment confirmation for all kinds of expenses and remuneration collected. (2) It shall develop specific procedures for examination and approval of the opening of and change in the accounts for transfer of funds. (3) The funds collection instructions shall be confirmed in a timely manner and be consistent with the information on the payment of funds. (4) The instructions for transfer of funds shall be subject to appropriate approval and be consistent with payment of funds. An insurance institution shall set up separate accounts for the management of self-owned assets and entrusted assets and assets under its own management, develop sound measures for the management of assets, and specify rigid control procedures for their respective uses and capital transfer.999 An insurance institution shall implement strict independence of personnel for front office trading, fund management, and clearing and accounting.1000 An insurance institution shall take appropriate accounting control measures to regulate accounting work, complete accounting and information disclosure in a timely and accurate manner, and ensure that the financial information is true, accurate, and complete.1001 (1) It shall specify the accounting methods and rules on the classification and re-classification of various forms of financial assets. (2) It shall specify the standards, methods, and accounting rules on the revenue accounting. 996 997 998 999 1000 1001

Ibid., art.50. Ibid., art.51. Ibid., art.52. Ibid., art.53. Ibid., art.54. Ibid., art.55.

778

REGULATION OF USE OF INSURANCE FUNDS

(3) It shall specify the accounting methods and rules on the repurchase of pledged securities. (4) It shall specify the standards, methods, and accounting rules on accrued interest and proceeds distribution. (5) It shall specify the methods and accounting rules on the funds and interest receivable and payable. (6) Financial accounting results shall be subject to independent review, and the relevant data in accounting, product reports, and financial reports shall be verified and consistent. An insurance institution shall develop appropriate accounting valuation policies, rules, and norms.The valuation results shall be subject to appropriate review, evaluation errors shall be handled in a timely manner under the relevant provisions and the agreement of the contract, and the information shall be disclosed.1002 After completion of the transactions every day, an insurance institution shall check the information on clearing and transactions.1003 (1) The transaction accounts of the investment department shall be consistent with the background clearing records and the funds records, and the review records shall be kept. (2) The background department shall regularly check the trading information and funds with the custody institution and the securities registration institution and keep the review records. (3) Financial accounting officers shall regularly check the post data, accounting classification, and other contents with the clearing personnel and keep written records. (4) Discrepancies found during the process of verification of data shall be corrected in a timely manner and maintained in the information system to guarantee the accuracy of financial accounting and investment trading post on the following day. An insurance institution shall, after investment clearing and income distribution, cancel the custody accounts in a timely manner with the custody institution. Clearing reports on account cancellation shall be issued and submitted to investors, other interested parties, and the supervision departments.1004 An insurance institution shall establish a sound system of transaction records. Routine transaction records shall be checked and filed in a timely manner. Upon receipt of the original document and the transaction summary records handed over in the previous link, financial accounting officers shall appropriately examine and keep relevant documents and the original certificates.1005

1002 1003 1004 1005

Ibid., art.56. Ibid., art.57. Ibid., art.58. Ibid., art.59.

779

REGULATION OF USE OF INSURANCE FUNDS

(V) CONTROL OF THE INFORMATION SYSTEM An insurance institution shall establish an information management system for the application of insurance funds and a perfect information management system; reduce or eliminate the artificial manipulation factors; and automatically identify, warn, report, and manage and control risks in the application of insurance funds so as to ensure real-time controlling of the risk status.1006 (1) An insurance institution shall, according to the functions, establish a system with such functions as investment transaction, clearing, valuation and accounting, credit rating, risk control, and information as the basis for the application of insurance funds. (2) An insurance institution shall, according to the business needs, specify the contents, direction, frequency, and operation mode, among others, of data to be automatically transmitted among all systems; reasonably guarantee the security, completeness, timeliness, and reliability of data transmission; establish a data verification mechanism before and after transmission; and ensure the accuracy and stability of the interface transmission. An insurance institution shall, according to the company’s business development strategy, develop specific information technology plans. The plans shall be open and forward-looking, meet the company’s needs of operation management, and ensure the stability and continuity in information construction.1007 An insurance institution shall, according to the requirements of the laws and regulations of the state and under the principles of security, practicability, and operability, strictly develop the management rules, operating procedures, post manuals, and risk control rules on the electronic information system relevant to the application of insurance funds and ensure the safe operation of the system through strict information safety management rules, authorization rules, post responsibility rules, system operation and maintenance rules, access control rules, internal and external network separation rules, and other management measures.1008 The relevant departments of an insurance institution shall standardize the responsibilities of the management posts in the information system relevant to the application of insurance funds and ensure the independence of the responsibilities of the incompatible posts during the process of the operation and maintenance of the system.1009 (1) Personnel for information technology development, operation and maintenance, business operation, and other posts shall be independent from each other, and information technology developers, operation and maintenance personnel, and other technicians shall not intervene with practical business operation. (2) It shall develop the standards for the authorization for posts in all systems, strictly control the separation of incompatible posts and the management 1006 1007 1008 1009

Ibid., art.60. Ibid., art.61. Ibid., art.62. Ibid., art.63.

780

REGULATION OF USE OF INSURANCE FUNDS

of the account authority, and standardize the procedures for authority allocation, inspection, and review. An insurance institution shall implement strict management of the information data and ensure the safety, authenticity, and completeness of the information data and the timely and accurate transmission of the data; it shall also strictly implement the procedures for authorized amendments to the computer transaction data and make regular inspections on the electronic information and data.1010 The system data of an insurance institution shall have a backup on a daily basis. Where filing of the counterparty information and transaction records is involved, the backup of system operation data shall be maintained in a unmodifiable medium for 15 years.1011 Threshold values of compliance and risk indicators shall be set up for the insurance information management system of an insurance institution, and all risk monitoring factors shall be solidified in the relevant information technology systems to reduce operational risks and prevent moral risks.1012 An insurance institution shall develop business continuity plans and disaster recovery plans and organize exercises on a regular basis.1013 An insurance institution shall establish a sound information system development management organization system, develop comprehensive development management rules, and ensure conformity to the safety requirements during the system development process, and the system development and test environment shall be effectively separated from the production environment to ensure the security and stability of the production system.1014 An insurance institution shall establish and improve the information security management system and the reporting mechanism and strengthen information security monitoring and early warning.1015 An insurance institution shall develop network access control measures; deploy monitoring means; strengthen firewall, anti-virus software, and network access authority management; ensure the physical and logical security of the network; respond in a timely manner to and analyze the security incidents; and ensure the safe and stable operation of the business system.1016 (e) Information and communication An insurance institution shall develop information and communication rules on the application of insurance funds, specify the collection, handling, and transmission procedures for relevant information on internal control; ensure timely communication of information; and promote the effective operation of internal control. An insurance institution shall conduct reasonable screening, checking,

1010 1011 1012 1013 1014 1015 1016

Ibid., art.64. Ibid., art.65. Ibid., art.66. Ibid., art.67. Ibid., art.68. Ibid., art.69. Ibid., art.70.

781

REGULATION OF USE OF INSURANCE FUNDS

and integration of various kinds of internal and external information collected and improve the effectiveness of information. Internal information shall be collected from such channels as financial and accounting information, operation management information, investigation reports, special information, internal publications, and office networks. External information shall be collected from such channels as industry associations, intermediary institutions, related entities, market research, reports by letters and visits, online media, and relevant supervision departments.1017 An insurance institution shall conduct communication and feedback on information relevant to the application of insurance funds among all internal management levels, responsible entities, and business links with external investors, business partners, customers, intermediary institutions, regulatory departments, and other parties concerned and ensure that necessary obligation of maintaining confidentiality of information is performed in all links. Important information during the information communication process shall be delivered to the board of directors, the board of supervisors, and the management in a timely manner, and problems found during the process of information transmission shall be reported and resolved in a timely manner.1018 An insurance institution shall use information technology to promote the integration and sharing of information and fully maximize the role of information technology in information and communication. An insurance institution shall strengthen control of information system development and maintenance, access and change, data input and output, document storage and safekeeping, network security, and other aspects to ensure the safe and stable operation of the information system.1019 (f) Internal supervision An insurance institution shall establish an investment accountability system. It shall establish a mechanism to “subject those who have neglected their duties to liabilities, exempt those that have diligently fulfilled their duties from liabilities and make liability investigations independently,” and all participants shall assume corresponding responsibilities of management within the scope of their respective duties. Where any of the senior managers or main business personnel, in violation of any regulatory provision or management rule of the company, fails to perform or accurately perform his or her functions and causes any asset loss, he or she shall be subject to liability under the accountability system. Where it involves any of the senior managers or main business personnel of a non-insurance institution, the insurance institution shall hold the aforesaid person liable under the relevant provisions and the agreement of the contract.1020 An insurance institution shall establish an effective internal control and audit inspection system, set up a special internal audit department or post, strictly implement the professional office-taking conditions for internal auditors, fully maximize 1017 1018 1019 1020

Ibid., art.71. Ibid., art.72. Ibid., art.73. Ibid., art.74.

782

REGULATION OF USE OF INSURANCE FUNDS

the authority of the internal audit department and personnel, and independently perform the functions of inspection, evaluation, report, and suggestion for internal control of insurance funds.1021 An insurance institution shall specify the specific responsibilities of all various posts of the internal audit department, strictly implement the operating procedures and organizational disciplines of internal audit, and improve the quality and efficiency of the internal audit work.1022 Internal auditors shall examine the implementation of the internal control rules on an annual basis, assist internal control departments in conducting comprehensive evaluation of the integrity, reasonableness, and validity of the system of internal control of insurance funds, develop the evaluation report on internal control of insurance funds, and ensure that the activities of application of insurance funds are effectively carried out.1023 Internal auditors that find any violations of laws and regulations, abnormal transactions, or significant potential risks, shall, according to the procedures and provisions, report to the management, the board of directors, and the board of supervisors of the company. The management, the board of directors, and the board of supervisors of the company shall pay attention to and support the work of internal audit and order relevant departments to make rectification within a time limit.1024 An insurance institution shall establish an anti-fraud mechanism combining punishment and prevention with the priority on prevention for the application of insurance funds, specify the key fields and key links of the anti-fraud work and the functions of relevant institutions in the anti-fraud work, and standardize the procedures for tip-off, investigation, handling, reporting, and remedy in fraud cases. An insurance institution shall establish a report and complaint system and a whistle-blower protection system for the application of insurance funds; set up a tip-off channel; specify the procedures, time limit, and requirements for handling reported offenses and complaints; and ensure that exposure and complaining are an important channel for the company to efficiently get information.1025 12.25.2 Application Guideline No. 1 for the Internal Control of Insurance Funds – Bank Deposits For the purpose of the Guideline, bank deposit means bank deposits of an insurance institution other than current account deposits as needed in maintaining its routine operations.1026

1021 1022 1023 1024 1025 1026 art.2.

Ibid., art.75. Ibid., art.76. Ibid., art.77. Ibid., art.78. Ibid., art.79. Application Guideline No. 1 for the Internal Control of Insurance Funds – Bank Deposits 2015,

783

REGULATION OF USE OF INSURANCE FUNDS

An insurance institution shall at least pay attention to credit risk, operational risk, and other risks concerning the management of bank deposits.1027 An insurance institution shall incorporate its bank deposits into the administration of investment accounts; develop the rules for credit assessment, investment decision-making, and risk management; specify the requirements for the administration in such operational links as the opening of accounts, transfer of funds, and safekeeping of documents so as to guarantee regulation-compliant operations.1028 (a) Assignment of responsibilities and authorization approval An insurance institution shall establish a post responsibility system; specify the functions of relevant departments and posts; strictly separate the post responsibilities of the front, middle, and back offices from each other so as to ensure mutual separation, restriction, and supervision of incompatible posts for the handling of the deposit investment business. The incompatible posts for the business of bank deposit investment shall at least include:1029 (1) credit assessment, credit granting, and investment with deposits; (1) credit assessment and credit granting and approval for investment with deposits; and (3) the implementation of investment decisions and investment with deposits. An insurance institution shall appoint qualified staff members to handle the business of bank deposit investment. Staff members handling the business of bank deposit investment shall have sound professional ethics and have acquired specialized knowledge in finance, investment, accounting, law, and other aspects.1030 An insurance institution shall establish and improve the bank deposit investment decision-making and authorization system which is relatively centralized and is featured with level-by-level management and matching powers and responsibilities; establish operation procedures and detailed operating rules covering investment research, decision-making, enquiry, negotiation, signing of contract, transaction execution, safe-keeping of business files, post-investment management, and other business links; and specify the requirements for the duties, the link-up methods, and the operating standards for all links and the relevant posts. An insurance institution shall regularly check and evaluate the implementation of relevant rules on bank deposit investment.1031 (b) Control of investment research and decision-making An insurance institution shall establish a specialized analysis platform; research and formulate the models and systems covering the management of counterparties and selection of investment varieties; establish a database of trading counterparties

1027 1028 1029 1030 1031

Ibid., art.3. Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.7.

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REGULATION OF USE OF INSURANCE FUNDS

conforming to the supervision provisions and the rules of the company; collect basic information on long-term credit rating, capital adequacy ratio, registered capital, net assets, severe violations, and other matters of trading counterparties; and update the database of trading counterparties in a timely manner.1032 For bank deposit investment, an insurance institution shall establish an internal credit assessment mechanism; evaluate the credit risks of bank deposits by using the information disclosed by bank of deposit, credit ratings of external independent institutions, and evaluation of supervision institutions; and develop credit lines according to the degree of credit risks.1033 The deposit investment department of an insurance institution shall establish a routine enquiry mechanism and track and obtain information on the deposit market according to its own needs of investment and management.1034 A deposit investment plan shall comply with the relevant provisions of the supervision institution, the investment guideline of the client, and the company’s internal investment policies and asset allocation plan. The deposit investment plan shall also ensure that all risks are effectively evaluated upon deliberation by relevant departments or functional institutions.1035 Deposit investment decisions shall be subject to deliberation and approval under the company’s investment decision-making and authorization system, and decision makers shall fully understand the research results of deposit investment and relevant information on the banks of deposit.1036 (c) Control of investment implementation An insurance institution shall, as required by relevant rules and provisions, arrange handlers to conduct transaction negotiations with the banks of deposit and closely monitor the processes of enquiry and negotiation. Major negotiations shall be made under the principle of two-person negotiation, and the records of negotiation shall be kept, reviewed, and confirmed by the handlers and monitors.1037 The deposit contracts on deposit investment shall be subject to review by relevant departments of the insurance institution so as to ensure that the information on the investment business is consistent with the investment resolutions and that the terms of the contract comply with the laws and regulations.1038 Handlers shall be responsible for handling the formalities for the signing and seal affixing of relevant agreements on bank deposits, and legal personnel shall be responsible for review of the contract and strictly comply with the provisions on the administration of the company’s contracts.1039 After the close of transaction every day, handlers shall review in a timely manner various transaction receipts generated during the process of transaction and 1032 1033 1034 1035 1036 1037 1038 1039

Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15.

785

REGULATION OF USE OF INSURANCE FUNDS

put them into archives in a timely manner under the rules and provisions of the company so as to completely keep the instruction records, bank certificates of deposit, and other transaction documents.1040 (d) Post-investment management The credit risk management department of an insurance institution shall continuously follow up the credit standing of the banks of deposit with balance of deposits. Where a bank no longer satisfies the investment requirements of the company as its credit rating downgrades, the bank deposit investment department shall be notified in a timely manner. Where a major event that may lead to credit deterioration occurs to a deposit bank, the credit risk management department shall give risk alerts and warnings in a timely manner.1041 An insurance institution shall specify the duties of post-bank deposit investment management posts, follow up and collect the information on changes in interest rates, adjust or require the custody bank to adjust the data on receivable interest in a timely manner, review the maturity date and interest payment date with balance of deposits, and ensure that the principal and interest are withdrawn upon maturity of the balance of deposits in a timely manner.1042 Withdrawal of bank deposits in advance shall follow the relevant rules and internal processes of the insurance institution so as to ensure that withdrawal in advance is subject to appropriate approval.1043 An insurance institution that raises capital for itself by pledging its bank deposits shall be subject to approval under the supervision requirements and the rules on internal administration. It shall also guarantee that the funds raised are utilized for temporarily regulating posts and dealing with bulk insurance compensation and other needs. The quota of financing by pledging its bank deposits shall be incorporated into the administration of leveraged financing monitoring percentage and reported to the supervision institution in a timely manner.1044 An insurance institution shall develop a response mechanism for the circumstance that the bank of deposit fails to pay the full amount of principal or interest on schedule, and it shall activate a major emergency response mechanism if necessary.1045 Under the relevant provisions of the supervision institution on bank deposits, reports, statements, documents, and materials shall be submitted to the supervision institution in a timely, authentic, accurate, and complete manner.1046

1040 1041 1042 1043 1044 1045 1046

Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

786

REGULATION OF USE OF INSURANCE FUNDS

12.25.3 Application Guideline No. 2 for the Internal Control of Insurance Funds – Fixed Return Investment Fixed-income investment means assets that are characterized by a specific maturity time, payment of interest and principal according to the predetermined interest rates and forms, and other characteristics, and assets whose main value relies on the change in the value of the aforesaid assets, including the bonds and other various forms of fixed-income investment conforming to the Measures for the Administration of the Utilization of Insurance Funds.1047 An insurance institution shall pay attention to at least the following risks involving fixed-income investment:1048 (1) (2) (3) (4) (5)

the scope of investment and the compliance risks of investment products; fixed-income products and counterparties’ credit risk; investment decision-making risks; transaction execution and post-investment management risks; and financial reporting and information disclosure risks.

An insurance institution shall establish specific decision-making and authorization mechanisms, strict and efficient business operating processes, sound risk control systems, risk disposal emergency plans and accountability systems. It shall also specify the internal control requirements on investment decision-making, transaction execution, post-investment management, information disclosure, and other links.1049 (a) Assignment of responsibilities and authorization approval An insurance institution shall establish a post responsibility system for the business of fixed-income investment; specify the functions of relevant departments and posts; establish the mechanisms of asset custody, centralized trading, and firewall; strictly separate the post responsibilities of the front, middle, and back offices from each other; and ensure mutual separation, restriction, and supervision of incompatible posts for the business of deposit fixed-income investment. The incompatible posts for the business of fixed-income investment shall at least include:1050 (1) credit assessment and credit granting research and issuing of instructions of fixed-income investment; (2) issuing of instructions of fixed-income investment and transaction execution; and (3) investment in the front office, middle-office risk control, portfolio management, and back-office clearing and accounting. An insurance institution shall appoint a certain number of staff members with bond investment experience to handle the business of fixed-income investment. 1047 Application Guideline No. 2 for the Internal Control of Insurance Funds – Fixed Return Investment 2015, art.2. 1048 Ibid., art.3. 1049 Ibid., art.4. 1050 Ibid., art.5.

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It shall also appoint professionals of bond analysis, credit assessment, and credit analysis.1051 An insurance institution shall establish and improve the decision-making and authorization systems for fixed-income investment which are relatively centralized and are featured with level-by-level management and matching powers and responsibilities; establish operation procedures and detailed operating rules covering investment research, investment decision making, bid price, signing of contract, execution of intra-market transactions and over-the-counter transactions, safekeeping of business files, post-investment management, and other business links; and specify the requirements for the duties, the link-up methods, and the operating standards for all links and the relevant posts. An insurance institution shall regularly check and evaluate the implementation of relevant rules on fixed-income investment.1052 (b) Control of investment research and decision-making An insurance institution shall establish an internal credit rating model to conduct internal credit rating; build a database of counterparties; collect the information disclosed by counterparties, credit ratings of external independent institutions, and evaluation of supervision institutions; evaluate the credit risks of counterparties and products; gradually improve the database of credit information; continuously accumulate credit information and data; and develop credit lines according to the degree of credit risks.1053 An insurance institution shall fully research the fixed-income securities to be invested in, develop research reports, establish fixed-income securities pools at different levels, track and analyze the changes in counterparties’ credit risks on a regular basis, strengthen the routine maintenance and management of fixed-income securities pools, and provide the basis for fixed-income investment decisions.1054 An insurance institution shall strengthen the administration of credit risks, market risks, and liquidity risks of bond investment and reverse repurchase of bonds, regularly carry out stress test and scenario analysis, and appropriately adjust the investment strategies based on the test results.1055 An insurance institution shall, within the scope of supervision requirements, carry out reverse repurchase of bonds; consider portfolio liquidity, money market rates, risk return of financial instruments, and other factors; reasonably determine the interest rates of funds borrowed; and specify the rate range of financing.1056 A fixed-income investment plan shall comply with the relevant provisions of the supervision institution, the investment guideline of the client, and the company’s internal investment policies and asset allocation plan; contain reasonable deliberation and control measures during the investment process; and ensure that all risks are effectively evaluated.1057 1051 1052 1053 1054 1055 1056 1057

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12.

788

REGULATION OF USE OF INSURANCE FUNDS

Fixed-income investment resolutions shall be subject to deliberation under the company’s investment decision-making and authorization system, and decision makers shall fully understand the external credit rating results and internal credit rating results.They must also guarantee the effect of fixed-income investment, the repayment sources of the issuer, and counterparties’ relevant information. Major investment shall be made under the requirements of centralized decision-making.1058 (c) Control of investment implementation An insurance institution shall review the investment instructions and shall only implement them after confirming their legitimacy, compliance, and completeness. For the execution of fixed-income investment transactions, a comprehensive centralized transaction management system shall be established, including but not limited to:1059 (1) implementing the centralized trading system and strictly separating investment decision-making from implementation of transactions; (2) establishing a centralized trading room; implementing the management of access control and preventing others from entering without approval; establishing the centralized trading monitoring system, early-warning system, and feedback system; monitoring the fixed-line telephone, network communication, and other items in the trading room within the time of transaction execution; and setting trading passwords for trading machines and regularly changing them so as to separate investment decision-making from implementation of transactions. (3) establishing effective supervision and restriction mechanisms; closely monitoring the negotiation, enquiry, and other key links in the process of transactions; separating negotiation and enquiry from implementation of transactions; and prohibiting traders from taking relevant materials on investment out of the trading room. Investment trading instructions shall be given through the company’s uniform investment trading management system. In principle, it shall be prohibited from giving instructions only by telephone, instead of the system. For over-the-counter transactions settled one by one, persons taking relevant posts shall be responsible for handling the formalities for signing relevant agreements and affixing seals on certificates and for conforming to the relevant provisions on contract management.1060 The trustee shall fairly treat the entrusted funds, including account setting, research support, resource allocation, personnel management, and system setting, among others. In the trading system, a fair trade module shall be launched, and the information on the setting of the parameters of the fair trade module shall be obtained. Similar investment instructions for different investment accounts at the

1058 Ibid., art.13. 1059 Ibid., art.14. 1060 Ibid., art.15.

789

REGULATION OF USE OF INSURANCE FUNDS

transaction level shall be implemented under the fair trade execution principles of time priority, price priority, and proportional distribution.1061 An insurance company and insurance asset management company shall specify the procedures for the approval of signing bonds sales contracts, distribution agreements, and other contract agreements on fixed-income investment so as to ensure that the information on investment business is consistent with the investment resolution and that the terms of the contract comply with the laws and regulations.1062 To make investment in fixed-income products, an insurance institution shall reach agreement in writing on commissions and other relevant expenses. Capital allocation and expenses payment between an insurance institution and a custody bank and payments of funds and fees to a securities operating institution shall be made through bank transfer in a transparent manner.1063 After the close of transaction every day, traders shall review in a timely manner various transaction receipts generated during the process of transaction, and put them into archives in a timely manner under the rules and provisions of the company so as to completely keep the investment instructions, bank transfer instructions, and other transaction documents.1064 (d) Post-investment management The credit risk management department of an insurance institution shall keep tracking the counterparties’ credit status and notify in a timely manner the fixedincome investment department of the adjustment to the credit rating, if any. Where a major event that may lead to credit deterioration occurs to the counterparty, the credit risk management department shall give risk alerts and warnings in a timely manner.1065 An insurance institution shall specify the duties of the posts for post-management of fixed-income investment; track and collect the information on the maturity day, interest payment day, and changes in the interest rates; closely communicate with the front-office investment managers on whether to exercise the rights of inventory bonds; communicate with the middle-office risk control personnel on the changes in the duration portfolio; and in a timely manner adjust the data of the receivable interest or request the custody bank to adjust the data so as to ensure timely withdrawal of principal and interest.1066 An insurance institution shall develop a response mechanism for the circumstance where the counterparty fails to pay the full amount of principal or interest on schedule,. It shall launch collection procedures and a major emergency response mechanism if necessary.1067 An insurance institution shall specify the provisions on the administration of such links as the acquisition, filing, safekeeping, and consulting of documents 1061 1062 1063 1064 1065 1066 1067

Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

790

REGULATION OF USE OF INSURANCE FUNDS

and materials relevant to fixed-income investment and the duties of relevant personnel.1068 Under the relevant provisions of the supervision institution on fixed-income investment, reports, statements, documents, and materials shall be submitted to the supervision institution in a timely, authentic, accurate, and complete manner.1069 12.25.4 Application Guideline No. 3 for the Internal Control of Insurance Funds – Stocks and Stock Funds The term “stocks” means the stocks publicly issued and listed for trading in which insurance institutions invest and the stocks publicly issued by listed companies to specific objects. The term “stock funds” means funds with more than 80% of the fund assets invested in stocks.1070 An insurance institution shall pay attention to at least the following risks involving investment in stocks and stock funds:1071 (1) (2) (3) (4) (5)

the scope of investment and the compliance risks of investment products; market risks of stocks and stock funds; investment decision-making risks; transaction execution and post-investment management risks; and financial reporting and information disclosure risks.

An insurance institution shall establish specific decision-making and authorization mechanisms, strict and efficient business operating processes, sound risk control systems, risk disposal emergency plans, and accountability systems and specify the internal control requirements on investment decision-making, transaction execution, post-investment management, information disclosure, and other links.1072 An insurance institution shall make investment in stocks and stock funds, under the Securities Law of China, the Securities Investment Fund Law of China, and relevant provisions of the securities regulatory department under the State Council and the supervision of the securities regulatory department under the State Council for market transactions. Staff members of an insurance institution involving decision-making, research, transaction, and clearing management of investment in stocks and stock funds and other relevant staff members shall be prohibited from engaging in insider trading and tunnelling.1073 (a) Assignment of responsibilities and authorization approval An insurance institution shall establish a post responsibility system for the business of equity investment; specify the functions of relevant departments and posts; establish the mechanisms of asset custody, centralized trading, and firewall; strictly 1068 Ibid., art.23. 1069 Ibid., art.24. 1070 Application Guideline No. 3 for the Internal Control of Insurance Funds – Stocks and Stock Fund 2015, art.2. 1071 Ibid., art.3. 1072 Ibid., art.4. 1073 Ibid., art.5.

791

REGULATION OF USE OF INSURANCE FUNDS

separate the post responsibilities of the front, middle, and back offices from each other; and ensure mutual separation, restriction, and supervision of incompatible posts for the business of stock investment. The incompatible posts for the investment in stocks and stock funds shall at least include:1074 (1) issuing of investment instructions and transaction execution; and (2) investment in the front office, middle-office risk control, portfolio management, and back-office clearing and accounting. An insurance institution shall appoint a certain number of staff members with equity investment experience to make investment in stocks and stock funds, and staff members of investment analysis and equity investment research. Staff members making equity investment shall have sound professional ethics and have acquired specialized knowledge in finance, investment, accounting, law, and other aspects.1075 An insurance institution shall establish and improve the equity investment decisionmaking and authorization system which is relatively centralized, and is featured with level-by-level management and matching powers and responsibilities; establish operation procedures and detailed operating rules covering investment research, investment decision-making, issuing of instruction, signing of contract, transaction execution, safekeeping of business files, post-investment management, and other business links; and specify the requirements for the duties, the link-up methods, and the operating standards for all links and the relevant posts. An insurance institution shall regularly check and evaluate the implementation of relevant rules on equity investment.1076 (b) Control of investment research and decision-making An insurance institution shall set up a stock investment research department and provide the stock investment department with timely, accurate, and comprehensive macro situation judgment, industry allocation strategy, and the latest information on the industries and the listed companies in order to provide a basis for investment decision-making.1077 An insurance institution shall establish a professional stock investment research and analysis platform, fully utilize the results of external research, and develop rules and models covering macro research and industry research. It shall establish stock pools such as forbidden stock pool, alternative stock pool, and core stock pool; conduct real-time tracking and analysis of the changes in the market; maintain the relevant information on the securities pools; and ensure the timeliness and effectiveness of the management of the securities pools.1078 An insurance institution shall implement the guidelines of the client for asset allocation, build portfolios according to the characteristics of insurance funds, and fairly treat different funds. An insurance institution shall determine the stock

1074 1075 1076 1077 1078

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10.

792

REGULATION OF USE OF INSURANCE FUNDS

investment plan under the investment guideline of the client and conduct approval and authorization in writing under the internal procedures.1079 Before making investment in stocks and stock funds, including strategic allotment of new shares, non-public issuance, non-public new issue, and strategic allotment of stocks, among others, an insurance institution shall carry out investment research on the fundamentals, the industry condition, the company situation, the financial conditions, and other aspects of the equity assets to be invested in, and it shall create formal investment research reports.1080 An insurance institution shall strengthen the management of market risks in equity investment, analyze the fluctuations in the value of equity investment and risk exposure by using the value at risk (VAR) and other quantitative analysis methods, regularly carry out pressure test and scenario analysis, and appropriately adjust the investment strategies according to the impact of the test results on solvency and asset-liability management. An insurance institution shall set concentration indicators for the industry and individual securities on the basis of the equity investment, closely monitor relevant risk exposures, and develop risk control measures under the requirements of asset-liability management and asset allocation so as to ensure that risks are controlled within its scope of risk tolerance and capital coverage. An insurance institution shall standardize the acts of participation in the subscription, new issue, and placement of stocks, among others, to prevent liquidity risks arising from the concentration risks and the lock-up period.1081 Resolutions of investment in stocks and stock funds shall be subject to deliberation under the company’s investment decision-making and authorization system, and decision makers shall fully understand the investment research reports and relevant information on the listed company. Equity investment resolutions shall conform to the provisions of the supervision institutions and the investment guidelines of the company, effectively evaluate and control the relevant risks, and ensure the professionalism and prudence during the decision-making process.1082 (c) Control of investment implementation An insurance institution shall review the investment instructions and shall only implement them after confirming their legitimacy, compliance, and completeness. For the execution of investment in stocks and stock funds, a comprehensive centralized transaction management system shall be established, including but not limited to:1083 (1) implementing the centralized trading system and strictly separating investment decision-making from implementation of transactions; (2) the recipients of transaction instruction shall have appropriate transaction authority of equity investment;

1079 1080 1081 1082 1083

Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15.

793

REGULATION OF USE OF INSURANCE FUNDS

(3) ensuring the separation of investment decision-making from implementation of transactions by establishing a centralized trading room, implementing the management of access control, and preventing others from entering without approval. Establishing the centralized trading monitoring system, early warning system and feedback system; monitoring the fixed-line telephone, network communication, and other items in the trading room within the time of transaction execution; and setting trading passwords for trading machines and making regular changes; and (4) establishing effective supervision and restriction mechanisms for traders, closely monitoring the enquiry and other key links in the process of transactions, and preventing traders from taking relevant materials on investment out of the trading room. An investment instruction shall be issued through the company’s uniform internal investment transactions management system and be subject to the inspection under the rules on control of system risks and review of instruction. For instructions to be issued manually, reviewers shall ensure that such instructions are reviewed under relevant inspection requirements and the internal rules of the company and that written review records are maintained. Instructions for investment over the quota shall be subject to the approval and authorization of the authorizer for the corresponding quota. An insurance institution shall specify the approval authorization mechanism for giving up placement and other transactions.1084 An insurance institution shall fairly treat the entrusted funds, including account setting, research support, resource allocation, personnel management, and system setting, among others, to ensure that various accounts and investment portfolios have fair opportunities for research information, investment suggestions, and transaction execution. In the trading system, a fair trade module shall be activated, and the information on the setting of the parameters of the fair trade module shall be obtained. Similar investment instructions for different investment accounts at the transaction level shall be implemented under the fair trade execution principles of time priority, price priority, and proportional distribution. An insurance institution shall arrange independent equity investment managers according to the nature of accounts or portfolios to strictly prevent stock purchase at high prices through different accounts to support such high prices, reverse operation, and other acts of tunnelling. An insurance institution shall strengthen the management of all forms of communication tools, take collective custody of the mobile communication tools of investment managers and traders during the trading hours, monitor the MSN, QQ, and other instant communications tools and e-mails. It shall also keep the history and preserve the aforesaid communication materials and data for five years or longer. An insurance institution shall establish a management system for declaration, registration, review, and handling of stock investment by stocks and stock fund investment managers, and it shall report the information on the aforesaid system and persons relevant to stock investment and the changes therein to the CBIRC. An insurance institution shall strengthen professional ethics 1084 Ibid., art.16.

794

REGULATION OF USE OF INSURANCE FUNDS

education, develop rules on the recordation of stock accounts of persons relevant to stock investment and their close relatives, and prevent operational risks and moral ethics risks.1085 The corresponding investment contracts used by an insurance institution during the investment process shall be developed and reviewed by the investment department so as to ensure the consistency between the information on investment business and the investment resolutions. Such contracts shall be reviewed by the law and risk departments so as to ensure that the terms of the contract conform to the laws and regulations and specify the rules on the modification of the model contracts and the approval procedures.The contracts of investment in stocks and stock funds, contracts on placement and underwriting of new shares, and other documents shall be subject to the review by relevant departments so as to ensure that the information on the investment business is consistent with the investment resolutions, that the terms of the contracts conform to the laws and regulations, and that reporting is conducted under the supervision requirements.1086 Persons taking relevant posts shall be responsible for handling the formalities for signing relevant contracts and agreements and affixing seals to certificates and strictly complying with the relevant provisions on contract management.1087 After the close of transaction every day, traders shall review in a timely manner various transaction receipts generated during the process of transaction, and file them under the rules and provisions of the company in a timely manner to completely keep the investment instructions, report for signature for investment, enquiry list, bank transfer instructions, and other transaction documents safe. In the event of any inconsistency between the amount of subscription and the results of transactions, persons taking relevant posts shall take measures and conduct internal and external communication in a timely manner so as to prevent any impact on subsequent transactions.1088 (d) Post-investment management An insurance institution shall keep tracking the market information of the stocks held and the data on the acts of the listed companies. In case there are any major events that may lead to fluctuations of stock prices of listed companies, the research department shall give risk warnings and pre-warnings in a timely manner.1089 An insurance institution shall establish a quota management system, including transaction quota, risk limits, and stop-loss limits for investment in stocks and stock funds; develop relevant rules and strictly implement them; and control the trading risks within the controllable scope.1090 An insurance institution shall establish a monitoring, prevention, and control mechanism; conduct key monitoring of such illegal acts as insider trading, tunnelling, and price manipulation; and disclose and report in a timely manner relevant 1085 1086 1087 1088 1089 1090

Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

795

REGULATION OF USE OF INSURANCE FUNDS

information on such circumstances as high proportion of investment in a same listed company, abnormal trade price, frequent reverse transactions, or large number of transactions, if any, under relevant provisions.1091 An insurance institution shall specify the functions of the posts for post-management of investment in stocks and stock funds, track and collect data on corporate actions, and make timely adjustment to the information of the trading system on ex-dividend day, dividend payment day, prospectus announcement day of new shares, among others.1092 An insurance institution shall specify the provisions on the administration of such links as the acquisition, filing, safekeeping, and consulting of all documents and materials relevant to investment in stocks and stock funds and the duties of relevant personnel.1093 Under the relevant provisions of the supervision institution on investment in stocks and stock funds, reports, statements, documents, and materials shall be submitted to the supervision institution in a timely, authentic, accurate, and complete manner.1094 12.26 The scoring supervision over internal control and regulatory compliance in the use of insurance funds In section 12.25 of this chapter, we considered the internal control of insurance funds. In this section, we consider the quantitative supervision on internal control and regulatory compliance. To enhance the effective supervision over regulatory compliance and internal control in the use of insurance funds, promote quantitative supervision and categorized supervision, and prevent investment risks, the Notice of the CIRC on Issuing Rules for the Scoring Supervision over Internal Control and Regulatory Compliance in the Use of Insurance Funds was issued on 22 June 2014 and became effective on the same day (hereinafter, the Rules 2014).1095 The “scoring of internal control and regulatory compliance in the use of insurance funds” means a process during which the CBIRC gives scores and continuously oversees insurance institutions through review, summarization, and analysis of the records, information, and data on their internal control and regulatory compliance in the use of funds, by conducting on-site inspection and off-site supervision. For the purpose of these Rules 2014, “insurance institutions” means insurance group (or holding) companies, insurance companies, and insurance asset management companies.1096

1091 Ibid., art.23. 1092 Ibid., art.24. 1093 Ibid., art.25. 1094 Ibid., art.26. 1095 Bao Jian Fa No. 54 [2014] (see accessed on 16 October 2020). 1096 The Notice of the CIRC on Issuing Rules for the Scoring Supervision over Internal Control and Regulatory Compliance in the Use of Insurance Funds 2014, art.2.

796

REGULATION OF USE OF INSURANCE FUNDS

12.26.1 Scoring methods The scoring system is adopted for the scoring of internal control and regulatory compliance in the use of insurance funds, and the benchmark score during each evaluation period is 100 points.1097 The CBIRC shall, on the basis of the benchmark score, add or deduct points based on the internal control operation, continuous regulatory compliance and regulatory violations of insurance institutions, and determine their final scores on a consolidated basis.1098 The CBIRC shall evaluate insurance institutions’ internal control and regulatory compliance in the use of funds twice each year, and the evaluation period shall be 1 January to 30 June and 1 July to 31 December each year respectively.1099 Where, within the evaluation period, an insurance institution is cited for violating any of the following regulatory measures by the CBIRC for the use of funds, points shall be deducted according to the following principles:1100 (1) Where the insurance institution fails to submit electronic data, statements, and materials through the insurance asset management and supervision information system and the information registration platform designated by the CBIRC according to regulatory provisions in a timely, accurate, and complete manner, or fails to submit the relevant reports to the CBIRC according to regulatory provisions in a timely, accurate, and complete manner, and is ordered to submit the report or make supplementation, one point and two points shall be deducted for each item each time respectively. (2) Where the insurance institution is ordered to disclose the relevant information in a timely, accurate, and complete manner, since the disclosed information is insufficient, or the custodian fails to diligently disclose information to the beneficiary of the investment plan, the investor of the asset management product, or the relevant party according to regulatory provisions, three points shall be deducted each time. (3) Where the insurance institution is given a risk warning letter or subject to a risk warning interview for the reason that its solvency adequacy ratio is lower than 100% in the moderate pressure test on the use of funds conducted in accordance with regulatory provisions, or its liquidity is insufficient, or for any other reason, four points shall be deducted each time. (4) Where any director, supervisor, senior manager, or person responsible for investment risks is subject to a regulatory interview since he or she is liable for the company’s violation of law or regulation, which has not caused investment losses or reached the penalty standards, five points shall be deducted each time; if any to-be-appointed director, supervisor, or senior manager that has temporarily been in charge for three months or more 1097 1098 1099 1100

Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8.

797

REGULATION OF USE OF INSURANCE FUNDS

(5)

(6)

(7) (8)

before obtaining the office qualification is subject to a regulatory interview, five points shall be deducted for each person each time. Where the recordation of investment capacity is suspended for the reason that the eligibility of the person responsible for investment risks fails to comply with regulatory provisions, or any other reason, five points shall be deducted each time. Where the issuance of asset management products is suspended, or equity or real estate investment is ceased due to the violation of any fund use policy without causing losses or any other significant impact, six points shall be deducted each time. Where the insurance institution is circulated a notice of criticism in the industry due to the violation of the fund use policy, seven points shall be deducted each time. Where the insurance institution is issued a regulatory letter, is ordered to increase internal regulatory compliance check, is ordered to make correction or make correction within a prescribed time limit, or is ordered to take disciplinary actions against the relevant persons, suspend the pilot asset management product business, restrict the fund use form or proportion, or is taken against any other regulatory measure, eight points shall be deducted each time.

Where an insurance institution is subject to any of the following administrative penalties by the CBIRC or is subject to criminal liability by the judicial authority due to any violation of law or regulation on the use of funds within the evaluation period, points shall be deducted under the following principles:1101 (1) Where the insurance institution is given a fine penalty, or the director, supervisor, senior manager, or person responsible for investment risks is given a warning or a fine penalty due to any violation of law or regulation, ten points shall be deducted each time. (2) Where the director, supervisor, senior manager, or person responsible for investment risks is liable for the company’s violation of law or regulation, is ordered to make adjustments, or is revoked from the office qualification or occupational qualification, 12 points shall be deducted each time. (3) Where the director, supervisor, senior manager, or person responsible for investment risks is prohibited from entering the market within a certain period or forever, since he or she is liable for the company’s violation of law or regulation, 15 points shall be deducted for each person each time. (4) Where the insurance institution is punished by being ordered to cease the new business, or restrict the business scope, or the license was revoked for some fund use business, or the director, supervisor, senior manager, or person responsible for investment risks has criminal liability for the company’s violation of law or regulation, 20 points shall be deducted each time.

1101 Ibid., art.9.

798

REGULATION OF USE OF INSURANCE FUNDS

Where an insurance institution is cited for violating several regulatory measures or administrative penalties or is subject to criminal liability for the same violation of law or regulation, the points deducted shall be calculated based on the maximum value, and points shall not be deducted repeatedly. Where an insurance institution is cited for violating the same regulatory measure or administrative penalty, or is subject to criminal liability for different violations of law or regulation, the points deducted shall be calculated on a consolidated basis.1102 Where an insurance institution may delay the submission of relevant data, statements, information, and reports or delay information disclosure under reasonable grounds as recognized by the CBIRC, points may not be deducted. Where the investment proportion exceeds the supervision proportion due to emergency or any other objective reason, and the insurance institution fulfils the reporting obligation and adjusts the investment proportion within the time limit prescribed by the CBIRC, points may not be deducted. Where an insurance institution that violates any law or regulation in the previous evaluation period has any other violation of law or regulation in this evaluation period, double points shall be deducted.1103 Where an insurance group (or holding) company or an insurance company authorizes an insurance asset management institution to make investment, and specifies in a contract, agreement or any other official document that the insurance asset management institution shall assume regulatory compliance management and control functions, the points of such insurance asset management institution shall be deducted, but if the regulatory violation in the authorized investment is caused due to the provision of false data by the insurance group (or holding) company or insurance company, the points of the insurance group (or holding) company or insurance company shall be deducted. If it is not prescribed in a contract, agreement or any other official document that the insurance asset management institution shall assume the regulatory compliance management and control functions, the points of the insurance group (or holding) company or insurance company shall be deducted. Where an insurance group (or holding) company or an insurance company authorizes any other investment management institution other than the insurance asset management institution to make investment, the points of the insurance group (or holding) company or insurance company shall be deducted.1104 Where an insurance institution falls under any of the following circumstances, corresponding points shall be added to the benchmark score.1105 (1) Two points shall be added if no matter as listed in article 8 or 9 occurs within the latest two consecutive evaluation periods, and four points shall be added if no matter as listed in article 8 or 9 occurs within the latest three consecutive evaluation periods.

1102 1103 1104 1105

Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13.

799

REGULATION OF USE OF INSURANCE FUNDS

(2) Two points shall be added if the insurance institution becomes a member of the Insurance Association of China within the evaluation period. (3) Two points shall be added if an independent third-party intermediary is retained to complete a comprehensive special audit on the internal control, regulatory compliance, and risk status in the use of insurance funds within the evaluation period, and two more points shall be added if clean opinions are issued. (4) Six points shall be added if all investment assets are subject to custody. (5) Six points shall be added if five-level investment asset risk classification rules and other post-evaluation and tracking rules for project investment assets are established according to regulatory standards, and an independent third-party intermediary conducts an audit and issues clean opinions. 12.26.2 Operating procedures The CBIRC shall establish supervision archives on insurance institutions’ internal control and regulatory compliance in the use of funds so as to record the adding and deduction of points and evaluation results in the insurance institutions’ use of funds.1106 Within the evaluation period, the CBIRC shall, in a timely manner, record and summarize the matters on the deduction of points of insurance institutions, the regulatory measures taken, and the deducted points, and the matters on the adding of points, within ten working days after the end of each month. The CBIRC shall notify its deduction and adding of points to the relevant insurance institutions, and verify and confirm the matters with insurance institutions.1107 Where an insurance institution has any objection to the matters on the deduction of points each month and the scoring and evaluation result within this evaluation period, it may submit a written statement to the CBIRC within ten working days after receiving the Notice. The CBIRC shall give a written reply within ten working days after receiving the statement of the insurance institution.1108 Within 30 working days after the end of the evaluation period, the CBIRC shall summarize and review the scoring results of all insurance institutions and record the results in supervision archives.1109 Within 40 working days after the end of the evaluation period, the CBIRC shall notify its scoring and evaluation results to insurance institutions in writing.1110 12.26.3 Use of scoring results The CBIRC will evaluate and categorize the internal control and regulatory compliance of insurance institutions in the use of funds based on the internal control and regulatory compliance scoring results of insurance institutions.1111 1106 1107 1108 1109 1110 1111

Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19.

800

REGULATION OF USE OF INSURANCE FUNDS

Grade A: 95 points or more. The insurance institution has strong ability in the internal control, regulatory compliance management, and risk control in the use of funds. Grade B: no less than 80 points and no more than 95 points. The insurance institution has relatively strong ability in the internal control, regulatory compliance management, and risk control in the use of funds. Grade C: no less than 60 points and no more than 80 points. The insurance institution has relatively weak ability in the internal control, regulatory compliance management, and risk control in the use of funds. Grade D: no more than 60 points. The insurance institution has weak ability in the internal control, regulatory compliance management, and risk control in the use of funds. Where the fund use business of an insurance institution falls under any of the following circumstances within the evaluation period, the CBIRC may directly determine its grade as Grade C or D within this evaluation period.1112 (1) The submitted regulatory information, data, statements, reports, investment plan registration materials, and external disclosed information have any false records, misleading statements, or major omissions, except that the documents provided by the investee or an independent third party in the investment plan registration materials have any false records and the insurance asset management institution is able to prove it is faultless. (2) The insurance institution has any violation of regulatory provisions and fails to make correction after being given a supervision warning or fails to do so within the prescribed rectification period in supervision. (3) The insurance institution misappropriates insurance funds. (4) The insurance institution fails to use insurance funds according to the client’s investment instruction, contract, or written agreement. (5) The insurance institution is ordered to conduct rectification in accordance with law or is subject to takeover or any other risk disposal measure taken by the China Insurance Security Fund Co., Ltd. (6) Any other circumstance as recognized by the CBIRC. Where an insurance institution fails to correct any circumstance as listed in this article, or the CBIRC has not revoked the corresponding regulatory measure taken against the insurance institution within the next evaluation period, its grade in this evaluation period shall continue to be used. Where an insurance institution is rated as Grade A or B according to its score in internal control and regulatory compliance within this evaluation period, its grade may be confirmed only if it continually reaches or exceeds the points of such grade in the following evaluation period. The grade of the insurance institution shall be the temporarily determined one before confirmation. Where the grade of an insurance institution after the end of the next evaluation period is lowered, the CBIRC would

1112 Ibid., art.20.

801

REGULATION OF USE OF INSURANCE FUNDS

downgrade its grade in the previous evaluation period by one level and confirm such a grade.1113 The CBIRC may, on a regular basis or from time to time, notify insurance institutions’ internal control and regulatory compliance evaluation results in the use of funds to the industry.1114 12.26.4 Supervision and administration The CBIRC will take internal control and regulatory compliance evaluation results in the use of insurance funds as the prudent conditions for insurance institutions’ recordation of investment management capacity. Where an insurance institution’s internal control and regulatory compliance in the use of funds is rated as Grade A (temporarily determined as Grade A) in the latest consecutive four evaluation periods, it may, upon application, be included in the pilot program on innovative businesses in priority.1115 The CBIRC will list insurance institutions rated as Grade C and D as major supervision objects. The CBIRC may increase on-site and off-site inspections on insurance institutions rated as Grade C and D and take such regulatory measures as restricting fund use channels, scope, or proportion against such institutions.1116 An insurance institution shall, in a timely manner, prepare rectification measures for the issues that incurred the deduction of points, and the CBIRC would conduct follow-up tracking of the rectification.1117 Where, within the evaluation period, an insurance institution is subject to any administrative disciplinary action, regulatory measure, penalty measure, or any other measure once again due to its ineffective rectification within the prescribed time limit, or falls under any other circumstance where its evaluation result is affected, the CBIRC shall make dynamic adjustments to its evaluation results in a timely manner.1118 The internal control and regulatory compliance evaluation result in the use of insurance funds shall be mainly used by regulatory authorities, and no insurance institution shall use scoring and evaluation results for such commercial objectives as advertising, publicity, and marketing, except that the counterparty or partner of an insurance institution requires the understanding of its internal control and regulatory compliance evaluation result in its use of funds for non-commercial objectives.1119 The CBIRC shall, in light of insurance institutions’ internal control and regulatory compliance in the use of insurance funds in the past two years, determine their first score. Where an insurance institution has been established for no more than

1113 1114 1115 1116 1117 1118 1119

Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27.

802

REGULATION OF USE OF INSURANCE FUNDS

two years, the CBIRC shall determine its first score in light of its internal control and regulatory compliance in the use of insurance funds since its establishment.1120 These Rules 2014 shall, by reference, apply to the branch companies of foreignfunded insurance companies and branch companies of foreign-funded reinsurance companies that engage in the insurance fund use business.1121 12.27 Five-grade risk-based insurance asset classification To improve the post-investment management of insurance funds and evaluate asset risks in a scientific and prudential manner, the CIRC released the Notice of the CIRC on the Trial Implementation of the Guidelines for the Five-Grade Risk-based Insurance Asset Classification on 17 October 2014 which became effective on the same day (hereinafter, the Guidelines 2014).1122 These Guidelines 2014 were formulated to strengthen the comprehensive risk management of insurance group (holding) companies and insurance companies (hereinafter, insurance institutions), improve the usage efficiency of insurance funds, and improve asset quality.1123 “Risk-based asset classification” means the process under which investment assets of insurance institutions are divided into different grades according to the degree of risk. The assets for which risk classification is required include the assets under the investment of insurance institutions, excluding those measured at their fair values and with their fluctuations included in the current profits and losses or owner’s equities.1124 To evaluate the asset qualities of insurance institutions, assets shall be divided into five categories on the basis of their risks, namely, normal, concerned, inferior, doubtful, and loss categories, and the last three categories are collectively referred to as non-performing assets. Core definitions of classification standards:1125 Normal category: There is no sign of impairment of assets, funds can be normally recovered, and there are no sufficient reasons to doubt the occurrence of losses to assets or income. The basic feature thereof is “all going well”. Concerned category: There is no sign of significant impairment of assets, but there are some factors which may cause losses to assets or income. The basic feature thereof is “latent defect”. Inferior category: There has been signs of significant impairment of assets, and even if all possible measures are taken, minor losses are likely to be incurred to assets. The basic feature thereof is “patent defect and minor losses”. 1120 Ibid., art.28. 1121 Ibid., art.29. 1122 Bao Jian Fa No. 82 [2014] (see accessed on 16 October 2020). 1123 The Notice of the CIRC on the Trial Implementation of the Guidelines for the Five-Grade Riskbased Insurance Asset Classification 2014, art.1. 1124 Ibid., art.2. 1125 Ibid., art.3.

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Doubtful category: Assets have been significantly impaired, and even if measures are taken, there will surely be great losses. The basic feature thereof is “there must be losses, and the losses are great”. Loss category: After all possible measures or all necessary legal procedures are taken, all assets are lost, or only a very small part thereof can be recovered. The basic feature thereof is “fundamental loss”. The classification of various assets in these Guidelines 2014 shall be conducted in a prudential and meticulous manner according to the basic requirements of core definitions and in consideration of actual asset information.1126 Risk-based asset classification shall reasonably evaluate asset risks and actual values by centring on the degree of safety of asset values, basing evaluation on investment costs, and observing the following principles:1127 (1) Risk principle. Risk-based classification shall take the internal risks of insurance assets as the primary basis and take the severity of the losses incurred or expected to occur as a primary classification standard. (2) Principle of truthfulness. All kinds of information on insurance assets shall be widely collected. The risk status of underlying assets of debtors and creditors shall be analyzed in an in-depth manner through the transmission method, and classification shall be conducted in strict accordance with classification standards, methods, and procedures so as to fully estimate the actual and potential risk statuses and comprehensively and truthfully reflect the degree of risk of insurance assets. (3) Principle of combining qualitative and quantitative analyses. Qualitative and quantitative-combined analyses and evaluation shall be conducted on the risk-based insurance asset classification so as to divide risk categories in a scientific and reasonable manner. Where it is difficult to judge the sign of impairment or whether the accuracy of measurement thereof is affected, prudential and professional judgments and reliable classification methods shall be adopted. (4) Principle of dynamics. In case of any risk factors that may affect the safety of insurance assets, the relevant assets shall be re-recognized and reclassified at appropriate times in a dynamic manner, and measures shall be taken to prevent and resolve risks. Five-grade risk-based asset classification shall achieve the following goals:1128 (1) To reveal the actual value and degree of risk of an insurance asset and reflect asset quality in a comprehensive, true, and dynamic manner. (2) To discover the problems existing during the usage, management, and monitoring of insurance funds and strengthen the risk management of the utilization of insurance funds.

1126 Ibid. 1127 Ibid., art.4. 1128 Ibid., art.5.

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(3) To provide a reference for judging whether the asset impairment reserves set aside by an insurance institution are sufficient. 12.27.1 Classification standards for fixed-income assets The term “fixed-income assets” means the assets featured by specified durations and the repayment of interest and principal at assumed interest rates and in scheduled forms. The term also refers to the assets whose main value depends on changes in the value of the assets, and other financial assets with fixed income attributes.1129 Fixed-income assets exist primarily in the following forms: infrastructure debt investment plans, real estate debt investment plans, and holding of mature bonds of enterprises (companies), as well as the project asset support plans, credit asset-backed securities, securities companies’ special asset management plans, commercial banks’ financial management products, collective fund trust plans, and insurance asset management products, among others, with the feature of fixed-income assets.1130 The five-grade risk-based classification of fixed-income assets is defined as follows:1131 Normal category: A debtor and all relevant parties to a transaction can perform a contract or agreement, and there are not sufficient reasons to doubt the principal and income of the investment of an insurance institution cannot be recovered on schedule in the full amount. Concerned category: Though a debtor and all relevant parties to a transaction have the repayment ability for the time being, there are some factors which may exert adverse impacts on the repayment. Inferior category: There are some obvious problems in a debtor’s repayment ability, and the principal and interest of the investment of an insurance institution cannot be fully repaid by completely depending on the normal business income of the debtor, and even if credit enhancement measures are executed, there may be some losses incurred. Doubtful category: A debtor cannot repay the principal and interest of the investment of an insurance institution in the full amount, and even if credit enhancement measures are executed, there will be surely some large losses incurred. Loss category: After all possible measures or all necessary legal procedures are taken, the principal and interest of the investment of an insurance institution remain unable to be recovered, or only a very small part of them can be recovered. In the process of the risk-based classification of fixed-income assets, the following factors shall be primarily taken into consideration:1132 1129 1130 1131 1132

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9.

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(1) (2) (3) (4) (5) (6)

The credit status of the issuer and the debtor. The debtor’s repayment ability. Assets’ credit enhancement measures. Legal responsibility for the repayment of assets. Internal management and control of the debtor and the issuer. Usage of project funds and cash flow.

Credit status includes reputation, credit rating, credit records, repayment records, and repayment willingness, among others. Repayment capabilities include financial condition, profitability, and non-financial factors which may affect repayment, among others. In the process of the classification of fixed-income assets, the number of days after the assets or income thereof become overdue shall be taken as an important indicator for asset classification.1133 (1) If the principal or interest thereof has been overdue for 60 days or less, the corresponding assets shall be classified as the inferior category. (2) If the principal or interest thereof has been overdue for more than 60 days but less than 180 days (inclusive), the corresponding assets shall be classified as the doubtful category. (3) If the principal or interest thereof has been overdue for more than 180 days, the corresponding assets shall be classified as the loss category. The number of days after the principal or interest thereof becomes overdue shall commence from the date as agreed on in a contract, and shall, where a grace period is agreed on in the contract, commence upon the expiration of the grace period For the purpose of the classification of infrastructure debt investment plans, real estate debt investment plans, project asset support plans with the feature of creditor’s rights and other assets, the quality and risk status of target underlying assets shall be analyzed and evaluated through the transmission method, and, at the same time, the qualification of debtors and risk control systems, product transaction structures, repayment sources, credit enhancement measures and other factors shall be taken into consideration.1134 First, if the underlying assets represent a single project, the classification standards are as follows: (1) Normal category:The following conditions shall be met concurrently: (i) Target underlying assets have clarified ownership and clear boundary, integrated form, and complete elements; (ii) Target underlying assets have sustainable and stable cash flow or specified expected income; (iii) Product transaction structures are clear and simple; (iv) The debtor operates in good condition and has sufficient repayment capacities, complete risk control measures, or powerful product credit enhancement measures. (2) Concerned category: Any of the following circumstances occurs: (i) There are small flaws in the ownership, boundary, form, and elements of target 1133 Ibid., art.10. 1134 Ibid., art.11.

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underlying assets; (ii) Target underlying assets have unstable cash flow, or there is certain uncertainty in expected income; (iii) Though the debtor has repayment capacities for the time being, its internal business management or financial conditions have changed and may exert adverse impacts on repayment. (3) Inferior category: Any of the following circumstances occurs: (i) Target underlying assets are deteriorating in quality, expected income is considerably uncertain, and there has been no cash flow; there are obvious problems in the debtor’s repayment capacities, and the principal and interest of the investment of an insurance institution cannot be repaid in the full amount by simply relying on the normal operating income thereof, and certain losses are possible even after the surety is executed; (ii) The recovery of the principal or interest or the investment of the insurance institution has been overdue for 60 days or less. (4) Doubtful category: Any of the following circumstances occurs: (i) No repayment is made in the full amount after the product becomes mature, and the losses are relatively large; (ii) Target underlying assets are severely deteriorating in quality and severely devaluated, and the debtor cannot repay the principal and interest for the investment of the insurance institution in the full amount, and even if a security is executed, there will be surely large losses incurred; (iii) The principal or interest for the investment has been overdue for more than 60 days but less than 180 days (inclusive). (5) Loss category: Any of the following circumstances occurs: (i) Target underlying assets have been lost or devalued, and, after all possible measures or all necessary legal procedures are taken, the debtor remains unable to repay matured principal and income; (ii) The principal or interest for the investment has been overdue for more than 180 days. Second, where underlying assets represent multiple projects, insurance institutions may conduct asset classification by reference to the aforesaid standards. An insurance institution without the corresponding capabilities may hire a third-party professional institution to evaluate the value of corresponding assets and conduct classification in accordance with the following standards: (1) Normal category: Evaluation values are not lower than investment costs, and there is no adverse factor which may affect investment. (2) Concerned category: Though evaluation values are not lower than investment costs, adverse factors which may affect investment are estimated to exist. (3) Inferior category: Evaluation values are lower than investment costs, and there are certain investment risks, with the loss rate expected to be within 30%. (4) Doubtful category: Evaluation values are lower than investment costs, and there are relatively large investment risks, with the loss rate expected to be between 30% (inclusive) and 80%. 807

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(5) Loss category: Evaluation values are lower than investment costs, and there surely will be investment losses, with the loss rate expected to be 80% or more. Expected loss rate = [(investment costs-evaluation values)/investment costs] ×100%. Where the mature bonds of financial enterprises (companies) and non-financial enterprises (companies), among others, are held for the purpose of long-term investments, classification shall be conducted through the risk analysis method according to bond durations, issuers’ credits, and credit enhancement measures and other circumstances. The classification standards are as follows:1135 (1) Normal category: Bonds are within their duration, and there are not sufficient reasons to doubt that the bond principal and interest cannot be fully repaid on schedule. There are generally the following features: normal operation of the bond issuer, reasonability of main business indicators, and sufficient cash flow. (2) Concerned category: A bond issuer has the capability to repay bond principal and interest for the time being, but there are some factors which may exert adverse impacts on repayment. There are generally the following features: changes in macro economy, industry, or market or changes in the bond issuer’s internal business management or financial condition, have adverse impacts on the bond issuer’s normal operation, but there has been no obvious problem yet in repayment capabilities. (3) Inferior category: Any of the following circumstances occurs: (i) Bonds are within their duration, there are obvious problems in the bond issuer’s repayment capacities, and even if credit enhancement measures are executed, there might be some losses incurred; (ii) The recovery of the principal and interest for the bond investment has been overdue for 60 days or less. There are generally the following features: a bond issuer has relatively big problems in operating condition or financial condition, faces difficulties in payment and can only with difficulty obtain new funds. (4) Doubtful category: Any of the following circumstances occurs: (i) Repayment problems appear after the maturity of bonds, and even if credit enhancement measures are executed, there will surely be relatively large losses incurred; (ii) Though bonds are within the duration, they have been declared in default; (iii) The principal or interest for the bond investment has been overdue for more than 60 days but less than 180 days (inclusive). There are generally the following features: A bond issuer has deteriorated in operating condition or financial condition and has been suspended or semi-suspended for more than six consecutive months, and their sources of income are very unstable. (5) Loss category: Any of the following circumstances occurs: (i) A bond issuer has been bankrupt or has been closed down, though not bankrupt, and, 1135 Ibid., art.12.

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after all possible measures or all necessary legal procedures are taken, the bond issuer still cannot repay the matured principal and income; (ii) A bond issuer cannot repay matured debts, the principal or interest for the bond investment has been overdue for more than 180 days, and the confirmed funds cannot be recovered. The classification of the credit asset-backed securities, securities companies’ special asset management plans, commercial banks’ financial management products, collective fund trust plans, insurance asset management products, and other financial products with the features of fixed-income assets shall primarily take into consideration the reputation, credit rating, internal risk control system, product transaction structures, product credit enhancement measures, and other factors. At the same time, it shall take into consideration the quality and risk status of target underlying assets through the transmission method. The specific classification may be conducted by reference to the standards as listed in article 11 of the Guidelines 2014.1136 12.27.2 Classification standards for equity assets For the purpose of these Guidelines, “equity assets” primarily include stock equities and equity financial products. “Equities” means the equities of a non-listed company invested in and held by an insurance institution as an investor. “Equity financial products” means equity investment-type financial products invested in by insurance institutions and sponsored and established by equity investment management institutions, including unlisted equity investment funds, infrastructure equity investment plans, real estate equity investment plans, equity collective fund trust plans, equity project asset support plans, and equity insurance asset management products, among others.1137 The risk-based equity investment classification is as follows:1138 First, where the fair market value of the equities of an invested company is obtainable, classification shall be conducted according to the lower of investment costs and the fair market value. The principles for determining the fair market value are as follows: if there is an active market for such equities, the market price thereof shall be the fair market value; if there is no active market for such equities, but there is an active market for similar equities, the fair market value of such equities shall be determined by reference to the market price of the relevant similar equities. It is recommended to select the equities of a listed company as similar equities. The reference standards are as follows: indicators in such aspects as the industry to which the enterprise belongs, and the total assets, net assets, earnings per share, and rate of return on net assets are basically identical. (1) Normal category: The fair market value is not lower than investment costs, and there is no adverse factor which may affect equity investment. 1136 Ibid., art.13. 1137 Ibid., art.14. 1138 Ibid., art.15.

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(2) Concerned category: Though the fair market value is not lower than investment costs, it is estimated that there are adverse factors which may affect equity investment. (3) Inferior category: The fair market value is lower than investment costs, and there are certain equity investment risks, with the loss rate expected to be within 30%. (4) Doubtful category: The fair market value is lower than investment costs, and there are relatively large equity investment risks, with the loss rate expected to be between 30% (inclusive) and 80%. (5) Loss category: The fair market value is lower than investment costs, and there will surely be equity investment losses incurred, with the loss rate expected to be 80% or more. Expected loss rate = [(investment costs-fair market value)/investment costs] ×100%. Second, where the fair market value of the equities of an invested company cannot be obtained, the invested company’s operating condition, financial condition, profitability, net assets, and other factors as well as the equity withdrawal mechanism arrangements shall be taken into comprehensive consideration to conduct an overall evaluation of the risk status and expected loss severity thereof. (1) Normal category:The following conditions shall be met concurrently: (i) The total net assets of the shares held are not lower than investment costs; (ii) The invested enterprise operates in good condition, has strong profitability, and distributes dividends as agreed upon; (iii) Equities have explicit and effective equity withdrawal mechanism arrangements. (2) Concerned category: The following conditions shall be met concurrently: (i) Total net assets of the shares held are not lower than investment costs; (ii) The invested enterprise has ordinary profitability and has been unable to normally distribute dividends as agreed upon, or the equity withdrawal mechanisms are ambiguous or have weak effectiveness. (3) Inferior category: Any of the following circumstances occurs: (i) Total net assets of the shares held are lower than investment costs, with the loss severity expected to be within 30%; (ii) The invested enterprise has relatively poor profitability, has big problems in operation, and cannot distribute dividends as agreed upon for three consecutive years. If, for the equity investment of an enterprise that has newly opened businesses (for three consecutive years or more), the total net assets of the shares held are lower than investment assets, but the invested enterprise operates in good condition and has good business prospects, and the corresponding equity investment may be classified as concerned category. (4) Doubtful category: Any of the following circumstances occurs: (i) The total net assets of the shares held are lower than investment costs, with the loss severity expected to be between 30% (inclusive) and 80%; (ii) The invested enterprise has any business crisis or severe violation of regulations, and the regulatory department has given it a warning or notifies it to make rectifications; (iii) The invested enterprise is insolvent, but the insolvency difference is small. 810

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(5) Loss category: Any of the following circumstances occurs: (i) The total net assets of the shares held are lower than investment costs, with the loss severity expected to be 80% or more; (ii) The invested enterprise is insolvent, but the insolvency difference is large; (iii) The invested enterprise has been declared bankrupt, taken over, or revoked, or stopped business operation and exists in name only, and has entered liquidation procedures, among others. Expected loss severity = [(investment costs – total net assets of the shares held)/ investment costs] × 100%, of which, total net assets of the shares held = net asset value per share × number of the shares held by an insurance institution. The factors in item 1 of the aforesaid classification standards may not be taken into consideration until the lapse of two full years from the date when an equity investment is made. The classification of equity financial products is primarily conducted through the transmission method, which puts emphases on the evaluation of quality and risk status of an enterprise towards which equity investment is made, and, at the same time, takes consideration of the credit status, investment management capabilities, risk control measures, investment equity protection mechanisms, equity withdrawal mechanism arrangements, and other factors so as to reasonably determine the risk classification of such products.1139 First, where underlying assets represent a single target enterprise, the classification standards are as follows: (1) Normal category:The following conditions shall be met concurrently: (i) The target enterprise operates in good condition, has strong profitability, and can distribute dividends as agreed upon; (ii) The equity investment management institution can perform the investment contract or agreement and has good business performance; (iii) The equity investment management institution has made expected-to-be-feasible equity withdrawal mechanism arrangements. (2) Concerned category: Any of the following circumstances occurs: (i) The target enterprise has ordinary profitability and has been unable to normally distribute dividends as agreed upon; (ii) Though the equity investment management institution is able to perform the investment contract or agreement for the time being, there are some factors which may exert adverse impacts on the performance of the contract or agreement; (iii) The equity withdrawal mechanisms arranged by the equity investment management institution are not explicit or have weak effectiveness. (3) Inferior category: Any of the following circumstances occurs: (i) The subject enterprise has poor profitability, has big problems in operation, has a deteriorated financial condition, and has failed to distribute dividends as agreed upon for three consecutive years; (ii) The equity investment management institution has a certain probability of default or has been unable

1139 Ibid., art.16.

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to normally perform the investment contract or agreement, which may cause certain losses to the equity investment of the insurance institution, with the loss severity expected to be within 30%. (4) Doubtful category: Any of the following circumstances occurs: (i) The subject enterprise encounters an operation crisis, severely deteriorates in financial condition, or has any major regulatory violation, and the regulatory department has given it a warning or notified it to make rectifications; (ii) The target enterprise is insolvent, but the insolvency difference is small; (iii) The equity investment management institution has a relatively great possibility of default or is basically unable to perform the investment contract or agreement, which will surely cause heavy losses to the equity investment of the insurance institution, with the loss severity expected to be between 30% (inclusive) and 80%. (5) Loss category: Any of the following circumstances occurs: (i) The target enterprise is insolvent, but the insolvency difference is relatively large; (ii) The target enterprise has been declared bankrupt, taken over, revoked, or stopped business operation and existed in name only and has entered liquidation procedures, among others; (iii) The equity investment management institution has declared the target enterprise to be in default, and, after all possible measures or all necessary legal procedures are taken, the entire equity investment of the insurance institution is lost, or only a very small part of it can be recovered, with the loss severity expected to be 80% or more. Expected loss severity = [(equity investment costs – “amount of return on investment”)/equity investment costs] × 100%. Second, where underlying assets represent multiple target enterprises, an insurance institution shall conduct asset classification by reference to the aforesaid standards; where the insurance institution does not have the relevant capabilities, it may hire a third-party professional institution to evaluate the values of the corresponding equity assets, and provisions of item 2 of article 11 shall apply, mutatis mutandis, to the classification standards thereof. 12.27.3 Classification standards for real estate assets “Real estate assets” means the invested land, buildings, and other fixtures on the land, among others.1140 Assets that require risk classification are non-self-use real estate measured by cost method, and its main forms include commercial real estate, office real estate, eligible government land reserve projects, and real estate for the aged, medical care, and automobile services related to the insurance business, and other real estate investment categories which meet the provisions of the CBIRC.1141

1140 Ibid., art.17. 1141 Ibid., art.18.

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The non-self-use real estate classification primarily considers the fair evaluated values of real estate. The principles for determining the fair evaluated value of real estate are as follows: If there is an active market for the real estate, the market value thereof shall be the fair evaluated value thereof; if there is no active market for the real estate, but there is an active market for any other similar asset, the fair evaluated value of the real estate shall be determined by reference to the market value of the relevant similar asset; if there is neither an active market for the real estate itself nor an active market for any other similar asset, the fair evaluated value of the real estate shall be the value evaluated by a national asset evaluation company within the most recent year.1142 (1) Normal category: The fair evaluated value of real estate is not lower than investment costs, and there is no major adverse factor which may affect the value of this real asset. (2) Concerned category: Though the fair evaluated value of real estate is not lower than investment costs, it is estimated that there are adverse factors that may affect real estate investment, such as unfavourable changes in macro economy, industry, and market. (3) Inferior category: The fair evaluated value of real estate is lower than investment costs, and there are certain risks in real estate investment, with the loss severity expected to be within 30%. (4) Doubtful category: The fair evaluated value of real estate is lower than investment costs, and real estate investment has relatively large risks, with the loss severity expected to be between 30% (inclusive) and 80%. (5) Loss category: The fair evaluated value of real estate is lower than investment costs, and there will surely be investment losses, with the loss severity expected to be 80% or more. Expected loss severity＝[(investment costs – fair evaluated value)/investment costs] × 100%. 12.27.4 Basic requirements for asset classification Asset classification is an important component of the asset quality administration of an financial institution. An insurance institution shall conduct work at a minimum from the following aspects:1143 (1) Establishing and improving the internal control system and the asset classification system; (2) Establishing effective asset classification business processes and organization and management system. (3) Clarifying the duties of all asset classification departments and personnel.

1142 Ibid., art.19. 1143 Ibid., art.20.

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(4) Improving the archives and materials administration system to ensure the continuity and integrity of investment archives. (5) Improving the management information system to ensure that the relevant asset information can be collected and taken in a timely and effective manner. (6) Supervising and urging counterparties or the invested institutions to provide true and accurate business or finance and other relevant information. For the purpose of these Guidelines 2014, “risk-based asset classification standards” means the minimum standards for asset classification and the basis for judging the asset quality of an insurance institution. Insurance institutions shall, on the basis of these Guidelines 2014, develop more prudential and meticulous classification standards according to their respective circumstances and encourage qualified insurance institutions to execute more rigorous asset classification standards but shall have clear corresponding and conversion relationships with the standards of these Guidelines 2014.1144 Insurance institutions shall make sure the personnel in charge of preliminary asset classification and review personnel have corresponding capabilities and qualities and require them to master necessary business management, financial analysis, and other knowledge and be familiar with the fundamental principles of asset classification. The quality of asset classification shall be guaranteed through regular trainings and follow-up administration measures.1145 12.27.5 Organization and implementation of asset classification For the purpose of asset classification, insurance institutions shall conduct preliminary classification, review, and determination in strict accordance with the classification standards, methods and procedures. They shall also conduct approval according to their approval authorities. An insurance institution shall establish a working mechanism in which the investment department is responsible for the initial analysis, the compliance and risk functional department is responsible for review and confirmation, and the board of directors or its authorized department is responsible for examination and approval.Where investment assets are authorized to professional asset management institutions, the investment departments of the professional asset management institutions may be authorized to conduct preliminary classification, and compliance and risk functional departments thereof may be authorized to conduct review and determination, but the boards of directors or their authorized departments of insurance institutions shall remain in charge of approval so as to ensure the independency, consistency, and reliability of asset classification.1146

1144 Ibid., art.21. 1145 Ibid., art.22. 1146 Ibid., art.23.

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Insurance institutions shall conduct asset classification at a minimum once every six months. When there are adverse factors which may affect asset quality, the asset classification results shall be adjusted in a timely manner.1147 The board of directors of an insurance institution shall be fully responsible for risk-based asset classification and assume the final liability for asset classification.1148 12.27.6 Supervision and administration of asset classification Insurance institutions shall report the risk-based asset classification systems and working mechanisms to the CBIRC for recordation and submit the information on asset classification of their respective companies every six months. The CBIRC will establish a specialized information platform to encourage insurance institutions to conduct risk information sharing.1149 The CBIRC will regulate the asset classification by insurance institutions through on-site inspection and off-site monitoring. Where an insurance institution has any asset risk, but it fails to reflect such risk in its asset classification report, the CBIRC will hold a regulatory talk with the relevant responsible persons of the insurance institution and will take further measures against the insurance institution in accordance with the law according to the actual circumstances.1150 12.27.7 Supplementary provisions Where the financial condition of any asset or other information cannot be obtained in a timely and effective manner due to the insurance institution, counterparty, or any other personal factor, the investment asset shall be classified as concerned category.1151 The assets which are used by a debtor to maliciously evade debts by such means as bankruptcy, dissolution, merger, reorganization, splitting, leasing, transfer, or contracting shall be generally classified as doubtful category or a lower grade.1152 The assets formed in violation of the relevant laws or regulations of the state or insurance rules and regulations shall be classified as doubtful category or lower grade.1153 Insurance institutions shall, under the prudential accounting principle, establish the asset loss reserves preparation systems, and, by reference to the results of the risk-based five-grade classification of insurance assets, timely set aside asset loss reserves, including impairment reserves.1154 Insurance institutions shall, according to their respective asset qualities and operating conditions, develop feasible annual plans for setting aside asset loss reserves and for writing off such losses and non-performing assets disposal plans 1147 1148 1149 1150 1151 1152 1153 1154

Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31.

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which shall be reported to the CBIRC for recordation after they are adopted by the boards of directors.1155 12.28 Disclosure of capital use information by insurance companies In order to promote the transparency as to the use of insurance funds, the CIRC developed four pieces of regulations which require insurance companies to disclose information in relation to the use of insurance funds: (1) The Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies No. 1: Affiliated Transactions on 19 May 2014.1156 (2) The Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies No .2: the Persons Responsible for the Risks on 10 April 2015.1157 (3) The Notice of the CIRC on Issuing the Standards for the Disclosure of Fund Use Information by Insurance Companies No. 3: Acquisition of Shares of a Listed Company Subject to Notification and Announcement Requirements on 23 December 2015.1158 (4) The Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies No. 4: Investment in Large-amount Unlisted Equities and Large-amount Real Estate on 4 May 2016.1159 In this section, we consider these four pieces of regulations. 12.28.1 No. 1: affiliated transactions To regulate insurance companies’ disclosure of information on affiliated transactions in the use of capital and prevent investment risks, the CIRC released the Notice on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies No. 1: Affiliated Transactions 2014. For the purposes of the Standards, “affiliates” means the affiliated enterprises and affiliated natural persons as determined in accordance with the Interim Measures for the Administration of Affiliated Transactions of Insurance Companies 2007.1160 This Standard shall apply to the disclosure of information on the following use of insurance funds by an insurance company with its affiliates:1161

1155 Ibid., art.32. 1156 Bao Jian Fa No. 44 [2014]. 1157 Bao Jian Fa No. 42 [2015]. 1158 Bao Jian Fa No. 121 [2015]. 1159 Bao Jian Fa No. 36 [2016]. 1160 Bao Jian Fa No.24 [2007] (see accessed on 16 October 2020). 1161 The Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies No. 1: Affiliated Transactions 2014, art.3.

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(1) The insurance company makes bank deposits (excluding demand deposits) with an affiliate. (2) The insurance company invests in the equity, real estate, or other assets of an affiliate. (3) The insurance company invests in any financial products issued by an affiliate or any financial products of which the underlying assets include any assets of an affiliate. (4) Other affiliated transactions as determined by the CBIRC. For any of the aforesaid affiliated transactions between an insurance company and its affiliates, an information disclosure announcement shall be prepared in accordance with the relevant format requirements to disclose the following information:1162 (1) A brief introduction to the transaction and the basic information on the subject matter of the transaction. (2) The affiliation between the parties to the transaction and the basic information on the affiliate. (3) The pricing policies and pricing basis for the transaction. (4) The major provisions of the transaction agreement, including but not limited to the transaction price, settlement method for the transaction, conditions for entry into force, effective time, and time limit for performance of the agreement. (5) The decision-making and deliberation regarding the transaction. (6) Other information to be disclosed as required by the CBIRC. Where an insurance company conducts any of the aforesaid affiliated transactions with its affiliates, it shall, within ten working days of execution of a transaction agreement (or within ten working days of occurrence of the transaction in the absence of a transaction agreement) issue an information disclosure announcement on its website and the website of the Issuance Association of China as legally required.1163 The information on affiliated transactions disclosed by insurance companies under this Standard shall be true, accurate, complete, and standardized, without any false records, misleading statements, or material omissions.1164 Where the information on any affiliated transaction required to be disclosed by an insurance company under this Standard may not be publicly disclosed in accordance with the law for involving any state secret or business secret or for other relevant reasons, the insurance company shall, within five working days at a minimum prior to the specified date of information disclosure, provide a written explanation to the CBIRC and shall not disclose the information in accordance with the law. Where, in accordance with the requirements for information disclosure by listed companies, a listed insurance company has disclosed the relevant information required to be disclosed under this Standard, it may be exempt from repeat disclosure but shall indicate in the information disclosure announcement the

1162 Ibid., art.4. 1163 Ibid., art.5. 1164 Ibid., art.6.

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exact place where the information is disclosed (websites, newspapers, periodicals, and media, among others).1165 This Standard shall apply, mutatis mutandis, to the affiliated transactions as set out in art.3 of this Standard conducted by insurance groups (or holding) companies and insurance asset management institutions and to the financial products initiated by insurance asset management institutions with their affiliates as counterparties or the assets of their affiliates as underlying assets.1166 12.28.2 No. 2: the persons responsible for the risks In order to regulate insurance companies’ disclosure of information on the persons responsible for the risks in the use of capital and prevent investment risks, the CIRC promulgated and implemented the Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies No. 2: the Persons Responsible for the Risks on 10 April 2015.1167 For the purposes of these Standards, “the persons responsible for the risks” means the administrative responsible persons and professional responsible persons as determined in accordance with the Notice on Matters concerning the Persons Responsible for the Investment Risks of Insurance Institutions 2013.1168 An insurance company shall, in carrying out the following activities of capital use, publicly disclose relevant information on the persons responsible for the risks:1169 (1) (2) (3) (4) (5) (6)

Recording investment capacity; Transferring investment capacity; Investing in collective fund trust plans; Making overseas investment; Changing the persons responsible for the risks; and Determining other persons responsible for the risks under the principle of prudential supervision.

An insurance company shall disclose the following information in accordance with the relevant format requirements:1170 (1) The announcement on disclosure of basic information of the persons responsible for the risks; (2) The document of the company for determining the persons responsible for the risks; (3) The letter of commitment indicating that the persons responsible for the risks meet the regulatory requirements signed by the legal representative of the company; 1165 Ibid., art.7. 1166 Ibid., art.8. 1167 Bao Jian Fa No. 42 [2015]. 1168 Bao Jian Fa No.28 [2013] (see accessed on 16 October 2020). 1169 The Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies No. 2: the Persons Responsible for the Risks 2015, art.3. 1170 Ibid., art.4.

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(4) Letter of knowledge of responsibilities signed by the persons responsible for the risks; and (5) Other information to be disclosed as required by the CBIRC. An insurance company which needs to determine the persons responsible for the risks in the activities of capital use shall disclose relevant information on its own website and the website of Insurance Association of China, in accordance with the contents and format specified, while submitting relevant written reports.1171 The information on the persons responsible for the risks disclosed by an insurance company under these Standards shall be true, accurate, complete, and standardized, without any false records, misleading statements, or material omissions.1172 An insurance company shall disclose relevant information on the determined persons responsible for the risks through a designated information platform within one month of the issuance of this Notice.1173 These Standards shall apply, mutatis mutandis, to the relevant circumstances as set out in these Standards conducted by an insurance asset management institution and the insurance asset management products and business provided by an insurance asset management institution.1174 12.28.3 No. 3: Acquisition of shares of a listed company subject to notification and announcement requirements For purposes of regulating the disclosure of information concerning acquisition of shares of a listed company by an insurance company subject to notification and announcement requirements, and preventing investment risks, the CIRC published the Notice of the CIRC on Issuing the Standards for the Disclosure of Fund Use Information by Insurance Companies No. 3: Acquisition of Shares of a Listed Company Subject to Notification and Announcement Requirements on 23 December 2015.1175 For the purpose of these Standards, “acquisition of shares of a listed company by an insurance company subject to notification and announcement requirements” means the circumstance under which an insurance company notifies a listed company and makes an announcement within three days in accordance with relevant laws and administrative regulations when holding, independently or jointly with its affiliates and persons acting in concert, 5% of the issued shares of the listed company, and when acquiring, each time thereafter, additional shares that represent 5% of the shares of the listed company.1176 An insurance company acquiring the shares of a listed company subject to notification and announcement requirements shall, within two working days from 1171 Ibid., art.5. 1172 Ibid., art.6. 1173 Ibid., art.7. 1174 Ibid., art.8. 1175 Bao Jian Fa No. 121 [2015]. 1176 The Notice of the CIRC on Issuing the Standards for the Disclosure of Fund Use Information by Insurance Companies No. 3: Acquisition of Shares of a Listed Company Subject to Notification and Announcement Requirements 2015, art.2.

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the date of announcement by the listed company, make an information disclosure announcement on its website and the website of the Insurance Association of China and via the media with nationwide influence to disclose the following information:1177 (1) The name and code of the acquired stock of the listed company, the date of announcement by the listed company, and the date of transaction subject to notification and announcement requirements (hereinafter referred to as the “trading day”). (2) Information on the insurance company, affiliates participating in the acquisition, and the persons acting in concert. (3) As of the trading day, the book balance of the insurance company’s investment in the shares of the listed company and the proportion of such book balance to the insurance company’s total assets at the end of the last quarter, as well as the proportion of the book balance of the insurance company’s equity assets to its total assets at the end of the last quarter. (4) The trading manner through which the insurance company acquires the shares of the listed company (auction trading, block trading, issue of new shares, agreement-based transfer, and other means), sources of funds (own funds, insurance reserves, and other funds); if the funds are sourced from insurance reserves, the balance of the account or product’s investment in the stock, the balance of the funds that can be used, and the average holding period as of the trading day, as well as the cash inflow and outflow of each quarter in the last four quarters shall be respectively specified by the insurance accounts and products; if the funds are sourced from other channels, the specific sources, the balance of investment in the stock, cost of funds and duration of funds, among others, shall be specified. (5) The way through which the insurance company manages the stock investment (stock or equity); and if the conditions for subjecting the stock investment to equity management are satisfied according to the relevant provisions, the information on relevant materials submitted to the CBIRC shall be disclosed, indicating the titles, numbers, and submission dates of the documents submitted to the CBIRC. (6) Other information that the CBIRC deems necessary to be disclosed based on prudential supervision. The information disclosed by insurance companies in accordance with these Standards shall be authentic, accurate, complete, and standardized and shall neither contain any false records or misleading statements nor have any material omissions.1178 When an insurance company discloses information under the requirements of these Standards, if the information should not be publicly disclosed in accordance with the law due to involvement in any state secrets or any other reason, the insurance company shall, within one working day after the announcement by the listed 1177 Ibid., art.3. This article was modified by the Notice of CBIRC on Abolishing and Modifying Some Regulatory Documents (Yin Bao Jian Fa No. 5 [2020]). It is the new version of this article here. 1178 Ibid., art.4.

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company, provide a written explanation to the CBIRC and is allowed to not disclose the information in accordance with the law.1179 Where an insurance company authorizes a professional asset management institution to invest in stocks, if the acquisition subject to notification and announcement requirements occurs, the insurance company shall perform the obligation of information disclosure.1180 These Standards shall apply to the acquisition of shares of listed companies by insurance group (holding) companies subject to notification and announcement requirements. Insurance companies’ investment in shares of companies listed on overseas markets shall be governed, mutatis mutandis, by these Standards, if the investment satisfies the conditions for notification and announcement as prescribed by the laws and regulations of the countries or regions where the listed companies are located.1181 12.28.4 No. 4: Investment in large-amount unlisted equities and large-amount real estate For the purposes of regulating insurance companies’ disclosure of information on investment in large-amount unlisted equities and large-amount real estate and preventing investment risks, the CIRC issued the Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies No. 4: Investment in Large-amount Unlisted Equities and Large-amount Real Estate on 4 May 2016.1182 Insurance companies’ investment in large-amount unlisted equities and largeamount real estate within the territory of China shall be governed by these Standards.1183 Investment in large-amount unlisted equities required to be disclosed by these Standards refers to direct investment in the equities of a single unlisted enterprise with accumulated amount exceeding ¥3 billion yuan (or equivalent in foreign currency) within or outside the territory of China.1184 Investment in large-amount real estate required to be disclosed by these Standards means direct investment in real estate within the territory of China and investment in single real estate outside the territory of China in the form of real right with accumulated amount exceeding ¥5 billion yuan or investment in single real estate overseas in the form of equity with accumulated equity investment amount exceeding 1 billion yuan.1185

1179 Ibid., art.5. 1180 Ibid., art.6. 1181 Ibid., art.7. 1182 Bao Jian Fa No. 36 [2016]. 1183 The CIRC issued the Notice of the CIRC on Issuing the Standards for the Disclosure of Capital Use Information by Insurance Companies No. 4: Investment in Large-amount Unlisted Equities and Large-amount Real Estate 2016, art.2. 1184 Ibid., art.3. 1185 Ibid., art.4.

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An insurance company that makes investment in large-amount unlisted equities and large-amount real estate shall, within ten working days after the signing of the investment agreement, issue an information disclosure announcement at the website of the insurance company, the website of the Insurance Association of China (IAC), the website of the Insurance Asset Management Association of China, and the platforms designated by the CBIRC, to disclose the following information:1186 (1) The enterprise in which it plans to invest or the name of the real estate project and the expected investment amount. Where the investment is additional investment, the date of the first investment and the cost and balance of investment that has been made as of the date of signing this investment agreement shall also be specified. Where overseas investment is involved, the insurance company, special purpose company, the enterprise or real estate in which it plans to invest, and the amount and source of funds of all external financing or other funds shall be specified. (2) After the estimated investment is made, the proportion of the enterprise’s or the project’s investment balance to the total assets of the insurance company at the end of the previous quarter and the proportion of the book balance of the general category of assets to the total assets at the end of the previous quarter shall be specified; where overseas investment is involved, the balance of overseas investment after the estimated investment is made and the proportion of the balance of overseas investment to the total assets of the insurance company at the end of the previous quarter shall also be specified. (3) Where investment is jointly made with an associated company or a person acting in concert, the name of the associated company, the person acting in concert, and the amount of estimated investment shall be specified; and where other associated transactions are involved, the specific circumstances thereof shall be specified. (4) The solvency adequacy ratio of the insurance company at the end of the previous quarter. (5) Other information to be disclosed as required by the CBIRC on the basis of prudential regulation. The insurance company shall, within ten working days of actual investment, continue to disclose the source of investment capital (self-owned funds, insurance liability reserve funds, and other funds). Where capital is sourced from insurance liability reserve funds, the amount of contribution of the account and product and the balance of capital available as of the end of the previous quarter shall be respectively specified according to the insurance account and product; where capital is sourced from external financing or other funds, the source and amount of capital shall be specified.1187

1186 Ibid., art.5. 1187 Ibid.

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An insurance company that makes investment in large-amount real estate shall also disclose the following information besides the information as prescribed in Article 5 of these Standards:1188 (1) The city, location, and construction progress of the real estate; (2) The investment way (real right or equity); and (3) The project company’s name, registered capital, total assets, net assets, major business scope, and the proportion of shares held in the project company where investment is made in the form of equity. An insurance company whose information elements required to be disclosed by these Standards change during the process of subsequent operation shall disclose the information on the changes within ten working days after the change in relevant elements.1189 The information disclosed by an insurance company under these Standards shall be true, accurate, complete, and standardized, without any false records, misleading statements, or material omissions. An insurance company that makes multiple investments in large-amount unlisted equities and large-amount real estate shall develop information disclosure announcements item by item, to respectively disclose the information.1190 A listed insurance company that has disclosed relevant information as prescribed in these Standards according to the requirements for the information disclosure by listed companies may be exempted from repeated disclosure but shall indicate the name of the information and the specific places (websites, newspapers, media, and so on) disclosed in the information disclosure announcement; a company that shall regularly disclose relevant information as prescribed in these Standards according to the requirements for the information disclosure by listed companies may implement relevant provisions but shall indicate the report where it will disclose the relevant information in the information disclosure announcement.1191 Where an insurance company that makes investment in large-amount unlisted equities and large-amount real estate is required to disclose the enterprise in which it plans to invest or the listed company involved in the project according to the provisions, the listed company shall handle the formalities according to the provisions.1192 An insurance company that jointly makes investment with an associated enterprise or a person acting in concert and reaches the standards for the investment in largeamount unlisted equities and large-amount real estate as required by these Standards shall disclose relevant information as required by these Standards; a company that has disclosed relevant information as required by these Standards according to the Standards for the Disclosure of Insurance Capital Information No. 1: Associated Transactions may be exempted from repeated disclosure but shall indicate the name

1188 1189 1190 1191 1192

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10.

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of the repeated information and the specific places (websites, newspapers, media, and so on) disclosed in the information disclosure announcement.1193 Where an insurance company making major equity investment according to the Interim Measures for Equity Investment with Insurance Funds is required to be subject to approval under the provisions and reaches the standard for large amount as prescribed in these Standards, it shall disclose relevant information according to these Standards, and with the approval of the CBIRC, the insurance company may, within ten working days after the approval conduct information disclosure.1194 An insurance company that is required to disclose information according to the requirements of these Standards and shall not disclose information publicly according to the law as the information involves state secrets shall, within five working days after the signing of the investment agreement, explain the situation to the CBIRC in writing and not make disclosure according to the law.1195 An insurance company that entrusts an insurance asset management company or a unified investment platform of an insurance group to make investment in largeamount unlisted equities and large-amount real estate shall fulfil the obligations of information disclosure.1196 Insurance group (holding) companies, insurance asset management companies, and non-insurance subsidiaries of insurance companies subject to the supervision of the CBIRC that make investment in large-amount unlisted equities and largeamount real estate shall be governed by these Standards.1197 12.29 Conclusion The regulatory system for insurance funds utilization has taken shape and operates well in China. The traditional and newly developed investment channels are being used and regulated by specific pieces of regulation. A major piece of regulation, the Measures 2018, together with many specific regulations for each investment vehicle, forms the regulatory framework. The ICP rules are observed well and all the standards are met in China. The CBIRC adopts the approach of a combination of rules-based requirements and principles-based requirements. The regulatory requirements for insurance funds utilization are suitable to the circumstances for the rapid development of the insurance industry in China.

1193 1194 1195 1196 1197

Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15.

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CHAPTER 13

Regulation of insurance agents

13.1 Introduction Agency is a relationship which arises when one person, called the principal, authorizes another, called the agent, to act on his or her behalf, and the other agrees to do so; the acts of the agent bind the principal within the scope of the agent’s authority. Agents play a vital role in commercial activities. Commerce would literally grind to a halt if businessmen and merchants could not employ the services of factors, forwarding agents, estate agents, brokers, loss assessors, or adjusters and the like, and were expected to do everything themselves. The primary role of the agent in commerce is to negotiate and conclude contracts on behalf of the principal. The agent usually possesses special skill or expertise, or has special knowledge of a particular market, area, or commodity; the principal (the insurer) may need someone (the loss adjuster) on the spot to assess the loss caused by an insured accident. An agent may be broadly defined as a person (natural or legal) who is recognized by the law as having power to affect the legal rights, liabilities, and relationships of another person (the principal). In plain language, an agent is a middleman between the principal and the other party to the contract. The doctrine of privity of contract prevents a person acquiring rights under a contract unless he or she is a party to it, but, by a long-established exception to that rule, where the contract is concluded by an agent on behalf of the principal, the agent’s acts are treated as if they were the acts of the principal. Thus, the principal steps into the shoes of the agent and becomes a party to the contract concluded through the agent. In the context of insurance, the agents can be called insurance intermediaries which mainly include three types: insurance agents, insurance brokers, and insurance adjusters. Insurance agents can be institutions or individuals which charge insurers for commissions and operate the insurance business to the extent as authorized by insurers. Insurance agents include full-time insurance agents that only operate the insurance agent business and part-time insurance agents that concurrently operate the insurance agent business.1 Insurance brokers are institutions which, based on the interests of proposers, provide intermediary services for the proposers and insurers to enter into insurance contracts and charge commissions

1 The Insurance Law, art.117.

DOI: 10.4324/9781351122863-13

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according to law.2 Insurance adjustment is defined as an appraisal institution and its appraisal professionals who accept the entrustment to conduct appraisal, survey, identification, loss adjustment, and relevant risk assessment of the subject matter of insurance or insurance accidents. Insurance adjusters refer to appraisal institutions specifically engaging in the aforesaid business, including insurance adjusters and their branches.3 The Insurance Law devotes one chapter (chapter 5) on insurance agents and insurance brokers (articles 117 to 132). In chapter 5, the Law provides the definition of insurance agents and brokers, the requirements and conditions for formation of the intermediary companies, the standards of senior personnel and the employees, the business operation rules, and the prohibited conduct. Further, in chapter 7 of the Insurance Law, the Law sets out rules in the event of the breach of law or regulation by the insurance intermediaries. In accordance with the Insurance Law and other relevant laws, the Insurance Supervision and Regulatory Authority has formulated three major regulations to govern the establishment and business activities of the insurance intermediaries: (1) The Provisions on the Supervision and Administration of Full-Time Insurance Agencies.4 (2) The Provisions on the Supervision and Administration of Insurance Brokers,5 and (3) The Provisions on the Supervision and Administration of Insurance Adjusters.6 In addition to the three major Provisions, the former insurance regulatory authority, the China Insurance Regulatory Commission (CIRC), enacted the Measures for the Punishment of Illegal Conducts in the Intermediary Business of Insurance Companies 20097 for the purposes of maintaining the order of the insurance market and preventing and punishing illegal conduct in the intermediary business of insurance companies. Recently, the current insurance regulatory authority, the China Banking and Insurance Regulatory Commission (CBIRC), has issued three Notices regarding regulation of insurance sales personnel and insurance intermediaries, namely, the Notice on Strengthening the Administration of Business via Intermediary Channel

2 Ibid., art.118. 3 The Provisions on the Supervision and Administration of Insurance Adjusters (the CIRC Order No. 2 [2018]) which was issued by the CIRC on 1 February 2018 and came into force of 1 May 2018 (see

accessed on 14 October 2020). 4 The CIRC Order No. 3 [2015] (see accessed on 14 October 2020). 5 The CIRC Order No. 3 [2018], the Provisions were issued by the CIRC on 1 February 2018 and came into force on 1 May 2018 (see accessed on 14 October 2020). 6 The CIRC Order No.2 [2018]. 7 The CIRC Order No. 4 [2009];The Measures were issued on 25 September 2009 and become effective on 1 October 2009 (see accessed on 14 October 2020).

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of Insurance Companies,8 the Notice on Implementing the Main Responsibilities of Insurance Companies and Strengthening the Administration of Insurance Sales Personnel,9 and the Notice on Effectively Strengthening the Administration of Employees of Full-Time Insurance Intermediary Institutions.10 The general agency principles are applicable to all these three types of insurance intermediaries, and some specific rules are applicable to each of these three types. Thus, it is appropriate to consider the general agency principles first and then the regulatory rules on insurance agents in this chapter. We can then consider the specific rules on insurance brokers and insurance adjusters respectively in the next two chapters. Before discussing the law of agency, it is convenient to take a look at the status of insurance intermediaries in China. 13.2 Insurance intermediaries market in China In China, as of the end of 2018, there were five insurance intermediary group companies nationwide, 240 national insurance agency companies, 1,550 regional insurance agency companies, 499 insurance brokerage companies, 353 registered insurance adjustment companies, and 8.71 million personal insurance agents.There are 32,000 concurrent insurance agencies and more than 220,000 agency outlets. In 2018, insurance intermediary channels realized premium income of ¥3.37 trillion yuan, accounting for 87.4% of China’s total premium income. In the past five years, the insurance intermediary channel has always accounted for more than 80% of premiums and is an important channel for insurance sales.11 In 2017, the total premium income for property insurance reached ¥983.5 billion yuan. The intermediaries channel accounted for 80.4% of the premium, of which 90.9% was from insurance agents, and 9.1% was from insurance brokers.12 For life insurance, the total premium income was ¥2,674.6 billion yuan.The intermediaries channel accounted for 90.5% of the premium, of which 53.7% was from individual agents, 44.8% was from bancassurance agents and post office insurance agents, 0.7% was from full-time insurance agent institutions, and 0.8% was from insurance brokers.13 From these figures, it can be seen that for property insurance, insurance agents play a more important role than insurance brokers. For life insurance, individual insurance agents constitute the most important intermediary channel, because most transactions are carried out though individual insurance agents; the 8 Yin Bao Jian Ban Fa No. 19 [2019] which was issued on 26 February 2019 (see accessed on 14 October 2020). 9 Yin Bao Jian Ban Fa No. 41 [2020] which was issued on 6 September 2020. 10 Yin Bao Jian Ban Fa No. 42 [2020] which was issued on 12 May 2020 (see accessed on 14 October 2020). 11 See Financial News, 8 May 2019 (see accessed on 14 October 2020). 12 The Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Sciences Press, Beijing, China) pp. 126–132. 13 Ibid.

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next most important intermediary channel contains the part-time insurance agent institutions, such as banks and post offices; the full-time insurance agent institutions or the insurance brokers play a minor role in marketing of life insurance. 13.3 General agency principles The rules of agency law are provided in three legislations: Part 1 the General Provisions of the Civil Code of the People’s Republic of China (hereinafter, the Civil Code),14 Part 4 the Contract Law of the Civil Code, and the Insurance Law. In this section, we consider the general agency principles. 13.3.1 The authority of the agent Under art.163 of the General Provisions of the Civil Code, agency can be broadly divided into two classes on the basis of the ways of acquiring the power and authority, namely, agency by mandate and agency by statutory law. An agent under a mandate can exercise the power conferred by the principal. A statutory agent can exercise the power conferred by laws. A statutory agent is limited to a few civil situations, for instance, the guardian or parents of a person without capacity for civil conduct or with limited capacity for civil conduct can be the statutory agent of that person.15 We will not discuss the class of statutory agents, as they have little to do with insurance intermediaries. (a) Power and authority As we have seen, an agent is a person (natural or legal) who has power to act on behalf of the principal and affect the principal’s legal position. The relationship between the principal and the third party therefore depends on the scope of the agent’s power.The agency relationship between the principal and the agent depends on consent. Chinese law recognizes that an agent has power to act on the principal’s behalf when the principal has consented to the agent having such power, and in such a case the agent is said to have authority to act on the principal’s behalf.16 The consent is usually in the form of an agreement between the principal and the agent. In entrusting an insurance agent to conduct insurance business, an insurer can sign an agency agreement with the insurance agent to provide for the rights and obligations of the parties according to law.17 An insurer shall be liable for the acts of its insurance agents when they transact insurance business on behalf of the insurer in accordance with the delegated authority.18 Chinese law recognizes an agent having power to bind the principal in four situations. First, where the principal gives consent to the agent’s actions, the agent 14 The Civil Code of the People’s Republic of China (the Civil Code) was adopted at the third meeting of the 13th National People’s Congress on 28 May 2020 and came into force on 1 January 2021 (see accessed on 14 October 2020). 15 The General Provisions of the Civil Code, art.23. 16 Ibid., art.162. 17 The Insurance Law, art.126. 18 Ibid., art.127(1).

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has actual authority.19 Second, where the agent acts without prior authority but the principal gives retrospective consent by ratification.20 Third, where the agent acts without the principal’s consent, but the third party has reason to believe that the agent has the authority, the act is binding on the principal;21 the agent is said to have apparent authority. Fourth, where the agent acts to protect the interest of the principal without previous authorization from the principal, the agent may be said to have authority of necessity; this kind of authority is limited to the situation of the transfer of the agency of agent to a third party.22 (b) Types of authority An agent will bind his or her principal by any act performed within the scope of the agent’s authority. In the context of insurance intermediaries, authority may take one of two forms. The first is the actual authority, which stems primarily from express instructions from his or her principal,23 although as a matter of law the agent has implied authorities to do all acts necessary to carry out matters within his or her express authority. The second is the apparent authority, which arises where the agent acts outside his or her actual authority. The power exercised is not one that the agent would normally be expected to have but is one that has been held out by the principal as being possessed by the agent; the third party thus has reason to believe the agent has the authority.24 (c) Ratification An act performed by an agent in the name of the principal within the power conferred on the agent is binding on the principal.25 However, sometimes, an act may be performed by an agent expressly on behalf of the principal without authority of the principal. The general rule for such an act performed by an agent is that by art.171 of the General Provisions of Civil Code, where an agent performs an act of agency without a power of attorney, beyond his or her power of attorney, or after his or her power of attorney terminates, the act shall not be binding on the principal without the principal’s ratification.26 A third party may urge a principal to retroactively ratify an act of the principal’s agent within 30 days after the principal receives a notice of such an act. In the absence of a response by the principal, the non-response shall be deemed as a refusal of ratification. Pending the ratification, a bona fide third party shall be entitled to revoke the act in question. Revocation of the act shall be made by notice.27 Where ratification of the act is denied, the bona fide third party shall be entitled to request that the agent perform obligations or compensate it for any damage

19 20 21 22 23 24 25 26 27

The General Provisions of the Civil Code, art.162. Ibid., arts.171 and 172; the Contract Law of the Civil Code, art.503; the Insurance Law, art.127. The Insurance Law, art.127(2). The General Provisions of the Civil Code, art.169. The Insurance Law, art.127(1). Ibid., art.127(2). The General Provisions of the Civil Code, art.162. Ibid., art.171(1). Ibid., art.171(2).

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suffered by it, but such compensation shall not exceed the interest that could have been obtained by the third party if the act were ratified by the principal.28 Where the third party knows or should have known that the agent has no power of attorney, the third party and the agent shall assume liability according to their respective faults.29 However, where an agent performs an act of agency without a power of agency, beyond his or her power of attorney, or after his or her power of attorney terminates, the act shall be valid if the third party has reason to believe that the agent has the power of attorney.30 The key to this provision is that the third party has reason to believe that the agent has the power of attorney. Under art.127(2) of the Insurance Law, where an insurance agent enters into a contract in the name of an insurer, while the agent has no authority of agency or acts beyond the scope of the authority, or his or her authority of agency ceases, in such a way that the proposer has reason to believe that the agent has authority, the act of agency is effective. The insurer may pursue the insurance agent for liabilities of ultra vires acts according to law. Under normal circumstances, the insurer is only liable for the legal consequences arising from the business activities of the insurance agent within the scope of its authority, and is not liable for the act of the insurance agent without the authority or beyond the scope of the authority, or the expiration of the agency power. However, if an insurance agent handles insurance business on behalf of the insurer and acts without or beyond or after expiration of the agency power, the proposer has reason to believe that it has the agency power and has concluded an insurance contract, the insurer shall bear the insurance liability. An important condition for an insurer to assume responsibility for contracts concluded by the agent in these circumstances is that the proposer has reason to believe that the insurance agent has agency power. The phrase “has reason to believe” here means that the proposer does not know or should not know that the insurance agent has no agency power, and the proposer has fulfilled the necessary duty of care, that is, there is no negligence on the part of the proposer. The agency act is valid, and the resulting insurance liability is assumed by the insurer. The insurance agent should bear corresponding responsibilities for his or her act that exceed agency powers. If an insurance agent’s act of transcending his or her authority causes the insurer to assume more responsibility or cause other damage to the insurer, the insurer may demand compensation from the insurance agent for the damage. This can be illustrated by the case of Zhong v China Life Insurance Co. Ltd. Huichang County Branch.31 As an agent of the insurer, Mr Luo sold to Mr Zhong an endowment policy and a critical illness policy in 2003. Zhong paid Luo insurance premiums ¥18,000 and ¥1,637 respectively for the two policies

28 Ibid., art.171(3). 29 Ibid., art.171(4). 30 Ibid., art.172. 31 This case was tried by the Intermediate People’s Court, Ganzhou City, Jiangxi Province (2008) Gan Zhong Min Si Zhong Zi No. 163.

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and got two receipts of the premium payments from Luo. In July 2004, Zhong paid Luo the premiums for another year. In March 2005, the insurer terminated the contract with Luo and advertised in a newspaper that the receipts which were numbered in the hands of Luo were declared invalid but did not notify Zhong of termination of Luo’s agent contract. On 13 June 2005, Luo requested payments of premiums from Zhong who paid and got two receipts which were already declared invalid. Zhong did not pass the premiums to the insurer. The court held that the insurer failed to notify Zhong of the termination of the agent contract with Luo, Zhong did not know of Luo’s termination and paid premiums to Luo, genuinely believing that Luo was still the agent of the insurer. Luo’s receipt of premiums from Zhong was an act of apparent authority. Zhong’s request for the insurer to refund the premiums was upheld. It is obvious that the insured had reason to believe that the agent had authority, as the insured purchased the policies from the agent and had already paid premiums to the agent for two years. (d) Transfer of agency The General Provisions of Civil Code (art.169) permits the agent to transfer his or her agency to a third party. Where an agent needs to appoint a third party to perform the object of the mandate in its place, the agent must obtain the consent or ratification of the principal. If such a transfer has been agreed or ratified, the principal may directly instruct the third party regarding the agency affairs. The original agent is liable only for the appointment of the third party and his or her own instruction to the third party. Without the principal’s consent or ratification of the transfer, the agent shall be liable for the acts of the third party appointed by the agent, unless such a transfer occurs in the case of emergency to safeguard the interests of the principal.32 Article 923 of the Contract Law of the Civil Code provides similar rules in respect of transfer of the agency of an agent to a third party. The Insurance Law does not, however, provide any rule in respect of the transfer of agency. An insurance intermediary should perform the role of agency itself (personally), but there is no reason why it should be barred from the transfer of the agency to a third party as provided for in art.169 of the General Provisions of Civil Code. 13.3.2 Duties of insurance intermediaries The specific duties for each type of insurance intermediaries will be discussed elsewhere; here, the general duties are outlined. The intermediaries must obey the principal’s instructions precisely and perform the duties as specified in the agency contract. In the course of carrying out agency business, the agent must exercise the degree of care and skill reasonably to be expected of an agent with the qualifications which the agent has held himself or herself out as possessing.

32 Ibid., art.169.

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13.3.3 Right of insurance intermediaries The primary right an insurance intermediary is the right to remuneration, which is payable in the form of commission.33 According to art.130 of the Insurance Law, insurance commissions may only be paid to the insurance agents and insurance brokers and may not be paid to others.34 The effect of art.130 is that an intermediary who is not approved by the CBIRC will not receive commission from the insurer. It will only be allowed to receive payments in the form of a consultancy fee from the proposer. This makes a big difference in terms of the income received by the intermediary. For example, the average commission received by a broker is about 10–15% of the premium, whereas the consultancy fee is only about 2–5% of the premium.35 According to art.930 of the Contract Law of the Civil Code, in the course of handling the commissioned affair, if the agent sustains any loss due to a reason not attributable to itself, the agent may seek indemnification from the principal. This should also be applicable to insurance intermediaries. 13.3.4 Liabilities of insurance intermediaries As a general rule, where an agent fails to perform or fully perform its duties, causing damage to the principal, the agent shall assume civil liability.36 Where an agent and the third party in malicious collusion damage the principal’s lawful rights and interests, the agent and the third party are jointly and severally liable.37 According to art.929 of the Contract Law of the Civil Code, under a commission contract for value, if the principal sustains any loss due to the fault of the agent, the principal may claim damages. Under a gratuitous agency appointment contract, if the principal sustains any loss due to the agent’s intentional misconduct or gross negligence, the principal may claim damages. Where the agent acts beyond the scope of authorization, thereby causing loss to the principal, it shall pay damages.38 The aforesaid general rule should also be applicable to insurance intermediaries. Article 127(2) of the Insurance Law explicitly provides that where an insurance agent acts without or beyond or expiration of his or her authority, the insurer may pursue the insurance agent for liabilities of ultra vires acts according to law.39 By art.128 of the Insurance Law, an insurance broker is liable for loss and damage caused to the proposer or the insured due to its fault.40 In the course of carrying out insurance adjusting business, an insurance adjuster or its employees shall be

33 The Insurance Law, arts.117 and 118. 34 Ibid., art.130. 35 Miao Li, Insurance Brokers under Chinese law. In: Insurance Law in China, edited by Johanna Hjalmarsson and Dingjing Huang, Informa Law from Routledge, UK, 2015, pp. 29–37. 36 The General Provisions of the Civil Code, art.164. 37 Ibid. 38 The Contract Law of the Civil Code, art.929. 39 The Insurance Law, art.172(2). 40 Ibid., art.128.

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liable for any damage or loss caused to the insurer or the insured intentionally or negligently.41 13.3.5 Prohibited conduct The Insurance Law sets out a list of prohibited conduct of the insurance intermediaries in art.131, which provides that in handling insurance business, insurance agents and insurance brokers and their practitioners are not allowed to conduct any of the following acts in the course of conducting business: (1) Cheating the insurers, the proposers, the insureds, or the beneficiaries; (2) Concealing from the proposers material information relevant to the insurance contracts; (3) Preventing the proposers from fulfilling their obligation of making truthful disclosure provided under this Law or inducing them not to fulfil such an obligation; (4) Giving or promising any interests other than those provided for in the contracts to the proposers, the insureds, or the beneficiaries; (5) Using their administrative power, position, or the advantage of their profession or any other illicit means to force, induce, or restrict the insured to sign insurance contracts; (6) Forging or altering an insurance contract arbitrarily or providing false certification materials to the parties to an insurance contract; (7) Diverting, retaining, or encroaching on premium or insurance benefits; (8) Seeking illegitimate gains for other organisations or individuals by taking advantage of the business; (9) defrauding the insurer of insurance benefits by colluding with the proposers, the insureds, or the beneficiaries; (10) Divulging the business secrets of the proposers or the insured so that their business activities become known. The Insurance Law (art.165) provides administrative remedies for the misconduct performed by insurance intermediaries. Where an insurance agency or insurance broker commits any of the conduct proscribed in art.131 of the Insurance Law, the insurance supervision and regulation authority shall order the broker or agent to make correction and shall impose a fine of ¥50,000 yuan up to ¥300,000 yuan upon the broker or agent, and, if the circumstances are serious, the insurance supervision and regulation authority shall revoke the business operation license of the broker or agent. While the Insurance Law (art.165) imposes penalties on the agents and brokers for breach of art.131 of the Insurance Law in order to deter them from practising misconduct, it does not provide remedies to an aggrieved insured in the cases of agent and broker misconduct; in other words, there is no private right of action

41 Ibid., art.129(3).

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for the aggrieved insured to claim compensation for his or her loss.42 Although the Insurance Law provides that “whoever violates the Insurance Law and causes damage to others shall be subject to civil liability”,43 there have so far been no reported cases for the injured insured to seek remedies against the agent’s or the broker’s misconduct. Moreover, there is a gap of law in respect of criminal liability in the case of the agent’s fraud. 13.3.6 Establishment of insurance intermediaries The Insurance Law provides rules regarding the formation of insurance intermediaries. Insurance agencies and insurance brokers shall satisfy the requirements prescribed by the CBIRC and shall have obtained the insurance agency business license or brokerage business license issued by the CBIRC.44 For a full-time insurance agency or an insurance broker to be formed as a company, its minimum amount of registered capital shall be governed by the Company Law of China. The CBIRC may adjust the minimum amount of registered capital of a full-time insurance agency or an insurance broker according to its business scope or scale, but the amount shall not be less than the amount as set out in the Company Law of China. The registered capital or capital contribution of a fulltime insurance agency or an insurance broker must be paid-in monetary capital.45 The senior management officers of a full-time insurance agency or insurance broker shall have good morals, be well versed in insurance laws and administrative regulations, have the operation and management ability needed for performing their responsibilities, and have obtained the qualifications for holding a position verified by the CBIRC before taking up their position.46 Individual insurance agents, practitioners of insurance agencies, and practitioners of insurance brokers, shall meet the qualifications provided by the CBIRC and obtained qualification issued by the CBIRC.47 Insurance agencies and insurance brokers shall have their own business premises and set up special account books to record the revenues and expenditures of the insurance agency or brokerage business.48 Insurance agencies or insurance brokers shall deposit guarantee funds or take out professional liability insurance according to the provisions of the CBIRC.49 An individual insurance agent, in conducting life insurance agency business, shall not accept entrustment of more than two insurers concurrently.50

42 Zhen Jing, “Misleading conduct by insurers in sales of insurance policies in China” (2016) Company Lawyer, 38(1), 28–36. 43 The Insurance Law, art.175. 44 Ibid., art.119. 45 Ibid., art.120. 46 Ibid., art.121. 47 Ibid., art.122. 48 Ibid., art.123. 49 Ibid., art.124. 50 Ibid., art.125.

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13.3.7 Termination of agency The General Provisions of the Civil Code (art.173) provides that agency by mandate shall terminate under any of the following circumstances: (1) (2) (3) (4) (5)

The term of agency expires or the object of the mandate is fulfilled. The principal cancels the mandate or the agent surrenders the mandate. The agent loses capacity for civil conduct. The agent or the principal dies. The legal person or unincorporated organization as the agent or the principal is terminated.

The Contract Law of the Civil Code (art.933) also stipulates that either the principal or the agent may terminate the agency contract at any time. Where the other party sustains any loss due to termination of the contract, the terminating party shall indemnify the other party, unless such loss is due to a reason not attributable to the terminating party.51 A commission contract is discharged when either the principal or the agent is deceased or incapacitated or enters into bankruptcy, except where the parties agree otherwise, or where discharge is inappropriate in light of the nature of the commissioned affair.52 Having considered the general agency principles, we now turn our attention to the regulation of insurance agents. 13.4 Regulation of insurance agents There was no regulation of insurance agents until the issuance of the Provisions on Administration of Insurance Agents (For Trial) on 30 November 1997 by the People’s Bank of China, which was then the regulator of insurance in China. The Provision for the first time defined the legal position and the function of insurance agents and laid down the legal foundation for the development of the insurance agency market. On 4 August 2000, the CIRC published the Interim Measures on the Administration of Concurrent-Business Insurance Agency which regulated part-time insurance agents. On 1 December 2004, the CIRC enacted the Provisions on Administration of Insurance Agent Institutions, which was amended on 25 September 2009 and renamed as the Provisions on the Supervision and Administration of Full-Time Insurance Agency.The 2009 Provisions were again amended on 19 October 2015.53 On 1 June 2013, the CIRC issued the Measures for the Supervision and Administration of Insurance Sales Personnel which was concerned with insurance sales personnel, including individual insurance agents.

51 The Contract Law of the Civil Code, art.933. 52 Ibid., art.924. 53 The CIRC Order No. 3 [2015].

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On 19 October 2015, the CIRC issued the Provisions on the Supervision and Administration of Full-Time Insurance Agencies.54 On 23 August 2019, the CBIRC issued the Measures for the Administration of the Bancassurance Business of Commercial Banks,55 which came into force on 1 October 2019 and repealed all previous regulations in respect of bancassurance business. Currently, the two main regulations, namely, the Provisions on the Supervision and Administration of Full-Time Insurance Agencies 2015 and the Measures for the Administration of the Bancassurance Business of Commercial Banks 2019, are in place to regulate the activities of insurance agents in China. We consider these two regulations in detail in sections 13.6 and 13.7 respectively. 13.5 The duties of insurance agents According to the Insurance Law, an insurer, in entrusting an agent to conduct insurance business, can sign an agency agreement with the insurance agent to provide for the rights and obligations of the parties according to law.56 Therefore, the duties of the insurance agents must be specified in the agency agreement and the agent must perform the duties in accordance with the agreement. Agents are in contact with the insured almost at every stage in the formation and operation of an insurance contract.The agent may, according to the circumstances, be required either to perform an act on behalf of the insurer or to receive information on behalf of the insurer. Here we take the Insurance Agent Contract of Pingan Life Insurance Company Ltd. as an example to explain the duties of an insurance agent.57 13.5.1 Agent’s duty to explain the content of insurance contract Article 17 of the Insurance Law requires the insurer to explain the contents of the insurance contract to the proposer and to clearly explain the exclusion clauses to the proposer before concluding the contract. Otherwise the exclusion clauses shall have no effect. This is a unique feature of the Insurance Law. The insurer authorizes its agents to perform the duty of explanation of insurance clauses.The agents must “fully and faithfully explain the content of the insurance policies to the customers”.58 If the agent fails to clearly explain or misstates the exclusion clauses to the proposer, the exclusion clauses cannot be relied on by the insurer. Disputes very often arise from the agent’s failure in his or her duty to explain the exclusion clauses to the proposer at the time of selling the insurance policy. 54 The CIRC Order No. 3 [2015] (see accessed on 14 October 2020). 55 Yin Bao Jian Ban Fa No. 179 [2019] (see accessed on 14 October 2020). 56 The Insurance Law, art.126. 57 The Insurance Agent Contract from Pingan Life Insurance Company Ltd (see accessed on 2 June 2020). 58 The Insurance Agent Contract from Pingan Life Insurance Company Ltd 2016, clause 6(1).

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Because an individual agent works for the insurer for commission, he or she usually makes every effort to persuade the proposer to purchase the policy; sometimes he or she provides false information about the policy or the scope of coverage. As mentioned earlier, agents are prohibited from performing misconduct.59 Where an agent falsely states the scope of a policy to the proposer intentionally in order to mislead him or her to enter into the contract, the issue that arises here is whether the insurer can estop from denying the misstated scope of coverage. The Insurance Law does not provide an answer to this question. It seems unlikely that the insurer should be bound by its agent’s intentional misstatement of the scope of coverage. But this is an area to be addressed by the CBIRC or the SPC in the future. In the UK, an agent who falsely states the scope of a policy to a prospective insured faces criminal liability if his or her conduct was intentional or reckless.60 Where the agent is acting in respect of a policy which is within the Financial Service and Markets Act 2000, false statements as to coverage will also impose criminal liability on the insurer (s.39). However, the statutory structure does not assist the insured directly, for there are no civil sanctions under the legislation and the insured remains the holder of a policy which does not cover the risks intended by him or her that it should cover. The insured may well have an action against the agent for breach of warranty of authority, although if it is the case that such an action proves to be worthless, the question becomes whether he or she has any action against the insurers whereby the policy is to be regarded as extending to the anticipated risks. Any such action is conditional on it being demonstrated that the agent had the authority either to alter the terms of an existing policy or, where the policy has yet to be issued, to bind the insurers as to the scope of that policy. If authority can be shown, the insurers may well be estopped from denying that the coverage is as stated by its agent. If the agent does not have the authority to vary the terms of the contract,61 as where the policy itself removes from the agent the authority to make statements about coverage,62 then the insured cannot claim the promised extended coverage.63 13.5.2 Imputation of knowledge from agent to insurer According to the Insurance Law, at the time of formation of the insurance contract, the proposer has a duty to disclose to the insurer material information in relation to the risks to be covered.64 The insurer can rescind the insurance contract where the proposer fails to fulfil the obligation of truthful disclosure intentionally or by gross negligence so that the failure of disclosure or representation shall sufficiently influence the insurer’s decision on whether the insurer will accept the insurance 59 The Insurance Law, art.131. 60 Financial Service Act 2012 ss.89 and 90. 61 Re Hooley Hill Rubber and Cemical Co Ltd [1920] 1 K.B. 257. 62 Horncastle v Equitable Life Assurance Society of the United States (1906) 22 T.L.R. 735; Comerford v Britannic Assurance Co Ltd (1908) 24 T.L.R. 593. 63 Rob Merkin, Colinvaux’s Law of Insurance (11th edn., Sweet and Maxwell 2016) para. 16-020. 64 The Insurance Law 2015, art.16(1). For more detailed discussion on art.16, see Zhen Jing, Chinese Insurance Contracts: Law and Practice (1st edn., Informa Law from Routledge 2017) pp. 221–285.

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or raise the premium rate.65 Where the insurer knows that the proposer fails to make a truthful disclosure at the time of entering into a contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payment or paying insurance benefits.66 The phrase “the insurer knows” means that the insurer is aware of or should have been aware of ”,67 namely, the insurer has the actual and constructive knowledge of the proposer’s failure in performing his or her duty of pre-contract disclosure. As the insurer’s agent is authorized to sell the insurance policy and has the duty “to carefully and correctly guide the proposer to fill out the insurance proposal form”,68 the agent’s knowledge to the material information disclosed to him or her by the proposer should be imputed to the insurer. Under the following circumstances, the insurer can be deemed to know the insured’s failure to disclose material information. (a) The insurer is deemed to know the fact which its agent knows An insurer’s agent is authorized by the insurer to negotiate insurance contracts on behalf of the insurer; the insurer must take legal consequences for the agent’s acts within the scope of authorization.69 Thus, if the agent knows that the insured has failed to perform the duty of disclosure, the insurer is deemed to know that as well, and is thus prohibited from taking the defence of the non-disclosure. In Mrs Guihong Li v China Pingan Insurance Company Shanghai Branch,70 Mrs Li’s husband suffered from hepatitis and went to hospital to see a doctor on 7 December 2000. While her husband was staying at the hospital for treatment, Mrs Li effected a life policy on her husband’s life through an agent of the insurer (Mr Xie) on 8 December 2000. She gave negative answers to all questions about the state of the life insured’s health in the proposal form. Mr Xie stated in his business report to the insurer that he met the life insured on 8 December 2000 in hospital, which means that the agent was aware of the life insured’s health condition. The life insured died of cirrhosis in August 2001. The insurer repudiated liability by reason of the insured’s failure to perform the duty of disclosure when applying for the insurance. The issue of argument was whether the insurer knew that fact but still entered into the contract. The trial court held that the contract was entered into when the life insured was in hospital for medical treatment for hepatitis. Mr Xie met the life insured in the hospital so he was aware of the illness of the life insured. The Appeal Court held that the insurer was deemed to know the fact of the life insured’s illness, thus should not be allowed to repudiate liability on the ground of non-disclosure.

65 Ibid., art.16(2). 66 Ibid., art.16(6). 67 See Zhen Jing, Chinese Insurance Contracts: Law and Practice (1st edn., Informa Law from Routledge 2017) p. 265. 68 The Insurance Agent Contract from Pingan Life Insurance Company Ltd 2016, clause 6(2). 69 The Insurance Law, art.127. 70 This case was decided by the Second Intermediate People’s Court, Shanghai City, Civil Court Judgment (2003) No. 110.

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In another case,71 the insured took out an all-risk policy for his ship, which was rebuilt from an old ship. However, due to the fact that the certificate of the ship still retained the words of the “date of the building” and the “manufacturer of the building” rather than the “date of the rebuilding” and the “manufacturer of the rebuilding”, the insured filled in the proposal form by giving information about the ship according to the certificate and he did not disclose the fact that the ship was rebuilt from an old ship. The agent of the insurer knew the fact that the ship had been rebuilt and checked the ship in the port before the conclusion of the contract, but he did not ask the insured any further questions about this. The ship was destroyed by a collision with another ship. The insurer repudiated the liability on the ground that the insured failed to disclose the material fact of the rebuilding of the ship. The court rejected the insurer’s argument and held the insurer liable. (b) The circumstance which the insurer’s agent can observe is taken to be known by the insurer Sometimes, courts hold that the insurer is deemed to have known the circumstance which the insurer’s agent can observe, and the insured is released from disclosing such circumstance to the insurer. In Mr Jiangang Guo v China Life Insurance Company Ltd. Hebi Branch,72 the life insured had a surgery to remove a tumour from her brain (anaesthesia intracranial tumour resection). A few days later, an insurer’s agent visited the patient and persuaded her to take a life policy. The insured told the agent about the life insured’s disease and the treatment by surgery. The life insured’s hair had not grown out then. The agent would easily notice the fact that the life insured had just had brain surgery, but the agent (who completed the proposal form on behalf of the insured) gave negative answers to the questions about diseases in the proposal form. When the life insured died, the insurer refused to pay on the ground of the insured’s non-disclosure of the life insured’s disease. The court held that when the agent visited the life insured, he could easily see the fact that the life insured had a brain operation and her hair did not grow out then. That meant the agent knew the life insured’s health condition, so the insured was deemed to know that fact. In some situations, it is unreasonable to expect the insurer’s agent to know the state of health of the life insured by observation of the appearance of the life insured. For example, in Mr Huang Chen and Mr Tao Chen v Prudential Life Insurance Company Ltd. Guangdong Branch,73 the life insured had diabetes and longstanding retinal detachment but did not disclose the fact to the insurer. The trial court held that the insurer’s agent should have observed the life insured’s state of health from the appearances of the life insured according to the common sense of a man and then should have decided whether or not to take the risk. The appeal court found such a judgment by the trial court unreasonable. It would be very 71 See China Maritime Law Association News Letter (1999) No. 48, p. 17. 72 This case was decided by the Intermediate People’s Court, Hebi City, Henan Province, Civil Court Judgment (2010) No. 81. 73 This case was decided by the Intermediate People’s Court, Guangzhou City, Guangdong Province, Civil Court Judgment (2009) No 4198 (see accessed on 14 October 2020).

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unlikely for any person to notice such an eye disease by mere observation from the appearance of the life insured. (c) If the insurer’s agent is a friend or a relative of the insured, is the agent deemed to know the insured’s state of health? Some courts hold that if the insurer’s agent is a relative or a friend of the life insured, he or she (the agent) is deemed to know the state of the life insured’s health and thus the insured is released from the duty of disclosure. For example, in Mr Jianxiang Li v China Life Insurance Company Shangli County Branch,74 it was held that as the insurer’s agent who negotiated the life policy with Mr Li (the insured) was a friend of Mr Li and Mrs Li (the life insured), he should be aware of the state of the life insured’s health. It is submitted that it is rather arbitrary and unpersuasive to make such a judgment on a case like this one. An agent who is the friend of the insured may have more opportunity to know the state of the life insured’s health, but it cannot be said that he or she knows the facts. Whether or not such an agent knows the life insured’s disease must be determined in the light of relevant facts of the case. For example, as a friend of the life insured, if the agent takes the life insured to a hospital for treatment of a kind of disease, the agent should be deemed to know the fact that the insured has the disease. 13.5.3 Agent’s duty to guide the proposer to fill out the proposal form In some agency contracts, the agent is required to carefully and correctly guide customers to fill out the insurance proposal form and fill in the “Agent’s Report” to inform the insurer if they know or should know about the situation of the customer that may affect the insurer’s underwriting and underwriting rate.75 The agent is prohibited from signing the proposal form on behalf of the proposer.76 In practice, in China, it is not uncommon that an agent actually helps with the proposer to fill in the proposal form. If an answer is incorrect due to the fault or with the knowledge of the proposer, then obviously the insurer will be entitled to avoid liability. If, however, the proposer tells the agent the truth, but the latter chooses to falsify an answer, and the proposer does not write the proposal form, the question that arises here is whether the proposer is bound by what the agent has done. The general position is that if the proposer has signed the proposal form himself or herself, he or she is bound by what he or she has signed except if he or she can prove that the content filled by the agent was not his or her own knowledge or he or she was misled by the agent’s misconduct as stipulated in art.131 of the Insurance Law.77

74 This case was decided by the Intermediate People’s Court, Pingxiang City, Jiangxi Province, Civil Court Judgment (2009) No. 75. 75 The Insurance Agent Contract from Pingan Life Insurance Company Ltd 2016, clause 6(2). 76 Ibid., clause 7(2). 77 Article 131 of the Insurance Law is concerned with the misconduct of the insurers’ agents and has been mentioned earlier in this chapter.

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Article 3 of the SPC Interpretation II 2013 provides rules in respect of the signature of the proposer that where, when entering into an insurance contract, the proposer or the proposer’s agent does not personally affix its signature or seal to the contract, and the insurer or the insurer’s agent affixes a signature or seal to the contract on behalf of the proposer, the contract shall not be effective to the proposer. However, if the proposer has paid the insurance premiums, he or she shall be deemed to have subsequently recognized the signature or seal affixed on its behalf. Where an insurer or the insurer’s agent fills out the proposal form on behalf of the proposer, which is then signed or sealed by the proposer for confirmation, the information entered by the insurer or its agent on behalf of the proposer shall be deemed to represent the true will of the proposer, unless there is evidence that the insurer or its agent falls under any of the circumstances as described in articles 116 and 131 of the Insurance Law.78 13.5.4 Agent’s duty to deliver proposal forms and insurance policies in a timely manner When the proposer has completed the proposal form, the agent shall, in a timely manner, submit the form and other relevant insurance documents and accurate customer information to insurer for review.79 After the insurer agrees to underwrite, 78 Article 116 of the Insurance Law concerns the insurer or its employee’s misconduct, which provides the following provisions. An insurance company and its employees shall not have any of the following acts in the course of conducting business: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

Cheating the proposers, the insureds, or the beneficiaries; Concealing from the proposers material information relevant to the insurance contracts; Preventing the proposers from fulfilling their obligation of making truthful disclosure provided under this Law or inducing them not to fulfil such an obligation; Giving or promising premium rebates or other benefits other than those provided for in the contracts to the proposers, the insureds, or the beneficiaries; Refusing to fulfil the obligation of paying indemnity or insurance benefits agreed upon in an insurance contract according to law; Deliberately fabricating insured events that have never occurred, making up insurance contracts or deliberately exaggerating insured events that have occurred to make false indemnities and defrauding the company of insurance benefits or seeking other illegitimate gains; Misappropriating, withholding, or pilfering premiums; Entrusting agencies that have not obtained lawful qualifications to engage in activities of insurance sales.; Seeking illegitimate gains for other organisations or individuals by taking advantage of the insurance business; Using insurance agencies, insurance brokers, or insurance adjusting firms to engage in illegal activities such as siphoning off commission by making up insurance agency business or fabricating surrender of policies; Damaging the commercial reputation of its rivals by fabricating and disseminating false facts or other acts of unfair competition or disturbing the order of the insurance market by other acts of unfair competition; Divulging the business secrets of the proposers or the insured so that they become known in their business activities; and Other acts violating laws, administrative regulations, and provisions of the insurance supervision and regulation authority of the State Council.

79 The Insurance Agent Contract from Pingan Life Insurance Company Ltd 2016, clause 6(6).

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the agent shall deliver the insurance policy to the proposer within three days after receiving the original insurance policy issued by the insurer.80 13.5.5 Agent’s duty regarding insurance customer’s information The agent has the duty to collect and record customer information in accordance with the principles of accuracy, integrity, safety, and confidentiality and to submit the customer information to the insurance company truthfully.81 The information received by the agent is deemed to be received by the insurer. 13.5.6 Agent’s duty to collect premium If authorized, the agent shall collect premiums on behalf of the insurer and transfer the premiums collected to the insurer within 24 hours as specified in the contract.82 Any payment made by the proposer to the agent who is not passed on to the insurer is deemed to have been received by the insurer. Where the agent is authorized to collect premiums on behalf of the insurer from a customer who has entered into a contract with insurer or who intends to enter into an insurance contract with the insurer, at a site outside the business premises of the insurer, the agent shall receive a cash value of the premium not more than ¥1,000 yuan in a single insurance contract and give a receipt to the customer. Where the amount of premium for a single insurance contract exceeds ¥1,000 yuan, the cash payment method cannot be used; the payment of premium should be made directly to the special premium account of the insurer.83 13.5.7 Agent’s duty in relation to after-sales service The agent is obliged, in accordance with the requirement of the insurer, to provide the customers with after-sales service related to the insurance contract.84 For example, if there is any material increase of risk covered under the insurance policy, upon being notified by the proposer or the insured of the increase of risk, the agent must inform the insurer of such an increase of the risk. 13.6 Supervision and administration of insurance agents Full-time insurance agents in China are regulated by the Provisions on the Supervision and Administration of Full-Time Insurance Agencies 2015 (hereinafter, the Agency Provisions 2015). The Agency Provisions 2015 consist of 92 articles in seven chapters: the general provisions, market access, operational rules, market exit, supervisory inspection, legal liabilities, and supplemental provisions.

80 81 82 83 84

Ibid., clause 6(7). Ibid., clause 6(5). Ibid., clause 6(5). Ibid., clause 6(4). Ibid., clause 6(8).

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Under the Agency Provisions 2015, full-time insurance agencies refer to the institutions which engage in the insurance business on behalf of insurance companies as authorized by insurance companies and collect commissions from insurance companies, including full-time corporate insurance agents and their branches.85 A full-time corporate insurance agent to be formed within the territory of China shall satisfy the qualification requirements prescribed by the CBIRC and obtain an insurance agency business permit.86 Full-time insurance agencies shall comply with laws, administrative regulations, and the relevant provisions issued by the CBIRC and follow the principles of free will, good faith, and fair competition.87 For the purposes of these Provisions, “insurance intermediary institutions” includes insurance agencies, insurance brokerage institutions, insurance adjustment institutions, and their branch offices.88 Foreign-funded full-time insurance agencies formed with the approval of the CBIRC shall be governed by these Provisions, except as otherwise specified in the relevant international treaties to which China has acceded or specified by the CBIRC. These Provisions shall apply, mutatis mutandis, to the formation and management of a partnership full-time insurance agency, except as otherwise specified by the CBIRC.89 13.6.1 Market access (a) Formation of an insurance agency Except as otherwise specified by the CBIRC, a full-time insurance agency shall adopt either of the following forms of organization: (1) Limited liability company; and (2) Joint-stock limited company.90 For the formation of a full-time corporate insurance agent, the following conditions shall be met: (1) Its shareholders or promoters are of good credit standing and have no record of any major violation of laws in the last three years; (2) Its registered capital reaches the minimum amount specified in the Company Law and these Provisions; (3) Its by-laws are in compliance with the relevant provisions; (4) Its chairman of the board of directors or executive director and senior executives satisfy the office qualifications as set out in these Provisions; (5) It has a sound organizational structure and adequate and effective management rules; (6) It has a fixed domicile suitable for its scale of business; (7) It has business, financial, and other computer software and hardware facilities suitable for its business development; (8) Other conditions as set out in laws, administrative regulations, and the provisions issued by the CBIRC.91

85 86 87 88 89 90 91

The Supervision and Administration of Full-Time Insurance Agencies 2015, art.2(1). Ibid., art.2(2) Ibid., art.3. Ibid., art.87. Ibid., art.88. Ibid., art.5. Ibid., art.6.

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The minimum registered capital of a full-time corporate insurance agent to be formed shall be ¥50 million yuan, except as otherwise specified by the CBIRC. The registered capital of a full-time corporate insurance agent must be paid-in monetary capital.92 The branch offices of a full-time corporate insurance agent shall include branches and business departments. To form a branch office, a full-time corporate insurance agent shall meet the following conditions:93 (1) Its internal control rules are adequate and effective; (2) Its registered capital satisfies the requirements of these Provisions; (3) Its existing organizational structure is in normal operation, and it has committed no major violation of laws in the last year; (4) The proposed primary person in charge satisfies the office qualifications as set out in these Provisions; (5) The branch office to be formed has business premises satisfying the prescribed requirements and other facilities related to its operations. After receiving an application for formation of a full-time corporate insurance agent, the CIRC may alert the applicant to risks and may conduct interviews on issues related to the formation to learn the market development strategy, business development plan, development of internal control rules, personnel structure, and other relevant matters of the company to be formed.94 The CBIRC may, as actually needed, organize an on-site check. After approving the formation of a full-time corporate insurance agent according to the law, the CBIRC shall issue a permit to the applicant. Only after receiving the permit may the applicant engage in the insurance agency business.95 If any of the following circumstances occurs, a full-time insurance agency shall report it to the CBIRC in writing within five days of its occurrence:96 (1) modification of the name of the agency or any branch office thereof; (2) modification of the domicile of the agency or the business premises of any branch office thereof; (3) modification of the name of any promoter or principal shareholder of the agency; (4) modification of any principal shareholder of the agency; (5) modification of the registered capital of the agency; (6) material modification of the equity structure of the agency; (7) modification of the form of organization of the agency; (8) division or combination of the agency; (9) amendment of the company by-laws; and (10) formation or abolition of any branch office of the agency. Where any modification of a full-time corporate insurance agent involves any matter recorded in the permit, it shall surrender the original permit, obtain a new one, and issue an announcement in accordance with the relevant provisions of the Measures for the Administration of Insurance Permits.97 The permit of a full-time corporate insurance agent shall be valid for three years, and a full-time corporate insurance agent shall apply to the CBIRC for renewal 30 working days before its permit expires. Where a full-time corporate insurance agent applies for renewal of its permit, the CBIRC shall, before the expiration of 92 93 94 95 96 97

Ibid., art.7. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15.

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the permit, comprehensively review and assess the full-time corporate insurance agent’s operations in the last three years and make a decision to approve or disapprove the renewal. In the case of disapproval, it shall provide a written explanation of the reasons for the disapproval. The full-time corporate insurance agent shall surrender the original permit to the CBIRC within ten working days of receiving the decision; or in the case of approval, obtain a new permit.98 (b) Senior management personnel qualification Under the Agency Provisions 2015, “senior executive” of a full-time insurance agency refers to the following persons:99 (1) the general manager, a deputy general manager, or an executive with the same power of a full-time corporate insurance agent; and (2) the primary person in charge of a branch office of a full-time corporate insurance agent. The proposed chairman of the board of directors or executive director and senior executives of a full-time insurance agency shall meet the following conditions and be subject to the confirmation of the CBIRC:100 (1) having an educational background of junior college or above; (2) having two years or more of economic work experience; (3) having the management capability required for performing his or her duties and being familiar with insurance laws and administrative regulations and the relevant provisions issued by the CBIRC; (4) being honest and trustworthy and having good conduct; and (5) other conditions as set out by the CBIRC. One with ten years or more of financial work experience may be exempt from the condition in item (1) above. A person who falls under any of the circumstances as set out in art.146 of the Company Law or falls under any of the following circumstances shall not serve as the chairman of the board of directors, executive director, or a senior executive of a full-time insurance agency:101 (1) The person, as a former director, supervisor, or senior executive of an insurance company or insurance intermediary institution whose permit has been revoked for any violation of laws, was personally liable or was directly liable as a leader for the revocation of permit, and it has not been more than three years since the date of revocation; (2) The person, as a former director, supervisor, or senior executive of a financial institution, has been disqualified for the office by the financial regulatory authority for his or her violation of laws or discipline, and it has not been more than five years since the disqualification; (3) The person has been prohibited from access to the financial sector during a certain period as decided by the financial regulatory authority, and the period has not expired; (4) It has not been more than two years since the person was issued a warning or fined by the financial regulatory authority; (5) The person is under investigation by the judicial authority, the disciplinary inspection and supervision department, or the financial regulatory authority; (6) Other circumstances as set out by the CBIRC. 98 99 100 101

Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19.

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Without the consent of the shareholders’ meeting, a director or senior executive of a full-time insurance agency may not concurrently hold any position in an institution with any conflict of interest.102 To apply to the CBIRC for the confirmation of satisfaction of office qualifications for the chairman of the board of directors or executive director and senior executives, a full-time insurance agency shall honestly complete an application form and submit the relevant materials. The CBIRC may investigate or interview the proposed chairman of the board of directors or executive director and senior executives of a full-time insurance agency.103 Where the chairman of the board of directors, executive director, or a senior executive of a full-time insurance agency is transferred to or holds concurrently any post at the same or a lower level within the agency, reconfirmation of his or her satisfaction of office qualifications is not required. Where a full-time insurance agency removes the chairman of the board of directors, executive director, or a senior executive from the office or consents to his or her resignation, he or she shall be automatically disqualified for the office. The appointment or removal of the chairman of the board of directors, executive director, or a senior executive by a full-time insurance agency shall be reported to the CBIRC in writing within five days after the decision is made.104 Where the chairman of the board of directors, executive director, or a senior executive of a full-time insurance agency is prosecuted for any suspected economic crime, the full-time insurance agency shall submit a written report to the CBIRC within five days after the prosecution is instituted and within five days after the case is closed.105 Where a full-time insurance agency appoints anyone the temporary person in charge under special circumstances, it shall submit a written report to the CBIRC within five days after the appointment decision is made. The term of office of the temporary person in charge shall not exceed three months.106 13.6.2 Operation Rules (a) General Rules A full-time corporate insurance agent shall put its permit in a conspicuous position in its domicile or business premises. A branch office of a full-time corporate insurance agent shall put a photocopy (bearing the official seal of the corporate body owning the branch office) of the permit of the company and its business license in a conspicuous position in its business premises.107

102 103 104 105 106 107

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25.

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REGULATION OF INSURANCE AGENTS

A full-time insurance agency may engage in the following insurance agency business:108 (1) selling insurance products as an agent; (2) collecting insurance premiums as an agent; (3) conducting damage survey and claim settlement for the relevant insurance business as an agent; and (4) other business approved by the CBIRC. To engage in the insurance agency business in a province, autonomous region, or municipality directly under the Central Government other than its place of registration, a full-time corporate insurance agent shall form branch offices. The business territory of a branch office of a full-time corporate insurance agent shall not be beyond the province, autonomous region, or municipality directly under the Central Government where it is located.109 The practitioners of a full-time insurance agency shall meet the conditions as set out by the CBIRC.110 A full-time insurance agency shall provide its practitioners with training on insurance law and insurance business and education on professional ethics. The pre-job training received by an insurance agency practitioner shall not be less than 80 hours, and an insurance agency practitioner shall receive on-the-job training and education every year for not less than 36 hours accumulatively, including no fewer than 12 hours of training on legal knowledge and education on professional ethics.111 A full-time insurance agency shall establish special account books to record the revenues and expenditures in the insurance agency business. A full-time insurance agency which collects insurance premiums as an agent shall open an independent premium agent account to conduct settlement.112 A full-time insurance agency shall establish complete and standardized business archives, including the following at a minimum:113 (1) Basic information on the insurance policies sold as an agent, including but not limited to the names of insurers, insurance applicants, and the insured, the names of products, insured amounts, premiums, and methods of payment; (2) Information on the collection of insurance premiums as an agent and delivery of collected premiums to insurance companies represented; (3) Information on the amounts of insurance agency commissions and the collection thereof; (4) Other important business information. The records of a full-time insurance agency shall be true and complete. A full-time insurance agency shall properly manage and use the various documents and materials provided by the insurance companies represented and shall submit the remaining documents and materials to the insurance companies represented within 30 working days after the completion of the agency relationship.114 To engage in the insurance agency business, a full-time insurance agency shall enter into a written agency contract with an insurance company represented, agreeing on the rights and obligations of both parties and other relevant matters. An 108 Ibid., art.26. 109 Ibid., art.27. 110 Ibid., art.28. “Insurance agency practitioner” means an employee of a full-time insurance agency who engages in the sale of insurance products, damage survey, claim settlement, or other relevant business. 111 Ibid., art.29. 112 Ibid., art.30. 113 Ibid., art.31. 114 Ibid., art.32.

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REGULATION OF INSURANCE AGENTS

agency contract may not violate laws, administrative regulations, and the provisions issued by the CBIRC.115 A full-time insurance agency shall prepare a standard client notification letter and present it to clients in conducting business. The client notification letter shall, at a minimum, include the basic information on the full-time insurance agency and the insurance company represented, such as the names, business premises, scope of business, and contact methods thereof. If there is any affiliation between the full-time insurance agency or its director or senior executive and the insurance company represented or the relevant insurance intermediary institution, it shall be explained in the client notification letter.116 A full-time insurance agency shall clearly alert an insurance applicant (proposer) to the clauses in the insurance contract regarding the liability exemptions or exceptions, surrender, deduction of other expenses, cash value, and cooling-off period, among others.117 A full-time corporate insurance agent shall take out professional liability insurance or deposit a bond within 20 working days of obtaining a permit. A full-time corporate insurance agent shall, within ten working days of taking out professional liability insurance or depositing a bond, submit to the CBIRC a photocopy of the professional liability insurance policy or a photocopy of the bond deposit agreement and a photocopy of the original voucher of deposit of the bond.118 A full-time corporate insurance agent which takes out professional liability insurance shall ensure the continuing validity of the insurance. The limit of liability for each accident under the professional liability insurance policy owned by a full-time corporate insurance agent shall not be less than 1 million yuan, and the cumulative liability limits under a one-year policy shall not be less than ¥5 million yuan and not be less than two times the full-time insurance agency’s operating revenue in the prior year. If the cumulative liability limits under professional liability insurance reach ¥50 million yuan, further increase in the liability limits under professional liability insurance is not required.119 A full-time corporate insurance agent which deposits a bond shall deposit the bond at 5% of its registered capital; if it increases its registered capital, it shall increase the amount of the bond accordingly, but if the amount of the bond deposited reaches 1 million yuan, further increase in the bond is not required. The bond of a full-time corporate insurance agent shall be deposited in the form of bank deposit or any other form recognized by the CBIRC. If the bond is deposited in the form of bank deposit, it shall be deposited in a special account in a commercial bank.120 Under any of the following circumstances, a full-time corporate insurance agent may use the bond: (1) Its registered capital is reduced; (2) Its permit is cancelled; (3) It takes out professional liability insurance meeting the prescribed conditions; (4) Other circumstances as set out by the CBIRC. Within five working days of 115 116 117 118 119 120

Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36. Ibid., art.37. Ibid., art.38.

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REGULATION OF INSURANCE AGENTS

using the bond, a full-time corporate insurance agent shall report it to the CBIRC in writing.121 (b) Prohibited conduct No full-time corporate insurance agent may forge, alter, lease out, lend, or transfer its permit.122 The scope of business of a full-time insurance agency may not exceed the scope as specified in art.26 of the Agency Provisions 2015.123 The insurance agency business conducted by a full-time insurance agency shall not exceed the scope of business and the business territory of the insurance company represented, except insurance agency business involving co-insurance outside its business territory, insurance underwritten outside its business territory, or master policies124 as otherwise specified by the CBIRC.125 In conducting the insurance agency business, a full-time insurance agency and its practitioners may not deceive insurance applicants, the insured, beneficiaries, or insurance companies by the following means:126 (1) Concealing or fabricating any important information related to the insurance contract; (2) Conducting any misleading sale; (3) Forging or modifying without permission the insurance contract, selling false insurance documents, or providing false certifications to the parties to the insurance contract; (4) Obstructing an insurance applicant from performing or inducing any insurance applicant not to perform the obligation of telling the truth; (5) Fraudulently obtaining commissions by fabricating any insurance agency business or surrender; (6) Conducting any false claim settlement; (7) Fraudulently obtaining a claim payment by colluding with any insurance applicant, insured, or beneficiary; (8) Otherwise deceiving an insurance applicant, insured, beneficiary, or insurance company. In conducting the insurance agency business, a full-time insurance agency and its practitioners may not:127 (1) force or induce an insurance applicant to enter into or restrict an insurance applicant from entering into an insurance contract or restrict the normal operations of any other insurance intermediary institution by taking advantage of administrative power, shareholder privileges, or professional advantage, or by any other improper means; (2) misappropriate, intercept, or encroach on insurance premiums, surrender values, or claim payments; (3) provide or promise to provide any insurance company or employee thereof, insurance applicant, insured, or beneficiary with any benefit not under the contract; (4) seek improper benefits for any other institution or individual by taking advantage of its business; or (5) divulge any trade secret or individual privacy of an insurance applicant, insured, beneficiary, or insurance company known in its operations. 121 Ibid., art.39. 122 Ibid., art.40. 123 Ibid., art.41. 124 Master Policy: in property and liability coverage, the combining of several locations or operations under a single policy for the same insured or insureds.The term may also be used in the case of construction wrap-ups. In either case, underlying policies or certificates of insurance are issued to insureds under the policy as evidence of coverage under the master policy. 125 The Supervision and Administration of Full-Time Insurance Agencies 2015, art.42. 126 Ibid., art.43. 127 Ibid., art.44.

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A full-time insurance agency may not (1) damage the goodwill of competitors by fabrication or spreading false facts, nor disrupt the insurance market order by false advertisements, false publicity, or any other act of unfair competition;128 (2) conduct insurance agency transactions with any institution or individual which illegally engages in the insurance business or insurance intermediary business;129 (3) withhold commissions from the insurance premiums collected;130 (4) enter into insurance contracts on behalf of insurance applicants;131 and (5) recruit practitioners on condition of their payment of fees or purchase of insurance products, promise unreasonably high returns, and use the number of directly or indirectly recruited persons or sale performance as the main basis for computing the remuneration of practitioners.132 13.6.3 Market exit The CBIRC shall not grant the renewal of the permit of a full-time corporate insurance agent which falls under any of the following circumstances:133 (1) Failing to file a renewal application before the expiration of its permit; (2) No longer meeting any company formation condition except item (1) of article 6 of these Provisions; (3) Being unable to conduct normal operations due to internal mismanagement; (4) Failing to effectively address issues related to its major violation of laws; (5) Failing to pay the regulatory fees as required. Where the permit of a full-time corporate insurance agent expires and the CBIRC does not grant renewal of the permit or the permit is retracted, cancelled, or revoked according to the law, liquidation shall be organized or the insurance agency business shall be settled according to the law, and a liquidation or settlement report shall be submitted to the CBIRC.134 Where a full-time corporate insurance agent is dissolved, a liquidation group shall be formed according to the law to conduct liquidation, and within ten working days of appearance of the cause of dissolution, a written report shall be submitted to the CBIRC. After the end of liquidation, the full-time corporate insurance agent shall submit a liquidation report to the CBIRC.135 Where a full-time corporate insurance agent is dissolved, if it is discovered in the process of liquidation that the full-time corporate insurance agent is unable to repay its due debts and its assets are not enough to repay all its debts or it is evidently insolvent, a bankruptcy application shall be filed according to the law, and the liquidation of its property and the disposition of its claims and debts shall be governed by the statutory procedures for bankruptcy.136

128 129 130 131 132 133 134 135 136

Ibid., art.45. Ibid., art.46. Ibid., art.47. Ibid., art.48. Ibid., art.49. Ibid., art.50. Ibid., art.51. Ibid., art.52. Ibid., art.53.

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REGULATION OF INSURANCE AGENTS

Where the business license of a full-time corporate insurance agent is revoked or a full-time corporate insurance agent is abolished, ordered to close, or legally declared bankrupt by a people’s court, a liquidation group shall be formed according to the law to conduct liquidation under the statutory procedure and submit a liquidation report to the CBIRC.137 The CBIRC shall nullify the permit of a full-time corporate insurance agent which exits the market under any of the following circumstances, and issue an announcement of it: (1) Its permit expires, and according to the law, the CBIRC does not grant renewal of its permit; (2) Its permit is retracted, cancelled, or revoked according to the law; (3) It is dissolved, its business license is revoked, or it is abolished, ordered to close, or declared bankrupt according to the law; (4) Other circumstances as set out in laws and administrative regulations. A fulltime corporate insurance agent whose permit is nullified shall surrender the original permit in a timely manner.138 13.6.4 Supervisory inspection A full-time insurance agency shall, according to the relevant provisions issued by the CBIRC, submit the relevant reports, statements, documents, and materials in a timely, accurate, and complete manner, and submit the relevant electronic texts as required by the CBIRC. The statements, reports, and materials submitted by a full-time insurance agency shall bear the signature of the legal representative, the primary person in charge, or a person authorized by him or her and the seal of the agency.139 A full-time insurance agency shall properly preserve its business archives, account books, business ledgers, original vouchers of the commission revenue, and other relevant materials for not less than five years if the duration of insurance is not more than one year and for not less than ten years if the duration of insurance is longer than one year, starting from the day when the insurance contract is terminated.140 A full-time insurance agency shall, according to the relevant provisions, pay the regulatory fees into an account designated by the CBIRC.141 A full-time corporate insurance agent shall, within three months after the end of each accounting year, engage an accounting firm to audit its financial condition, including but not limited to its assets, liabilities, and profits, and submit the relevant audit report to the CBIRC. The CBIRC may, as needed, require a full-time corporate insurance agent to submit a specific external audit report.142 The CBIRC may, as needed in supervision, hold regulatory interviews with the chairman of the board of directors or executive director and the senior executives

137 138 139 140 141 142

Ibid., art.54. Ibid., art.55. Ibid., art.56. Ibid., art.57. Ibid., art.58. Ibid., art.59.

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REGULATION OF INSURANCE AGENTS

of a full-time insurance agency, requiring them to provide explanations on the major issues in operations.143 The CBIRC shall conduct an on-site inspection of a full-time insurance agency according to the law, including but not limited to the following:144 (1) Whether the formation or modification of the agency has been approved or whether the obligation to report the same has been performed according to the law; (2) Whether its capital is true and adequate; (3) Whether the set-aside and use of the bond is in compliance with the relevant provisions; (4) Whether it complies with the provisions on professional liability insurance; (5) Whether its operations are lawful; (6) Whether it is in good financial condition; (7) Whether the reports, statements, and materials submitted to the CBIRC are timely, complete, and true; (8) Whether its internal control rules are adequate and effectively implemented; (9) Whether the appointment of its chairman of the board of directors, executive director, and senior executives complies with the relevant provisions; (10) Whether it has effectively performed the duty of managing its practitioners; (11) Whether its announcements are published in a timely and true manner; (12) Whether its computer equipment and information systems are in good operating condition. Where a full-time insurance agency is under investigation by the CBIRC for any of the following reasons, the CBIRC shall have the authority to order it to stop part or all of its business during the period of investigation:145 (1) It is suspected of any serious violation of insurance law or administrative regulation; (2) There is any major risk in its operations; (3) It is unable to conduct normal operations. A full-time insurance agency shall, according to the following requirements, cooperate with the CBIRC in an on-site inspection, and may not refuse or obstruct the supervisory inspection legally conducted by the CBIRC:146 (1) It shall provide the relevant documents and materials as required, and may not delay their provision or displace or conceal them; (2) Its relevant managers, financial staff members, and practitioners shall appear on the site to provide explanations and answer questions as required. A full-time insurance agency which falls under any of the following circumstances may be placed by the CBIRC under priority inspection:147 (1) There are any abnormal changes in its operations or financial condition; (2) It fails to submit reports and statements on time or provides any false reports, statements, documents, and materials; (3) It is suspected of any major violation of laws or has received any administrative punishment by the CBIRC; (4) Other circumstances under which the CBIRC deems priority inspection necessary. In the process of an on-site inspection, the CBIRC may engage an accounting firm and other private intermediary institutions to provide the relevant services;

143 Ibid., art.60. 144 Ibid., art.61.The procedure of on-site inspection is stipulated in the On-site Inspection Measures of the CBIRC (for trial Implementation) (the CBIRC Order No. 7 [2019]). 145 The Supervision and Administration of Full-Time Insurance Agencies 2015, art.62. 146 Ibid., art.63. 147 Ibid., art.64.

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REGULATION OF INSURANCE AGENTS

and if so, shall enter into written engagement agreements with them. The CBIRC shall inform the inspected full-time insurance agency of the engagement.148 A full-time insurance agency which believes that an inspector has violated any law or administrative regulation or the relevant provisions issued by the CBIRC may report it or submit a complaint to the CBIRC. A full-time insurance agency shall have the right to apply for administrative reconsideration or institute administrative litigation against the administrative disposition measure taken by the CBIRC.149 13.6.5 Legal Liabilities The Provisions stipulate rules (articles 67 to 86) for legal liabilities in the case of the breach of the Provisions, the Insurance Law, and other regulations. Any illegal operation of the insurance agency business without a permit shall be banned by the CBIRC, and the CBIRC shall confiscate any illegal income and impose a fine of not less than the amount nor more than five times the amount of the illegal income on the violator or if there is no illegal income or the amount of illegal income is less than ¥50,000 yuan, shall impose a fine of not less than ¥50,000 yuan nor more than ¥300,000 yuan on the violator.150 Where an administrative licensing applicant conceals relevant information or provides false materials in the application for the formation of a full-time corporate insurance agent or for any other administrative licensing, the CBIRC shall reject or disapprove its application and issue a warning to it, and the applicant may not apply for the administrative licensing again within one year.151 Where a licensee forms a full-time corporate insurance agent or passes administrative licensing from the CBIRC by fraud, bribery, or any other improper means, the CBIRC shall revoke the administrative licensing according to the law and issue a warning to and impose a fine of ¥10, 000 yuan on the licensee, and the applicant may not apply for the administrative licensing again within three years.152 Where a full-time insurance agency fails to submit a report as required on the occurrence of any matter as set out in articles 14, 39, and 52, the CBIRC shall order it to take corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on it if there is any illegal income. For the directly liable supervising executive or any other liable person of the agency, the CBIRC shall issue a warning to and impose a fine of not more than ¥10,000 yuan on him or her.153 Where a full-time insurance agency appoints any person not satisfying the office qualifications, the CBIRC shall order it to take corrective action and impose a fine of not less than ¥20,000 yuan nor more than ¥100,000 yuan on it; and for the directly liable supervising executive or any other liable person of the agency, shall 148 149 150 151 152 153

Ibid., art.65. Ibid., art.66. Ibid., art.67. Ibid., art.68. Ibid., art.69. Ibid., art.70.

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REGULATION OF INSURANCE AGENTS

issue a warning to and impose a fine of not less than ¥10,000 yuan nor more than ¥50,000 yuan on him or her. Where a full-time insurance agency employs any person not meeting the prescribed conditions, the CBIRC shall order it to take corrective action and issue a warning to and impose a fine of not more than ¥10,000 yuan on it, and for the directly liable supervising executive or any other liable person of the agency, shall issue a warning to and impose a fine of not more than ¥10,000 yuan on him or her.154 Where a full-time corporate insurance agent leases out, lends, or transfers its permit, the CBIRC shall order it to take corrective action and shall impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan on it; if the circumstances are serious, it shall order it to suspend business for an overhaul or revoke its permit, and for the directly liable supervising executive or any other liable person of the company, it shall issue a warning to and impose a fine of not less than ¥10,000 yuan nor more than ¥50,000 yuan on him or her.155 For a full-time insurance agency falling under any of the following circumstances, the CBIRC shall order it to take corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on it if there is any illegal income: (1) Conducting business beyond the approved scope of business or business territory; (2) Conducting business beyond the scope of business or business territory of the insurance company represented; (3) Conducting insurance agency transactions with any entity or individual which illegally engages in the insurance business or insurance intermediary business; (4) Failing to manage and use as required the various documents and materials delivered to it by insurance companies.156 For a full-time insurance agency falling under any of the following circumstances, the CBIRC shall order it to take corrective action and shall impose a fine of not less than ¥20,000 yuan nor more than ¥100,000 yuan on it; if the circumstances are serious, the CBIRC shall order it to suspend business for an overhaul or revoke its permit. For the directly liable supervising executive or any other liable person of the agency, the CBIRC shall issue a warning to and impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan on him or her: (1) Failing to deposit a bond as required or using the bond in violation of the relevant provisions; (2) Failing to take out the professional liability insurance as required or failing to maintain the continuing validity of the professional liability insurance; (3) Failing to establish as required the special account books to record its business revenues and expenditures.157 Where, in violation of article 34 of these Provisions, a full-time insurance agency fails to prepare or present a client notification letter as required, the CBIRC shall order it to take corrective action and shall issue a warning to and impose a fine of not more than ¥10,000 yuan on it; for the directly liable supervising executive 154 155 156 157

Ibid., art.71. Ibid., art.72. Ibid., art.73. Ibid., art.74.

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or any other liable person of the agency, the CBIRC shall issue a warning to and impose a fine of not more than ¥10,000 yuan on him or her.158 For a full-time insurance agency or any of its practitioners falling under the circumstances as set out in article 43 or 44 of these Provisions, the CBIRC shall order the agency or practitioner to take corrective action and shall impose a fine of not less than ¥50,000 yuan nor more than ¥300,000 yuan on the agency or practitioner; if the circumstances are serious, the CBIRC shall revoke its permit, and for the directly liable supervising executive or any other liable person of the agency, the CBIRC shall issue a warning to and impose a fine of not less than ¥30,000 yuan nor more than ¥100,000 yuan on him or her.159 Where a full-time insurance agency or any of its practitioners seeks any illegal benefits by taking advantage of executing any insurance agency business in the process of conducting the insurance agency business, the CBIRC shall issue a warning to and impose a fine of not more than ¥10,000 yuan on the agency or practitioner.160 Where a full-time insurance agency violates article 45 of these Provisions, the CBIRC shall issue a warning to it and impose a fine of not more than ¥10,000 yuan on it if there is any illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on it if there is any illegal income; for the directly liable supervising executive or any other liable person of the agency, the CBIRC shall issue a warning to and impose a fine of not more than ¥10,000 yuan on him or her.161 Where a full-time insurance agency violates article 49 of these Provisions, the CBIRC shall issue a warning to and impose a fine of ¥10,000 yuan on it; and for the directly liable supervising executive or any other liable person of the agency shall issue a warning to and impose a fine of not more than ¥10,000 yuan on him or her.162 Where a full-time insurance agency fails to submit or preserve the relevant reports, statements, documents, or materials under these Provisions or fails to provide the relevant information or materials as required, the CBIRC shall order it to take corrective action during a specified period; if the agency fails to do so, the CBIRC shall impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan on it. For the directly liable supervising executive or any other liable person of the agency, the CBIRC shall issue a warning to and impose a fine of not less than ¥10,000 yuan nor more than ¥50,000 yuan on him or her.163 For a full-time insurance agency falling under any of the following circumstances, the CBIRC shall order it to take corrective action and shall impose a fine of not less than ¥100,000 yuan nor more than ¥500,000 yuan on it; if the circumstances are serious, the CBIRC may restrict its scope of business, order it to stop accepting new business, or revoke its permit. For the directly liable supervising executive or any 158 159 160 161 162 163

Ibid., art.75. Ibid., art.76. Ibid., art.77. Ibid., art.78. Ibid., art.79. Ibid., art.80.

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other liable person of the agency, the CBIRC shall issue a warning to and impose a fine of not less than ¥50,000 yuan nor more than ¥100,000 yuan on him or her: (1) Preparing or providing any false reports, statements, documents, or materials; (2) Refusing or obstructing any legally conducted supervisory inspection.164 For a full-time insurance agency falling under any of the following circumstances, the CBIRC shall order it to take corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on it if there is any illegal income; for the directly liable supervising executive or any other liable person of the agency, the CBIRC shall issue a warning to and impose a fine of not more than ¥10,000 yuan on him or her: (1) Failing to pay the regulatory fees as required; (2) Failing to put its permit or a photocopy thereof (bearing the official seal of the corporate body owning it) and its business license at its domicile or business premises as required; (3) Failing to surrender its permit as required; (4) Failing to undergo the modification registration of its permit as required or failing to apply for the renewal of its permit during the prescribed time limit; (5) Failing to manage its business archives as required; (6) Failing to use as required an independent account to collect insurance premiums as an agent; (7) The actual term of office of its temporary person in charge exceeding the prescribed period; (8) Failing to issue announcements as required; (9) Withholding commissions from the insurance premiums collected as an agent; (10) Entering into insurance contracts on behalf of insurance applicants.165 Where any provision of articles 165 to 170 of the Insurance Law is violated, if the circumstances of the violation are serious, the CBIRC may disqualify the directly liable supervising executive and other directly liable persons of the violator from holding the corresponding offices.166 For a violation of any law or administrative regulation with serious circumstances, the CBIRC may prohibit the relevant liable persons from access to the insurance sector for a certain period or even for life.167 Where it is discovered after a director, senior executive, or practitioner of a fulltime insurance agency resigns that such a person violated the insurance regulatory provisions during his or her former service in the agency, the person shall be held liable according to the law.168 Where the CBIRC discovers that a full-time insurance agency is suspected of tax evasion, illegal fundraising, pyramid sales, or money laundering, among others, which falls under the jurisdiction of any other authority, it shall report or transfer it to the other authority. Where a violator of these Provisions is suspected of a crime, the CBIRC shall report or transfer it to the judicial authority.169

164 165 166 167 168 169

Ibid., art.81. Ibid., art.82. Ibid., art.83. Ibid., art.84. Ibid., art.85. Ibid., art.86.

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REGULATION OF INSURANCE AGENTS

13.7 Regulation of sideline bancassurance business Banks and post offices play an important role as a kind of sideline insurance agent. In 2017, about 90% of premium income for life insurance was from insurance intermediaries, of which 53.7% was from individual agents, and 44.8% was from bancassurance agents and post office insurance agents.170 In order to strengthen the supervision and administration of the bancassurance business of commercial banks, protect the lawful rights and interests of consumers, and promote the standardized and sound development of the bancassurance business of commercial banks, the CBIRC issued the Measures for the Administration of the Bancassurance Business of Commercial Banks (hereinafter, the Measures of Bancassurance).171 These Measures came into force on 1 October 2019 and repealed the following regulations:172 The Notice of Regulating the Bancassurance Business,173 the Notice by the General Office of the China Banking Regulatory Commission of Further Regulating the Administration of the Bancassurance Business,174 the Notice by the China Banking Regulatory Commission of Further Strengthening the Compliance Sales and Risk Management of the Bancassurance Business of Commercial Banks,175 the Notice of Issuing the Regulatory Guidelines for the Bancassurance Business of Commercial Banks,176 the Notice by the CIRC and the CBRC of Further Regulating the Bancassurance Sales Activities of Commercial Banks,177 the Notice of Matters concerning the Administrative Licensing for Banking Sideline Insurance Agents,178 and the Notice of Further Specifying the Matters concerning the Administrative Licensing for Banking Sideline Insurance Agents.179 The Measures of Bancassurance consist of 70 articles in six chapters. Chapter 1 sets out general rules. Chapter 2 provides the requirements for business access, application, and approval processes. Chapter 3 put forward the sideline business rules for bancassurance. Chapter 4 specifies circumstances under which the business can be terminated. Chapter 5 sets forth the supervisory rules and legal liabilities. And Chapter 6 presents supplementary rules. In this section, we consider these rules in detail. The “bancassurance business of commercial banks” means that commercial banks as authorized by insurance companies sell insurance products and provide relevant services on behalf of insurance companies within the extent of authorization from insurance companies and collect commissions from insurance companies

170 The Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Sciences Press, Beijing, China) pp. 126–132. 171 The Measures for the Administration of the Bancassurance Business of Commercial Banks 2019, art.1. 172 Ibid., art.70. 173 The CIRC No. 70 [2006]. 174 The CBRC General Office No. 47 [2009]. 175 The CBRC No. 90 [2010]. 176 The CIRC No. 10 [2011]. 177 The CIRC No. 3 [2014]. 178 The CIRC No. 44 [2016]. 179 The CIRC No. 58 [2016].

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in accordance with the law. “Insurance salespersons” means the personnel who sell insurance products for commercial banks.180 A commercial bank which engages in the bancassurance business shall meet the conditions prescribed by the CBIRC and obtain the Sideline Bancassurance Business Permit (hereinafter, the Permit).181 A commercial bank and an insurance company which cooperate in the bancassurance business shall jointly promote the sustainable and sound development of the bancassurance business of the commercial bank under the principles of mutual benefits and win-win, joint development, and protecting the interests of consumers.182 A commercial bank shall maximize its advantages in sales channels, and an insurance company shall maximize the core technical advantages of long-term asset-liability matching management and risk prevention, vigorously develop long-term savings-type and risk prevention-type insurance products in its bancassurance business and continuously adjust and optimize its bancassurance business structure so as to provide comprehensive financial services for consumers.183 A commercial bank that engages in the bancassurance business shall comply with laws, administrative regulations, and relevant provisions of the CBIRC and observe the principles of equality, free will, fairness, and good faith.184 The CBIRC shall perform the functions of supervising the bancassurance business of commercial banks in accordance with the Insurance Law, the Law of Commercial Banks, the Banking Supervision Law, and the authorization of the State Council. Local CBIRC offices shall perform their supervision functions within the scope of authorization.185 13.7.1 Bancassurance business access From articles 8 to 15 of the Measures of Bancassurance, the requirements and conditions for establishing bancassurance agents are provided. A commercial bank which engages in the bancassurance business shall meet the following conditions:186 (1) It has the financial permit issued by the CBIRC or its local office. (2) It has good operating status in the main business and has no record of major violation of law or regulation in the most recent two years (except that effective rectification measures have been taken and recognized by the CBIRC or its local office). (3) It has established a bancassurance business information system that complies with the provisions of the CBIRC. 180 181 182 183 184 185 186

Ibid., art.2 Ibid., art.3. Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8.

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REGULATION OF INSURANCE AGENTS

(4) It has established bancassurance business management rules and mechanisms and has corresponding professional management capabilities. (5) The corporate institution and level-1 branch office have designated the department and personnel responsible for the management of the bancassurance business. (6) Other conditions prescribed by the CBIRC. The bancassurance business information system of a commercial bank shall meet the following conditions:187 (1) It has a technical support system and back office guarantee capability suitable for managing and controlling risks in the sales of insurance products. (2) It links with the business systems of insurance companies. (3) It realizes the management of insurance salespersons. (4) It is able to provide electronic contracts, including insurance application notices, application forms, insurance policies, insurance clauses, product descriptions, cash value tables, and other documents. (5) It records all information required for underwriting and checks the logical relations and veracity of all information. (6) Other conditions prescribed by the CBIRC. Where a commercial bank under the direct supervision by the CBIRC plans to engage in the bancassurance business, its corporate institution shall apply to the CBIRC for a permit. Where any other commercial bank plans to engage in the bancassurance business, the corporate institution shall apply for a permit from the local CBIRC office at the place where it is registered. The outlet of a commercial bank shall engage in the bancassurance business based on the authorization of the corporate institution.188 A commercial bank which applies for engaging in the bancassurance business shall submit the following application materials:189 (1) A photocopy of the duplicate of the business license. (2) An explanation of the violation of law or regulation in the most recent two years (if the institution has been formed for less than two years, an explanation of the information from the date of formation shall be provided). (3) An explanation of the information of the cooperative insurance company. (4) An explanation of the bancassurance business information system. (5) Bancassurance business management rules, such as underwriting, commission settlement, and client services. (6) An explanation of the designation of the department and personnel responsible for the bancassurance business. (7) Other materials prescribed by the CBIRC. 187 Ibid., art.9. 188 Ibid., art.10. 189 Ibid., art.11.

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The CBIRC or its local office may, after receiving the application of the commercial bank for engaging in the bancassurance business, take such means as interview, correspondence, and on-site inspection to understand and examine the applicant’s market development strategies, business development plan, construction of internal control rules, personnel structure, information system configuration, operation, and other relevant matters, and give risk warnings.190 Where the CBIRC or its local office makes a decision to approve a commercial bank’s operation of the bancassurance business in accordance with the law, it shall issue a permit to the applicant. No validity period shall be set in the permit. The applicant may engage in the bancassurance business only after obtaining the permit.191 The applicant shall, within five working days after obtaining the permit, register relevant information through the regulatory information system prescribed by the CBIRC. The registration information shall at least cover the following content:192 (1) the name, domicile or business premises of the corporate institution; (2) the department and person in charge of the management of the bancassurance business; (3) the name of the permit; (4) business scope; (5) business area; and (6) other matters prescribed by the CBIRC. Where the CBIRC or its local office decides to disapprove the application, it shall make a written decision and explain the reasons.193 Where a commercial bank falls under any of the following circumstances, the corporate institution or the branch office authorized by it shall, within five working days from the date of occurrence of the circumstance, report through the regulatory information system prescribed by the CBIRC:194 (1) modification of name, residence, or business premises; (2) authorization of any outlet to engage in the bancassurance business; (3) modification of the authorization of the outlet’s bancassurance business; (4) modification of the department or person responsible for the bancassurance business; and (5) other reporting matters prescribed by the CBIRC. The corporate institution of a commercial bank or the branch office authorized by it shall handle the practice registration of insurance salespersons through the regulatory information system prescribed by the CBIRC. Practice registration shall cover the following content:195 (1) name, gender, identity card number, education and photos; (2) the name of the outlet of the commercial bank where it is located; (3) complaint hotline of the commercial bank where it is located; (4) the practice registration number; and (5) date of practice registration. In the case of modification of practice registration matters, the corporate institution of the commercial bank or the branch office authorized by it shall, within five days from the date of occurrence of the circumstance, undergo practice registration modification through the regulatory information system prescribed by the CBIRC.196

190 191 192 193 194 195 196

Ibid., art.12. Ibid., art.13. Ibid. Ibid. Ibid., art.14. Ibid., art.15. Ibid.

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REGULATION OF INSURANCE AGENTS

The insurance salespersons of the commercial bank may conduct practice registration through only one commercial bank.197 Where the insurance salespersons of a commercial bank have completed the insurance company’s practice registration, the specific measures shall be developed by the CBIRC separately.198 13.7.2 Bancassurance business rules From articles 16 to 53 of the Measures of Bancassurance, the business rules are provided. When a commercial bank selects the cooperative insurance company, it shall fully consider the insurance company’s solvency, risk management, and control ability; business and financial management information systems; violation of any law or regulation in the most recent two years; and other information.199 An insurance company shall, when selecting the cooperative commercial bank, fully consider the commercial bank’s capital adequacy, risk management and control ability, business premises, soundness of bancassurance business and financial management rules, and any violation of law or regulation in the most recent two years, among others.200 Where a commercial bank cooperates with an insurance company in the bancassurance business, in principle, the corporate institutions of both parties shall sign a written agency agreement; if it is indeed necessary for the level-1 branch office to sign the agency agreement, the level-1 branch office shall obtain a prior written authorization from the corporate institution and, after the signing the agreement, file it with its corporate institution in a timely manner.201 The agency agreement signed by the commercial bank and the insurance company shall include but not be limited to the following major clauses: the types of authorized insurance products, commission rates and payment methods, management of documents and publicity materials, check-up of customers’ accounts and identity information, anti-money laundering, confidentiality of customer information, rights and responsibilities of both parties, resolution of disputes, mechanisms for coping with crises and handling customers’ complaints, period of cooperation, execution, modification and termination of the agreement, and the liability for the breach of contract.202 The insurance products sold by a commercial bank as an agency shall comply with the relevant requirements of the CBIRC for the management of examination, approval, and recordation of insurance products.203

197 198 199 200 201 202 203

Ibid. Ibid. Ibid., art.16. Ibid. Ibid., art.17. Ibid. Ibid., art.18.

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REGULATION OF INSURANCE AGENTS

An insurance company shall divide the market and develop diversified and complementary insurance products by considering the insurance demands of clients of the commercial bank and sales channels of the commercial bank.204 A commercial bank shall conduct the separate accounting of its bancassurance business, conduct independent accounting of the premiums and commissions collected by different insurance companies as an agency, and shall not deduct commissions from premium income.205 Where an insurance company authorizes a commercial bank to sell insurance products as an agency, it shall establish the independent financial accounting and evaluation mechanism for the commercial bank’s bancassurance business, conduct the independent accounting of new business value, profits, and expenses and shall develop the financial budget and business promotion policies for the commercial bank’s bancassurance business in a scientific manner under the principle of prudence, prevent business expansion regardless of business scale, and prevent the risk of fee loss.206 The commission to be settled by a commercial bank and an insurance company shall be paid in a unified manner by a level-1 branch office of the insurance company to a level-1 or, at a minimum, a level-2 branch office of the commercial bank by bank transfer. If the commercial bank and insurance company meet relevant conditions, the commission between corporate institutions shall be settled in a unified manner. If a local corporate banking financial institution is authorized to conduct the bancassurance business, the level-1 branch office of the insurance company shall pay to the local corporate banking financial institution in a unified manner by bank transfer.207 A commercial bank shall truthfully record the commission obtained in the full amount, shall strengthen the centralized management of commission, shall reasonably list the commissions of their insurance salespersons, and shall not conduct any off-book accounting or operation. An insurance company shall truthfully list the commission paid to the commercial bank according to financial rules. The insurance company and its personnel shall not pay any interest other than that prescribed in the payment agreement to the commercial bank and its insurance salespersons in any name or in any form.208 A commercial bank and an insurance company shall establish bancassurance business account books to record relevant content on each transaction.The account books shall at least cover the name of the insurance company, the insurance type, the number of insurance policies, insurance term, payment methods, the names of insurance salespersons and their practice registration number, the outlet to which they are affiliated, the name of the insurance applicant and the insured, the amount insured, insurance premium, and the commission, among others.209

204 205 206 207 208 209

Ibid. Ibid., art.19. Ibid. Ibid., art.20. Ibid., art.21. Ibid., art.22.

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REGULATION OF INSURANCE AGENTS

A commercial bank shall establish management rules and relevant files for the bancassurance business, including but not limited to the following content:210 (1) Signing and rescinding agency agreements and continuous cooperation rules with insurance companies; (2) Rules for the examination of insurance product publicity materials and relevant files; (3) Clients’ risk assessment standards and relevant files; (4) Periodical compliance inspection rules and relevant files; (5) Rules for the education and training of insurance salespersons and relevant files; (6) Insurance document management rules and relevant files; (7) Performance assessment standards; (8) Complaint handling mechanism and emergency response plans for risk disposal; and (9) Internal accountability and punishment rules for regulatory violations. An insurance company shall develop legal, effective, and stable rules for the management of the bancassurance business of commercial banks, which shall at least cover business management rules, financial management rules, information system management rules, and rules for the examination of insurance policy information and shall establish or designate a special department to be responsible for managing the bancassurance business of commercial banks.211 A commercial bank shall strengthen pre-employment training and follow-up education of its insurance salespersons and organize them to receive the training on laws and regulations, business knowledge, professional ethics, and protection of consumers’ rights and interests on a periodical basis. Among them, the commercial bank’s insurance salespersons that sell investment-linked insurance products shall also have one year or more of insurance sales experience, receive no fewer than 40 hours of special training each year, and have no bad records.212 An insurance company shall strengthen the management of its bancassurance personnel in accordance with the relevant provisions of the CBIRC, and the relevant provisions shall be developed by the CBIRC separately.213 A commercial bank’s outlet that engages in the bancassurance business shall place a photocopy of the permit of the corporate institution to which it is affiliated in a conspicuous position of its business premises.214 An insurance company shall effectively assume the responsibility for managing its branch offices and shall not entrust any commercial bank that has not obtained a permit or the outlet of a commercial bank that has not obtained the authorization of the corporate institution to conduct the bancassurance business.215

210 211 212 213 214 215

Ibid., art.23. Ibid. Ibid., art.24. Ibid. Ibid., art.25. Ibid.

863

REGULATION OF INSURANCE AGENTS

The outlet of a commercial bank shall place their insurance salespersons’ practice registration status in a prominent position of its business premises. The practice registration status shall cover the salespersons’ names, ID number, photos, practice registration number, and the name of the outlet, among others.216 The insurance salespersons of the commercial bank can only conduct the bancassurance business at the outlet of the commercial bank where they have registered.217 The outlet of a commercial bank shall post a notice of important information for insurance applicants in a uniform format in a conspicuous position of its business premises, and publicize the list of insurance products sold on a commission basis, including the names of insurance products, insurance companies, and other information.218 A commercial bank and its insurance salespersons shall introduce insurance products to clients in a comprehensive and objective manner and expressly inform clients of important matters such as insurance liability, liability exemption, surrender charges, cash value of insurance policy, payment terms, cooling-off period, and observation period according to insurance clauses and clearly define and expressly inform clients of the legal liability of the commercial bank and insurance company in the bancassurance business.219 A commercial bank and its insurance salespersons shall use insurance product publicity materials uniformly printed by the corporate institution of an insurance company or the level-1 branch office of an insurance company authorized by it, and shall not design, print, produce, or modify any publicity brochures, coloured flyers, and publicity boards or other auxiliary items for the sale of relevant insurance products.220 All kinds of publicity materials shall, according to insurance clauses, describe insurance products in a comprehensive and accurate manner, disclose the operators, insurance liabilities, surrender charges, cash value and cost deduction in conspicuous positions. They shall not exaggerate the benefits of insurance contracts or do so in any disguised form, shall not promise any undefined benefits or conduct any misleading demonstrations, and shall not make any statements that falsely report or conceal information or on unfair competition.221 All types of insurance documents and publicity materials shall be clearly distinguished from bank documents and publicity materials in such terms as colour, style, and materials. They shall not use Chinese and English characters with the name of commercial banks or the image logo of commercial banks and shall not have such characters as “deposits”, “savings”, and “jointly launched by banks”.222 An insurance company shall reasonably design the format of insurance policy booklets; the cover and inner sheets of insurance policy booklets shall be A4 size after binding. An insurance company shall indicate “insurance contract” in a font 216 217 218 219 220 221 222

Ibid., art.26. Ibid. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid.

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REGULATION OF INSURANCE AGENTS

size of 72 pt or higher on the cover of insurance policy booklets, indicate its name in a font size of 22 pt or higher on the cover of insurance policy booklets, and put a risk alert and a cooling-off period alert in a font size of 16 pt or higher on the cover of insurance policy booklets, and the insurance contract shall cover insurance clauses and other contract essentials.223 A commercial bank and its insurance salespersons shall conduct demand analysis and risk tolerance evaluation of insurance applicants, recommend insurance products based on assessment results, and sell suitable products to clients with corresponding needs and risk tolerance.224 (1) Where an insurance applicant falls under any of the following circumstances, the insurance products sold to the insurance applicant shall, in principle, be those with definite benefits, and the insurance policy shall be issued by an insurance company after the insurance application documents are submitted to it and underwritten by an underwriter instead of being automatically underwritten and issued on site through relevant systems: (i) The annual income entered by the insurance applicant is lower than the average disposable income per capita of urban residents or average net income per capita of rural residents in the last year published by the local provincial statistical department. (ii) The age of the insurance applicant is more than 65, or for products with premium payment in instalments, more than 60. The insurance company shall re-examine the suitability of insurance products, the personal information of insurance applicants, the signatures of proposers, and other information during the underwriting process. No insurance application shall be approved if problems such as unsuitable products, false information, and a client’s unwillingness to continue insurance application are identified. (2) For the sales of insurance products with undefined benefits, including personal insurance products such as participating, universal, investmentlinked, and variable ones as well as investment insurance products with non-predetermined benefits provided by property insurance companies, under any of the following circumstances, insurance may be underwritten only after an insurance application statement signed by an insurance applicant for confirmation is obtained: (i) The payment of premiums in a lump sum is more than four times the annual household income of the insurance applicant. (ii) The annual instalment of premiums is more than 20% of the annual household income of the insurance applicant, or the monthly instalment of premiums is more than 20% of the monthly household income of the insurance applicant. (iii) The sum of the premium payment years and the age of the insurance applicant reaches or exceeds 60. 223 Ibid., art.31. 224 Ibid., art.32.

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(iv) The amount of insurance premiums accounts for 150% or more of the premium budget of the insurance applicant. In the insurance application statement, the insurance applicant shall acknowledge his or her understanding of the product when purchasing the insurance and his or her willingness to assume the risks of undefined benefits.225 A commercial bank and its insurance salespersons shall provide the proposers with complete contract materials, including insurance application notices, application forms, insurance policies, insurance clauses, product descriptions, and cash value tables, among others and shall direct proposers to enter true and complete client information into insurance application forms and copy relevant statements in the application forms for new-type personal insurance products. Salespersons shall not copy relevant statements or sign on behalf of insurance applicants or the insured. The insurance application notices shall at least cover the following content:226 (1) The product bought by the client is an insurance product. (2) Reminding the client to read in detail the insurance clauses and product descriptions, especially insurance liability, cooling-off period, policy surrender matters, benefits demonstration, deduction of expenses, and other content. (3) Reminding the client that the insurance applicant shall copy the relevant sentences and affix a signature in person. (4) The channels for the client to consult and file a complaint with the commercial bank and the insurance company. (5) Other content prescribed by the CBIRC. The salespersons of a commercial bank’s outlet shall ask a proposer to fill out the application form in person. Under any of the following circumstances, the salespersons may fill out application forms on behalf of proposers:227 (1) Proposers who have difficulties in filling out application forms authorize in writing the salespersons to do so. (2) Proposers who have difficulties in filling out application forms and are unable to issue written authorizations authorize verbally salespersons to do so by audio or video recordings. An insurance salesperson shall, when filling out the application form for a proposer, check the information entered item by item with the proposer, and fill out the application form as described by the proposer. After filling out the application form, the proposer shall confirm that the information entered in the application form is the true expression of his or her intention and affix his or her signature or seal to it.228 The commercial bank shall submit the written authorization documents, video and audio recordings, and other materials to the insurance company for archiving management.229 225 226 227 228 229

Ibid. Ibid., art.33. Ibid., art.34. Ibid. Ibid.

866

REGULATION OF INSURANCE AGENTS

Where a commercial bank collects insurance premiums by automatic transfer from bank accounts, it shall reach an agreement with the proposer on the account, amount, time of transfer, and other content, and there shall be an automatic transfer authorization independent from the application form and other documents and materials, including information such as the account from which money is transferred, the amount of money transferred in each term, time limit for transfer, frequency of transfer; the insurance premium invoice or the receipt for deduction of insurance premium shall be issued to the proposer.230 An insurance company shall, within 24 hours of deducting the initial premium or within 24 hours after underwriting if no initial premium is deducted, send a reminding message to the proposer in such forms as mobile phone messages, WeChat, and e-mail in the name of the insurance company. The reminding message shall at least include the name of the insurance company, the name of the insurance product, the insurance period, the beginning and ending dates of the cooling-off period, the premium payment in instalments and frequency, and the uniform client service hotline of the company. For the insurance products with premium payment in instalments, the adoption of monthly payment and other manners of premium payment consistent with consumers’ consumption habits shall be encouraged. The insurance company shall, when premium is paid upon renewal or when the insurance contract expires, remind the proposer in a timely manner by mobile phone message, WeChat, e-mail, or other means. If the proposer has no mobile phone number, the proposer shall be reminded by e-mail, letter, or other means.231 Where the duration of an insurance product sold by a commercial bank as an agency exceeds one year, there shall be a cooling-off period of 15 natural days in the contract, and the proposer’s rights during the cooling-off period shall be stated in the contract. The cooling-off period shall be calculated from the day when the proposer receives the insurance policy and signs for it.232 A commercial bank and its insurance salespersons shall sell investment-linked insurance products and property insurance companies’ investment insurance products with non-predetermined benefits, among others, at outlets above the sales area and strictly restrict them within the sales area.233 For insurance products which have a relatively long policy term or payment term, have a high degree of safeguard or have a relatively complex design requiring rather detailed explanations, the commercial bank shall actively expand special sales zones and sell appropriate products to appropriate clients through the control of sales areas and salespersons.234 The sum of bancassurance premium incomes of a commercial bank from accidental injury insurance, health insurance, term life insurance, whole life insurance, annuity insurance with a term of not less than ten years, endowment insurance with

230 231 232 233 234

Ibid., art.35. Ibid. Ibid., art.36. Ibid., art.37. Ibid.

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REGULATION OF INSURANCE AGENTS

a term of not less than ten years, and property insurance (excluding investmentlinked insurance of property insurance companies) shall not be less than 20% of the total bancassurance premium income.235 Where a commercial bank engages in the internet insurance business and telephone sales insurance business, its corporate institution shall establish a uniform and centralized business platform and processing flow to conduct centralized operation and uniform management and comply with the relevant provisions of the CBIRC. In addition to the aforesaid business, each outlet of a commercial bank can only cooperate with not more than three insurance companies in the bancassurance business in the same fiscal year.236 Each outlet of a commercial bank shall maintain cooperation with each insurance company for not less than one year. The commercial bank and insurance company shall maintain the stability of their cooperation relations and client services. Where, during the cooperation period, any party falls under any adverse circumstance which has a substantive impact on the cooperation between both parties, the other party may terminate cooperation in advance. If a commercial bank and an insurance company terminate cooperation, the commercial bank shall cooperate with the insurance company in providing follow-up services such as payment upon maturity, policy surrenders, and complaint handling.237 The insurance salespersons of a commercial bank shall sell insurance products as authorized by the commercial bank and shall not sell unauthorized insurance products or sell insurance products in private.238 A commercial bank shall not allow any person of an insurance company or any employee of a non-commercial bank to conduct the activities relating to insurance sales at its business premises.239 A commercial bank and its insurance salespersons shall not authorize any other institution or individual to engage in the bancassurance business.240 A commercial bank shall not conduct the bancassurance business through a third-party network platform. The insurance salespersons of a commercial bank shall not engage in the internet insurance business in their own name.241 A commercial bank shall provide comprehensive, complete and true clients’ insurance application information to the insurance company and inform clients and shall not withhold any insurance application information so as to ensure that the insurance company underwrites insurance and pays return visits to clients smoothly.242 The insurance company shall provide the commercial bank with the information on clients’ policy surrenders, renewal and expiration, among others, in a complete and truthful manner and assist the commercial bank in providing good 235 236 237 238 239 240 241 242

Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid., art.41. Ibid., art.42. Ibid., art.43. Ibid., art.44. Ibid., art.45.

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client services such as payment upon maturity and renewal payment after the sale of insurance products.243 Where the commercial bank applies for policy surrender, payment upon maturity, and renewal payment business, the commercial bank and insurance company shall cooperate with each other and effectively conduct the corresponding work in a timely manner.244 A commercial bank shall not prepare false client information in such forms as tampering with the client information and shall not falsely use the phone numbers of the commercial bank’s outlets, salespersons, and relevant personnel as the phone numbers of clients.245 Where an insurance company discovers that any client information is not true or an application form is signed by any person on behalf of the proposer, it shall not underwrite the insurance if a policy has not been issued; if a policy has been issued, it shall, in a timely manner, contact the client to provide an explanation on the insurance policy and undergo relevant formalities and require the commercial bank to take corrective action.246 A commercial bank and an insurance company shall strengthen the protection of client information and prevent the illicit use of client information.247 A commercial bank that conducts the bancassurance business shall conduct the retrospective management of insurance sales in accordance with the relevant provisions of the CBIRC and record the key links of sales in a complete and objective manner.248 A commercial bank that conducts the bancassurance business shall strictly observe the rules of prudential operation and shall not commit any of the following conduct:249 (1) Mixing the sale of insurance products with savings deposit products, fund products, banks’ wealth management products, and other products; (2) Narrowly comparing the return on insurance products with savings deposits or funds and banks’ wealth management products and exaggerating insurance liability or the return on insurance products; (3) Promising the return of insurance products with undefined benefits; (4) Selling insurance products as products developed by other financial institutions; (5) Inducing consumers to rescind insurance contracts in advance by such means as misleading publicity and reducing surrender charges as agreed upon in the contract; (6) Concealing possible losses resulting from the clauses exempting the insurer’s liability and advance rescission of the insurance contract or any other important information relating to the insurance contract; 243 244 245 246 247 248 249

Ibid. Ibid. Ibid., art.46. Ibid. Ibid., art.47. Ibid., art.48. Ibid., art.49.

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(7) Accepting or soliciting in any form any benefits not agreed upon in the cooperation agreement from the insurance company or any of its staff members; and (8) Any other violation of prudential operation rules. A commercial bank and its insurance salespersons shall not commit any of the following conduct in the bancassurance business:250 (1) Cheating the insurance company, the proposer, the insured, or the beneficiary; (2) Concealing any important information on the insurance contract; (3) Obstructing the insurance applicant from performing the notification obligation or inducing the proposer not to perform the notification obligation; (4) Providing or promising to provide the proposer, the insured, or the beneficiary with any benefit not agreed upon in the insurance contract; (5) Forcing or inducing a proposer to enter into or restrict an insurance applicant from entering into an insurance contract by taking advantage of administrative power, post, or profession, or by any other illicit means; (6) Forging or modifying without permission the insurance contract or providing false certifications to the parties to the insurance contract; (7) Misappropriating, withholding, or embezzling insurance premiums or insurance benefits; (8) Seeking improper benefits for any other institution or individual by taking advantage of its business; (9) Fraudulently obtaining insurance benefits by colluding with the proposer, the insured, or the beneficiary; and (10) Divulging any trade secret of the insurer, the proposer, or the insured known in the process of business activities. A commercial bank and an insurance company shall promptly handle complaints, policy surrenders, and other events immediately after complaints from clients or insurance surrenders occur, shall implement the initial inquiry accountability rules, shall not deflect responsibility to avoid adverse effects and intensification of situation, and shall take measures in a timely manner to properly address such issues according to the measures jointly developed by both parties.251 A commercial bank and an insurance company shall regard as major events the mass visits and complaints and mass surrenders of polices that occur in the bancassurance business of the commercial bank and establish a joint emergency response mechanism for the major events. They shall also jointly develop measures for handling the major events, designate special personnel, form emergency response teams, and establish a joint information disclosure mechanism to properly respond to the major events in a timely manner.252 A commercial bank shall report business data through the regulatory information system prescribed by the CBIRC within 15 days after the end of each month. A commercial bank under the direct supervision of the CBIRC, any other commercial 250 Ibid., art.50. 251 Ibid., art.51. 252 Ibid., art.52.

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bank, or its level-1 branch office shall, within 30 working days after the end of each year, report the information on the bancassurance business to the CBIRC and the local CBIRC office respectively, which shall at least cover the content of bancassurance business operations; the proportions of all bancassurance premiums; information on complaints and the handling thereof; cooperation with insurance companies; changes in the commercial bank’s internal control and risk management and other information that needs to be reported.253 13.7.3 Bancassurance business exit Where a commercial bank falls under any of the following circumstances, the CBIRC or its local office shall cancel its permit in accordance with the law and make an announcement:254 (1) The permit is cancelled, withdrawn, or revoked in accordance with the law. (2) It is legally terminated since it is dissolved, is declared bankrupt in accordance with the law, or terminated for any other reason. (3) Any other circumstance prescribed by laws, administrative regulations, and the CBIRC. Where an outlet of a commercial bank falls under any of the following circumstances, the corporate institution shall not authorize the outlet to conduct the bancassurance business. If the outlet has been authorized, the authorization must be revoked within five days:255 (1) It has disordered internal management, and it is unable to conduct normal business operation. (2) It has any serious violation of law which has not been rectified in an effective manner. (3) It refuses to implement the regulatory requirements such as rectifying the violation of law or regulation within a prescribed time limit and submitting regulatory data on time. (4) Any mass visits and complaints involving 30 or more persons or abnormal centralized surrender of policies involving 100 or more persons that occurred in the bancassurance business in the most recent year. (5) Any other circumstance prescribed by laws, administrative regulations, and the CBIRC. Under any of the following circumstances, the corporate institution of the commercial bank or the branch office authorized by it shall cancel its insurance salesperson’s practice registration within five working days:256 (1) An insurance salesperson resigns. (2) An insurance salesperson receives any administrative punishment of prohibition from access to the insurance industry. 253 254 255 256

Ibid., art.53. Ibid., art.54. Ibid., art.55. Ibid., art.56.

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(3) An insurance salesperson terminates practice for any other reason. (4) Any other circumstance prescribed by laws, administrative regulations, and the CBIRC. Where a commercial bank terminates bancassurance business activities, it shall protect the lawful rights and interests of insurance applicants, the insured, and the beneficiaries.257 13.7.4 Supervision and administration of bancassurance The CBIRC and its local offices shall, in accordance with the law, develop the rules and prudential operation rules on the bancassurance business of commercial banks and conduct on-site inspection and off-site supervision.258 Banking associations and insurance associations must play a positive role in maintaining market order and promoting fair competition by strengthening industry self-discipline. The CBIRC and its local offices shall urge banking associations and insurance associations to take industrial self-regulatory measures, establish the exchange and coordination mechanism within the industry, strengthen selfdiscipline and mutual supervision, jointly maintain the market order, and promote fair competition.259 The CBIRC and its local offices may hold talks with and provide education and training to the persons in charge of the bancassurance business of commercial banks.260 Where the business ratio of the corporate institution of a commercial bank or its level-1 branch office fails to satisfy the requirements of Article 38 of the Measures, the CBIRC, or its local office at the provincial level has the right to take regulatory measures such as ordering corrective action within a prescribed time limit.261 Where a commercial bank commits any violation of prudential operation rules or article 48 or 49 of the Measures in the course of conducting the bancassurance business, the CBIRC or its local office at the provincial level shall order it to take corrective action within a prescribed time limit; if the commercial bank fails to do so within the prescribed time limit, or its conduct seriously endangers its stable operation and damages the lawful rights and interests of any client, with the approval of the person in charge of the CBIRC or its local office at the provincial level, the CBIRC may take the measures of suspending part of the business and ceasing the approval of new business.262 After the commercial bank makes rectification, it shall submit a report to the CBIRC or its local office at the provincial level. If it complies with prudential operation rules upon acceptance check by the CBIRC or its local office, it shall

257 258 259 260 261 262

Ibid., art.57. Ibid., art.58. Ibid., art.59. Ibid., art.60. Ibid., art.61. Ibid., art.62.

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remove the measures prescribed in the preceding paragraph within three days from the date of acceptance check.263 Where a commercial bank commits any conduct set forth in article 50 of the Measures in the course of conducting the bancassurance business, the CBIRC or its local office shall, in accordance with article 65 of the Insurance Law, take regulatory measures against or impose an administrative punishment on it in accordance with the law.264 A commercial bank, as the seller of insurance products, shall assume the responsibility for the agency sales of its insurance salespersons in accordance with the law. When the insurance company is liable when the CBIRC or its local office imposes an administrative punishment on and takes other regulatory measures against a commercial bank in accordance with the law, it shall, at the same time, legally impose an administrative punishment on and take other regulatory measures against the insurance company involved in the act.265 The CBIRC and its local offices shall, in accordance with the law, strictly investigate and punish such conduct as unfair competition in the bancassurance business of the commercial bank and increase the investigation of management responsibilities of the commercial bank, insurance company, and their senior executives.266 Where a commercial bank or an insurance company violates the relevant requirements of these Measures, the CBIRC or its local office shall, in accordance with the Insurance Law, the Law of Commercial Banks, the Banking Supervision Law, and other relevant laws, administrative regulations, and relevant provisions take regulatory measures against or impose an administrative punishment on the violator in accordance with the law and hold relevant personnel liable.267 These Measures shall apply, mutatis mutandis, to financial institutions, other financial institutions, and policy banks that have been approved to absorb public deposits by the banking and insurance regulator of the State Council within China.268 The risk alert and a cooling-off period alert as prescribed in these Measures are as follows:269 The risk alert for participating insurance is: “You are purchasing participating insurance with undefined distribution of dividends.”270 The risk alert for universal insurance is: “You are purchasing universal insurance with undefined investment return above the guaranteed minimum interest rate.” For products with initial cost, it shall also include: “The insurance premiums

263 Ibid. 264 Ibid., art.63. 265 Ibid., art.64. 266 Ibid. 267 Ibid., art.65. 268 Ibid., art.66. 269 Ibid., art.67. 270 A participating policy pays dividends to the policyholder. Dividends are generated from the profits of the insurance company that sold the policy and are typically paid out on an annual basis over the life of the policy. Most policies also include a final or terminal payment that is paid out when the contract matures. Some participating policies may include a guaranteed dividend amount, which is determined at the onset of the policy. A participating policy is also referred to as a with-profits policy.

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paid by you will be included in the insurance policy account after deduction of the initial cost.”271 The risk alert for investment-linked insurance is: “You are purchasing investmentlinked insurance with undefined investment return.” For products with initial cost, it shall also include: “The insurance premiums paid by you will be included in the investment account after deduction of the initial cost.”272 The risk alerts for other types of products are determined by companies themselves. The cooling-off period alert is: “You are entitled to cancel the insurance contract with a full refund within 15 natural days after receiving the insurance contract (minus a booklet cost of not more than ¥10 yuan). You may suffer loss if you cancel the insurance contract after the 15 natural days.” 13.8 Strengthening the supervision and administration of insurance intermediaries There is a very clear trend of strengthening the supervision and administration of insurance intermediaries. In recent years, the CBIRC has issued three Notices regarding strengthening the regulation of insurance sales personnel and insurance intermediaries, namely, the Notice on Strengthening the Administration of Business via Intermediary Channel of Insurance Companies 2019,273 the Notice on Implementing the Main Responsibilities of Insurance Companies and Strengthening the Administration of Insurance Sales Personnel 2020,274 and the Notice on Effectively Strengthening the Administration of Employees of Full-Time Insurance Intermediary Institutions 2020.275 In this section, we consider in detail the Notice on Effectively Strengthening the Administration of Employees of Full-Time Insurance Intermediary Institutions 2020. In the next section, the Notice on Strengthening

271 Universal insurance is a hybrid life insurance policy which combines elements of term life insurance with an investment savings option. Universal life combines the ability to build savings at the same time as providing a life insurance policy. This allows flexibility in what you can do with the savings or investment portion of the premium. Universal life insurance also contains an element of long-term investment strategy because it requires you build the values in the investment portion through part of the amount you pay monthly. 272 A unit-linked (or investment-linked) insurance policy is a life insurance product that unlike a pure insurance policy, gives investors both insurance and investment under a single integrated policy. A unitlinked insurance policy is essentially a combination of insurance and an investment vehicle. A portion of the premium paid by the policyholder is utilized to provide insurance coverage to the policyholder and the remaining portion is invested in equity and debt instruments. The aggregate premiums collected by the insurance company is pooled and invested in varying proportions of debt and equity securities in a similar manner to mutual funds. Each policyholder has the option to select a personalized investment mix based on his or her investment needs and risk appetite. Like mutual funds, each policyholder’s unitlinked insurance policy holds a certain number of fund units, each of which has a net asset value (NAV) that is declared on a daily basis. The NAV is the value upon which net rates of return are determined. The NAV varies from one unit-linked insurance policy to another based on market conditions and fund performance. 273 Yin Bao Jian Ban Fa No. 19 [2019]. 274 Yin Bao Jian Ban Fa No. 41 [2020]. 275 Yin Bao Jian Ban Fa No. 42 [2020].

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the Administration of Business via Intermediary Channel of Insurance Companies 2019276 will be considered. In 2019, the CBIRC carried out the checking and inspecting of practice registration of full-time insurance intermediary practitioners (hereinafter collectively referred to as employees, including employees of full-time insurance agencies, employees of insurance brokers, and employees of insurance adjusters). The outcome of the inspection shows that the number of employees in full-time insurance intermediary institutions has grown rapidly in recent years, with uneven quality, and some even towards disordered development, reflecting the problems of most institutions in the management concepts, the management systems, and the management measures for their employees. In order to effectively promote the implementation of the main responsibility of full-time insurance intermediaries, strengthen management, improve quality, promote rectification, establish positive image and other aspects to comprehensively strengthen the management of the workforce, the CBIRC sets out requirements for the full-time insurance intermediaries to follow. Insurance intermediary institutions shall fully assume the responsibility of the management body. An insurance intermediary institution authorizing employees to carry out business activities in the name, brand, and credit of the institution must bear the legal responsibility of the employees for the corresponding business activities according to law and assume the main responsibility for managing the employees. The board of directors and operation management shall play the role of management responsibilities to form a working mechanism with layers of responsibilities and clear responsibilities for everything and to strengthen the management of employees in all aspects and all processes.277 Insurance intermediary institutions shall strengthen the overall management of employees. Each legal person institution shall establish a responsibility system for the management of practitioners from top to bottom. They shall make comprehensive arrangements in terms of organizational structure, functional division of labour, working mechanism, operation process, reward and punishment assessment, and clarify the management system from the management department to the responsible employees. The main responsible person assumes leadership responsibility, and the responsible person in charge bears management responsibility.The person in charge of the organization assumes responsibility for implementation. They shall establish a system of management systems for employees, improve the internal supervision system, strengthen the supervision and assessment of employees’ management responsibilities and the constraints on reward and punishment, and improve risk monitoring and accountability mechanisms.278 Insurance intermediary institutions shall strictly manage the recruitment of employees, adhere to strict personnel selection, continuous education, and career retention orientation; formulate unified management methods for recruiting employees; and strictly prohibit the recruitment of those who are prohibited from 276 Yin Bao Jian Ban Fa No. 19 [2019]. 277 The Notice on Effectively Strengthening the Administration of Employees of Full-Time Insurance Intermediary Institutions 2020, s.1. 278 Ibid., s.2.

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engaging in the insurance business. The publication of recruitment information shall be standardized. It is strictly prohibited to authorize an individual to publish recruitment advertisements or recruit personnel alone. It is strictly prohibited to use the internet to recruit employees in a disorderly manner. If a person is not employed by the institution, he or she is not allowed to register for a business permit. It is strictly prohibited to authorize those who have not been registered to engage in insurance business activities.279 Insurance intermediary institutions shall strictly manage the training of employees. The institutions should formulate a full-cycle training plan for employees and earnestly carry out pre-job training for employees and continue to carry out on-the-job training for employees. The institutions shall effectively strengthen the compliance and law-abiding training of employees; take laws and regulations, regulatory rules, and standards, professional ethics, and other contents as the basic content of on-the-job training; the training time for each person shall be no fewer than 30 hours per year. If newly recruited personnel fail to pass the special examination and evaluation, they are not allowed to register for business practice. Before authorizing practitioners to sell new insurance products, special training and corresponding tests shall be organized.280 Insurance intermediary institutions shall establish a grading system for the sales ability of employees. It is necessary to comprehensively inspect the employees’ years of experience, academic knowledge, and integrity records and strictly differentiate the capabilities of employees to entrust and authorize. Industry self-regulatory organizations shall be supported to play an active role as the platform in order to comply with the high-quality development requirements of the insurance industry, to promote the grading of sales personnel’s ability in selling products, and to establish a grading system for sales personnel’s ability qualification and corresponding training and testing mechanism. Insurance intermediary institutions are encouraged to set up multilevel competency qualifications for their employees based on the complexity of insurance products and professional knowledge requirements and to establish targeted training and testing systems to form a long-term mechanism.281 Insurance intermediary institutions shall strictly manage the integrity of employees to strictly prevent practitioners from practising the prohibited conduct listed in article 131 of the Insurance Law and article 31 of the Regulations on the Supervision and Administration of Insurance Adjusters. If employees are found to be in violation of laws and regulations, immediate punishment and internal accountability shall be imposed on them. Institutions are required to effectively strengthen the integrity management of practitioners and keep a record of information accurately, timely, and completely in respect of the awards and administrative penalties and other information in the insurance intermediary supervision information system in accordance with regulatory requirements. If an employee leaves the job, the relevant integrity record information shall be completed before the practice registration is cancelled. It is necessary to strengthen the joint disciplinary punishment 279 Ibid., s.3. 280 Ibid., s.4. 281 Ibid., s.5.

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of employees for dishonesty, to support industry self-regulatory organizations to build a platform for managing dishonesty, and to establish a joint punishment mechanism for dishonesty. If employees are found to have serious dishonesty in insurance service activities or other economic and social activities, they shall be reported to the dishonesty management platform in a timely manner and dealt with seriously until the agency (employment) contract is cancelled. They must not be hired again within two years after the contract is cancelled.282 Insurance intermediary institutions shall effectively consolidate the management base of employees. They are required to actively rely on information technology to comprehensively record and manage the employees’ identity information, business information, financial information, and so on, to ensure that the data is comprehensive, true, and traceable. They shall strictly comply with the requirements of the practice registration management regulations and implement the registration and maintenance of practice information for employees in the whole process of their employment in order to ensure that the basic information of employees is true, accurate, and complete. They must effectively strengthen the auditing and checking of data in different systems to ensure that the data of practitioners registered by the institution in the insurance intermediary supervision information system are consistent with those recorded in the internal personnel management system.283 The CBIRC shall stick to strict supervision, severe punishment, and serious accountability according to law. The CBIRC and its local offices shall continue to strengthen the supervision of practitioners of insurance intermediary institutions, focus on improving the practice registration mechanism, organize special inspections, deepen the management of personnel data quality, and actively use big data, internet and other technical means to improve the effectiveness of supervision. Insurance intermediary institutions and their management personnel who violate regulatory requirements and fail to implement the management responsibilities of employees shall be severely punished in accordance with the law and be held accountable in accordance with regulations. Where the insurance intermediary institutions have neglected the responsibility of the management personnel of the practitioners, failed to establish a management system in accordance with the requirements of this Notice, there are gaps in the practice registration management, the practice process management is superficial, there are violations of the law or regulations, or the affiliated employees have a major breach of trust that has a bad influence, the CBIRC will strictly implement double punishment for the institutions and for the responsible personnel and accountability for the management personnel, and at the same time take regulatory measures according to law.284 The supervisory officers who fail to perform their supervisory duties in accordance with law and regulations shall be held strictly accountable. The local offices of the CBIRC shall fully implement territorial supervision requirements, fulfil territorial supervision responsibilities, and effectively strengthen the supervision of practitioners of insurance intermediary institutions so that they are responsible 282 Ibid., s.6. 283 Ibid., s.7. 284 Ibid., s.8.

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for their duties, do their duty, and do their due diligence. If a local office fails to fully fulfil its territorial supervisory responsibilities, or due to its negligence and dereliction of duty serious violations of laws and regulations, major events, and serious group incidents of employees take place, the supervision and accountability of the local office shall be carried out in accordance with the law and regulations. In doing so, the pressure of accountability can be turned into the driving force for supervision and performance.285 If the previous regulatory documents are inconsistent with this Notice, this Notice shall prevail. If the Insurance Regulatory Bureaus and insurance intermediaries encounter relevant problems in the implementation, they should report to the CBIRC in a timely manner.286 13.9 Strengthening the administration of intermediary channel of insurance companies In order to strengthen supervision, prevent systemic financial risks, further standardize the order of the insurance market, and strengthen the bottom line of risk prevention and control, the CBIRC formulated the Notice on Strengthening the Administration of Business via Intermediary Channel of Insurance Companies in 2019.287 13.9.1 Insurance companies should establish an intermediary channel business management system with clear rights and responsibilities Insurance companies conducting insurance business through insurance intermediary channels such as individual insurance agents, full-time insurance agents, insurance brokers, concurrent part-time insurance agents, insurance adjusters, and Internet insurance shall strengthen the management of intermediary channel businesses.288 Insurance companies shall set up an intermediary channel business line management department and a dedicated post at the headquarters. The headquarters management shall have an intermediary channel business management person in charge and report to the CBIRC.289 Insurance companies shall have a legal, effective, and robust intermediary channel management system, including at least a business management system, financial management system, and information system management and control system, to ensure that business operations are in compliance with the law and that business financial data are true and transparent.290

285 Ibid., s.9. 286 Ibid. 287 Yin Bao Jian Ban Fa No. 19 [2019]. 288 The Notice on Strengthening the Administration of Business via Intermediary Channel of Insurance Companies 2019, s.1. 289 Ibid., s.2. 290 Ibid., s.3.

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Insurance companies shall have information management methods; the information system for business management and the information system for financial management shall truly, accurately, and completely cover the entire process of the intermediary channel business.291 Insurance companies shall establish a compliance audit system for intermediary channel business, improve compliance audits for business departments and branches at all levels, and form a sound accountability mechanism for intermediary business violations of laws or regulations.292 13.9.2 Insurance companies should strengthen the management of the intermediary institutions that have business cooperation with the insurance companies Insurance companies shall stipulate the relevant responsibilities in the entrustment contract with the cooperating intermediary institutions, implement the responsibility for the management and control of the intermediary channel business compliance with laws and regulations, and promptly request that the intermediary institutions correct the violations of laws and regulations.293 Insurance companies shall establish the management file of the intermediary institutions and accurately record the institutions’ business qualifications, personnel practice qualifications, shareholder risk assessment, training, business conditions, and assessments of compliance with laws and regulations.294 Insurance companies shall strengthen the authenticity management of insurance policies sold through intermediary channel and strengthen internal control of customer information collection, recording, management, and use.295 Insurance companies shall formulate a scientific and effective management system for individual insurance agents, improve the practice registration management of individual insurance agents, strengthen the business practice process management, and ensure that the practice registration data is true and accurate. The insurance companies shall establish a regular inspection mechanism for product sales and resolutely prohibit the illegal sale of non-insurance financial products.296 Insurance companies shall perform well in business qualification review and compliance management of professional agents, brokers, and other cooperative entities, and the business files shall be true and accurate.297 Insurance companies shall strengthen the management of insurance channels of banks, postal services, car dealers, and so on; assume responsibility for business compliance management; establish a regular data verification mechanism; and ensure the authenticity of insurance policy information.298

291 292 293 294 295 296 297 298

Ibid., s.4. Ibid., s.5. Ibid., s.6. Ibid., s.7. Ibid., s.8. Ibid., s.9. Ibid., s.10. Ibid., s.11.

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If an insurance company entrusts an insurance adjuster to carry out insurance adjusting business, it shall fully record the process of investigation and settlement of claims and improve the management of claims files.299 If an insurance company cooperates with a third-party internet platform, the head office shall manage the access and making of contract with the third-party internet platform for cooperative business in a unified manner, appoint the management department of each provincial branch company, and strengthen the legal compliance assessment of the business management.300 If an insurance company discovers the following serious violations of laws and regulations by the intermediary institutions, it shall promptly report to the CBIRC and its local offices: use the convenience of the insurance business to carry out illegal activities such as illegal fundraising, pyramid selling, or money laundering; illegal acts that seriously infringe on the lawful rights and interests of the proposer, the insured, or the beneficiary; business activities involved in other suspected crimes; and other matters required to be reported by the CBIRC.301 13.9.3 Insurance companies are not allowed to use intermediary channel to carry out illegal activities An insurance company and its employees shall not directly or indirectly give benefits to the intermediaries and their employees other than those stipulated in the entrustment contract with the intermediary institutions.302 Insurance companies and their staff shall be prohibited from performing the following acts to instigate or induce intermediaries to deceive the proposers, the insured, or beneficiaries;303 (1) to use intermediaries to claim fees by falsely suspending insurance premiums, falsely issuing tax invoices, falsely revising or cancelling insurance policies, or fabricating surrenders of insurance policies;304 (2) to use intermediaries to obtain undue benefits for other institutions or individuals;305 (3) to give or promise to give insurance rebates or other benefits beyond the insurance contract to the proposer, the insured, or the beneficiary through the intermediary channel;306 (4) to collude with the intermediaries to misappropriate, withhold, and embezzle insurance premiums; (5) to collude with the intermediaries to fabricate insurance contracts, deliberately fabricate insurance accidents that have not occurred, or deliberately exaggerate the degree of loss, deceive to gain insurance money, or seek other illegitimate benefits;307 (6) to entrust institutions that have not obtained legal qualifications or individuals who have not registered for insurance practice, are of poor conduct and do not have the professional knowledge required for insurance

299 300 301 302 303 304 305 306 307

Ibid., s.12. Ibid., s.13. Ibid., s.14. Ibid., s.15. Ibid., s.16. Ibid., s.17. Ibid., s.18. Ibid., s.19. Ibid., s.20.

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sales to engage in insurance sales;308 (7) to fabricate false intermediary business or intermediary employee information, falsely charge intermediary business expenses, or compile or provide false intermediary business in other insurance business activities reports, statements, and documents;309 and (8) to carry out other activities prohibited by law and administrative regulations.310 13.9.4 Insurance companies should improve the compliance supervision of intermediaries Insurance companies shall further improve the compliance supervision of intermediary channel businesses. The headquarters shall submit the electronic report of the intermediary channel business report to the CBIRC within 15 days after the end of each quarter. They shall submit the internal audit report of the intermediary channel business compliance of the previous year to the CBIRC by 1 March each year. The report shall include the business situation of the insurance intermediary channel, the risk assessment situation, the compliance audit situation, the punishment and rectification of violations of laws and regulations, and other matters. The general manager of the company shall sign the report and is responsible for the authenticity of the content of the report. The provincial branch of an insurance company shall submit an internal audit report of the intermediary channel business compliance to the local banking and insurance regulatory bureau by 1 March of each year (the content is the same as described in the previous paragraph), and the general manager of the branch shall sign the report and is responsible for the content of the report. The CBIRC and its local offices shall strengthen on-site inspection and off-site supervision of the intermediary channel business of insurance companies. Penalties shall be imposed on insurance companies, insurance intermediaries, and relevant personnel for violations of laws and regulations. 13.10 Conclusion In China, the insurance agency market has developed rapidly, and the agents are playing an increasingly important role in the insurance industry, with about 80% of property insurance premium income and 90% of life insurance premium income being received from insurance agents. The insurance supervision and regulatory authority has developed a number of pieces of regulations for governing the business activities of the insurance agents, including the two major pieces, namely, the Provisions on the Supervision and Administration of Full-Time Insurance Agencies 2015311 and the Measures for the Administration of the Bancassurance Business of Commercial Banks 2019.312

308 309 310 311 312

Ibid., s.21. Ibid., s.22. Ibid., s.23. The CIRC Order No. 3 [2015]. Yin Bao Jian Ban Fa No. 179 [2019].

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On the basis of the Provisions on the Supervision and Administration of FullTime Insurance Agencies 2015, the CBIRC is currently preparing a new piece of regulation, that is, the Provisions on the Supervision and Administration of Insurance Agents. Two drafts of the Provisions have been published for public consultation, the first draft on 13 July 2018 and the second draft on 16 April 2020. New provisions will be introduced into the new regulations, among which two points may be mentioned here. First, the current law position is that the insurance permit of a full-time corporate insurance agent is valid for three years, and a full-time corporate insurance agent shall apply to the CBIRC for renewal 30 working days before its permit expires.313 It is intended in the new Provision that the three-year validation period is to be removed and the permit is to be open-ended. The cancellation of the validity period of the permit may stimulate the vitality of agent companies and support the accelerated development of high-quality agent companies. At the same time, the insurance supervision and the regulatory authority will further improve the supervision methods and increase the inspection and punishment of inferior agent companies that disrupt the market. Second, the draft Provisions put forward new requirements and responsibilities of the CBIRC and its local offices. The draft Provisions (art.88) requires insurance supervision, regulatory authority, and their local offices to conduct supervision, inspection, or investigation in accordance with the law, and their supervision, inspection, and investigation personnel must not be less than two persons, and they must show legal certificates and supervision inspection and investigation notices. If there are fewer than two persons involved in supervision, inspection, and investigation, or if they fail to produce legal certificates and notice of supervision, inspection, and investigation, the entity or individual under inspection or investigation has the right to refuse. In addition, the draft Provisions (art.113) states that persons from the insurance supervision and regulatory authorities who carry out supervision and regulatory duties shall be given administrative sanctions in accordance with the law if they have any of the following circumstances, and if a crime is constituted, criminal responsibility shall be investigated in accordance with the law: (1) Violating regulations to approve the agent to operate insurance agent business; (2) Violating regulations to approve the qualifications of senior managers; (3) Conducting on-site inspections of insurance agents in violation of regulations; (4) Violating regulations to impose administrative penalties on insurance agents; (5) Violating regulations to interfere with the commission level of the insurance agency market; and (6) Other acts of abusing of power and negligence of duty. The draft Provisions clarify the requirements for supervisory authorities and supervisors, regulate performance of duties, clarify supervisory responsibilities, and avoid self-willed supervision. These are important manifestations of strict supervision by law.314 313 The Provisions on the Supervision and Administration of Full-Time Insurance Agencies 2015, art.16. 314 See the draft Provisions on the Supervision and Administration of Insurance Agents (see accessed on 14 October 2020).

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CHAPTER 14

Regulation of insurance brokers

14.1 Introduction Insurance brokerage is one of the three types of insurance intermediaries in China. The general agency principles have been considered in chapter 13, and are applicable to all these three types of insurance intermediaries (insurance agents, insurance brokers, and insurance adjusters). In this chapter, we consider the statutory and regulatory rules specific to insurance brokers. According to article 118 of the Insurance Law, insurance brokers are institutions which, based on the interests of proposers, provide intermediary services for the proposers and insurers to enter into insurance contracts and charge commissions according to law.1 Insurance brokers can take the form of a limited liability company or a joint-stock limited company.2 There is no individual insurance broker in China; this is unlike the insurance agents, the majority of which are individual agents. 14.2 Insurance brokerage market in China In China, the insurance brokerage market has a short history of development and is still in its preliminary stage in both the market share and business scope and activities. The first insurance broker firm, Huatai Insurance Agencies and Consultant Service Ltd., was established in 1993 in Beijing. The first foreign insurance broker, Sedgwick Insurance and Risk Management Consulting (China) Co. Ltd., opened its business in China in May 1993. In November 1998, with the merger of Sedgwick and Marsh & McLennan, the operating license was transferred to the latter.3 In 2003, AON (an American insurance broker) and in 2004 Willis (a British insurance broker) entered the insurance broker market in China.4 In 2000, three Chinese insurance brokers, namely, Jiang Tai Insurance Brokers Co. Ltd., Shanghai Dongda Insurance Brokers, and Chang Cheng Insurance Brokers Ltd., were granted business licenses by the CIRC to carry out the insurance brokerage business in China.The establishment of these three nationwide insurance

1 2 3 4

The Insurance Law, art.118. The Provisions on the Supervision and Administration of Insurance Brokers 2018, art.6. See accessed on 9 June 2020. Ibid.

DOI: 10.4324/9781351122863-14

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brokers marked the official launch of Chinese insurance broker market. Gradually, more insurance brokers started their businesses in China. As of the end of 2018, there were 499 insurance brokerage companies.5 In 2017, the total premium income for property insurance reached ¥983.5 billion yuan. The intermediaries channel accounted for 80.4% of the premium, of which 90.9% was from insurance agents and only 9.1% was from insurance brokers.6 For life insurance, the total premium income was ¥2,674.6 billion yuan. The intermediaries channel accounted for 90.5% of the premium, of which 53.7% was from individual agents, 44.8% was from bancassurance agents and post office insurance agents, 0.7% was from full-time insurance agent institutions, and only 0.8% was from insurance brokers.7 From these figures, it can be seen that insurance brokers play an insignificant role in the market share of premium income. The insurance brokers’ market share and numbers of insurance brokers are significantly lower than those in the developed insurance markets. In the UK, for instance, according to the British Insurance Brokers’ Association (BIBA), BIBA membership includes more than 1,800 regulated insurance brokers employing more than 100,000 staff. General insurance brokers contribute 1% of GDP to the UK economy; they arrange 67% of all general insurance with a premium totalling £66.5bn and 81% of all commercial insurance business.8 There is large potential for the insurance brokerage business to develop in China. 14.3 An overview of regulation of insurance brokers The insurance brokers are regulated by the agent provisions in the General Provisions of the Civil Code and the Contract Law of the Civil Code, the Insurance Law, the regulations of CBIRC, and the industrial self-regulation. The Insurance Law sets out rules regulating insurance agents and insurance brokers (articles 117 to 132). In chapter 5 of the Insurance Law, rules are provided for the definition of insurance agents and brokers, the requirements and conditions for formation of the intermediary companies, the standards of senior personnel and the employees, the business operation rules, and the prohibited conduct. Further, in chapter 7 of the Insurance Law, the Law sets out rules in the event of the breach of law or regulation by the insurance brokers.

5 See Financial News, 8 May 2019 (see accessed on 1 June 2020). 6 The Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Sciences Press, Beijing, China) pp. 126–132. 7 Ibid. 8 See the website of BIBA accessed on 9 June 2020. The British Insurance Brokers’ Association (BIBA) issued its voluntary code of conduct for members in May 2015: (1) Abide by all relevant laws, principles and regulations. Understanding and ensuring we comply with regulatory principles and work within the law. (2) Act with integrity and honesty. We should conduct ourselves in a fair, reliable, trustworthy and respectful manner with all our stakeholders. (3) Act in the best interests of each client. We have a duty to act in a manner which pays due regard to the best interests of each client and ensure decisions and recommendations are based on a clear understanding of their needs, priorities, concerns and circumstances. (4) Act with skill, care and diligence.We act at all times with high levels of skill, care and diligence.

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In accordance with the Insurance Law and other relevant laws and regulations, the CIRC/CBIRC have formulated a number of regulations for insurance brokers, namely, the Provisions on the Supervision and Administration of Insurance Brokerage Institutions issued by the CIRC on 25 September 2009,9 the Measures for the Supervision and Administration of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners issued by the CIRC on 6 January 2013,10 and the Decision of the CIRC on Amending the Provisions on the Supervision and Administration of Insurance Brokerage Institutions issued by the CIRC on 27 April 2013.11 These aforesaid regulations have been repealed by the recent Provisions on the Supervision and Administration of Insurance Brokers (hereinafter, the Provisions of Brokers).12 the Provisions of Brokers were issued by the CIRC on 1 February 2018 and came into force on 1 May 2018; they prevail now in regulating insurance brokers in China. On 27 April 2018, The CBIRC also issued the Notice of the CBIRC on Expanding the Business Scope of Foreign-funded Insurance Brokerage Companies.13 In addition, the CBIRC has issued three Notices regarding regulation of insurance sales personnel and insurance intermediaries, namely, the Notice on Strengthening the Administration of Business via Intermediary Channel of Insurance Companies,14 the Notice on Implementing the Main Responsibilities of Insurance Companies and Strengthening the Administration of Insurance Sales Personnel,15 and the Notice on Effectively Strengthening the Administration of Employees of Full-Time Insurance Intermediary Institutions.16 14.4 The features of insurance brokers Article 118 of the Insurance Law provides a definition of insurance broker: “Insurance brokers shall be institutions which, based on the interests of insurance applicants, provide intermediary services for insurance applicants and insurers to enter into insurance contracts, and charge commissions according to law.” According to the provisions of article 118, the features of insurance brokers should be understood from the following aspects:17 9 The CIRC Order No. 6 [2009]. 10 The CIRC Order No. 3 [2013]. 11 The CIRC Order No. 6 [2013]. 12 The CIRC Order No. 3 [2018) (see accessed on 15 October 2020). 13 Yin Bao Jian Fa No. 19 [2018]; it came into force on 27 April 2018 (see accessed on 15 October 2020). 14 Yin Bao Jian Ban Fa No. 19 [2019]; it was issued on 26 February 2019 (see accessed on 15 October 2020). 15 Yin Bao Jian Ban Fa No. 41 [2020]; it was issued on 12 May 2020 (see accessed on 15 October 2020). 16 Yin Bao Jian Ban Fa No. 42 [2020]; it was issued on 12 May 2020 (see accessed on 15 October). This Notice is examined in detail in section 13.8 of this book. 17 The Provisions on the Supervision and Administration of Insurance Brokers 2018, art.6.

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First, an insurance broker represents the interests of the proposer (the principal). Unlike an insurance agent, an insurance broker accepts the entrustment of the proposer and represents the interest of the proposer. It should act in accordance with the proposer’s instructions and requirements within the scope of its authority and provide intermediary services for the formation of an insurance contract between the proposer and the insurer. In the process, the broker must reflect and adhere to the interests and requirements of proposer. Second, although the insurance broker accepts the entrustment of the proposer and represents the proposer’s interests, it only reports to the proposer the opportunity and information for entering into an insurance contract or facilitates the proposer to conclude an insurance contract with the insurer, and it does not conclude insurance contracts with insurers in its own name or in the name of proposer. Third, an insurance broker can collect commissions according to law. Commission is the remuneration of insurance brokers for providing intermediary services between the insured and the insurer. In general, once the broker facilitates the formation of the proposed contract, the proposer shall pay the remuneration in accordance with the intermediation contract.18 However, according to the general rules of the insurance industry, although insurance brokers accept the entrustment of proposers and represent the interests of proposers to provide intermediary services for the conclusion of insurance contracts with the insurers, their commissions are generally paid by the insurers. If there is an agreement between the broker and the proposer that the proposer shall pay a commission for the insurance broker’s intermediary services and the proposer shall pay the commission in accordance with the contract. Fourth, the insurance broker must be an institution, and individuals are not allowed to carry out the brokerage business. According to the current practice in China, an insurance broker is an insurance brokerage company that meets the prescribed conditions, is approved by the CBIRC, and handles the industrial and commercial registration for the insurance brokerage business. 14.5 The business scope of insurance brokers The main business of the insurance brokers as mentioned in article 118 of the Insurance Law is to “provide intermediary services for the proposers and insurers to enter into insurance contracts”. In fact, this provision does not accurately reflect the true business scope of the insurance brokers in China. Insurance brokers not only play the role of assistance in the conclusion of insurance contracts between the proposers and the insurers but may engage in other intermediary business in whole or in part. The brokers’ business scope is stipulated in the Provision on the Supervision and Administration of Insurance Brokers 2018 in the following aspects.19 First, a broker can draft insurance proposal forms, select insurance companies, and handle the insurance application formalities for insurance applicants. By the broker’s intermediary service, the proposer can find a suitable insurer and a 18 The General Provisions of the Civil Code, art.963. 19 The Provisions on the Supervision and Administration of Insurance Brokers 2018, art.36.

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suitable insurance product. The formation of the contract becomes more efficient; this saves customers’ time. Second, a broker can assist the insured or beneficiaries in making claims. When the insured notifies the broker of the happening of a risk, the broker shall inform the insurer in a timely manner. If necessary, the broker may go to the site of the accident and assist the insured to mitigate loss. The broker can also advise the insured of the documents which are needed for the claim and assist the insured to negotiate the claim and reach an agreement with the insurer for the amount of insurance payment. In the case of a large claim, the broker may participate in the negotiation with the insurer and the loss adjuster. Sometimes, a broker may also be involved in subrogation. Third, a broker can carry out the reinsurance brokerage business in accordance with the provisions issued by the CBIRC.20 To engage in the reinsurance brokerage business, an insurance broker shall set up a special department to isolate the business flow, financial management, risk control, and other aspects from other insurance brokerage business.21 An insurance broker shall establish complete and regulated business archives, including the following at a minimum: (1) the confirmation letter on reinsurance arrangements; and (2) the ceded proportion that the reinsurer accepts. An insurance broker shall respectively establish account books for the reinsurance brokerage business and other insurance brokerage businesses to record its business income and expenditures.22 Fourth, a broker can provide clients with disaster, loss prevention, risk assessment, or management consulting services. Fifth, a broker may carry out other business relevant to insurance brokerage as prescribed by the CBIRC.23 In short, insurance brokers are independent agents appointed by the insured to carry out various functions, such as advice and placement, post-contractual assistance, claims handling service, and so on.24 14.6 The duties of insurance brokers 14.6.1 The duty to provide true information between the proposer and the insurer The Contract Law of the Civil Code (art.962[1]) requires a broker to provide true information concerning matters relevant to the conclusion of the proposed contract. The Provisions of Brokers also provides that an insurance broker shall provide insurance companies with true and complete information on purchase of insurance policies, and shall, according to the law, agree with insurance companies on the confidentiality, reasonable use, and other matters of the information on the purchase of insurance policies.25 20 21 22 23 24 25

Ibid., art.45. Ibid. Ibid., art.46. Ibid., art.36. Rob Merkin, Colinvau’s Law of Insurance (11th edn., Sweet and Maxwell 2016) para. 16-031, p. 974. The Provisions on the Supervision and Administration of Insurance Brokers 2018, art.47.

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The proposer has a pre-contractual duty of disclosure of material information to the insurer as to the risks to be covered.26 If the contract is concluded through a broker, the proposer must inform the broker of all material information, and the broker shall accurately and truthfully pass all the information to the insurer. The proposer is required to disclose information actually known to him or her;27 constructive knowledge is not required and thus irrelevant.28 A question arises here: if the broker knows some material information through ways other than the proposer telling him or her, should the broker’s knowledge of the information be deemed to be the proposer’s knowledge and does the broker then have a duty to disclose the information to the insurer? The Insurance Law (art.16) requires the proposer to disclose material information but does not require other persons to do so; hence it is unlikely that the broker’s knowledge can be imputed to the proposer’s knowledge. Even if the broker knows something which the proposer does not know, he or she may have no duty to tell the insurer such information. It seems that the broker’s duty is to pass what it has been told by the proposer to the insurer accurately and truthfully, and it has no independent duty to disclose material information to the insurer. But it has to admit that this is an area with a lack of clarity. As the broker’s market is not well developed yet, many questions have not been raised and tested. In contrast to the Chinese position in this regard, the English law takes the broker’s knowledge as the proposer’s knowledge with respect to pre-contractual information.29 Section 19 of the Marine Insurance Act 1906 imposed an independent duty on the broker towards the insurers to disclose to them all material facts known to him or her30 on top of the duty to forward the material facts disclosed by the insured to the insurer. Breach of the independent duty gave the insurer the right to avoid the policy as against the insured, although there was some unresolved debate as to whether insurers who chose not to avoid had the right to sue the broker for breach of the s.19 duty. Section 19 has been repealed by the Insurance Act 2015, and the repeal of s.19 has resolved that particular issue. The position under s.4(2)-(3) of the Insurance Act 2015 is that the insured is treated as having the knowledge of any individual, whether employee or independent agent, responsible for the insured’s insurance, so that if a broker fails to disclose information to the insurers, then the breach of the duty is the responsibility of the insured.31 The only exceptions to the imputation of knowledge from a broker to the insured

26 The Insurance Law, art.16. 27 The SPC Interpretation II, art.5: When an insurance contract is entered into, the information actually known by the proposer regarding the subject matter of insurance or the insured shall be the information that the proposer “shall truthfully disclose” as mentioned in art.16(1) of the Insurance Law.

28 Zhen Jing, “Limitations on the insured’s duty of disclosure in Chinese law: a comparative analysis with English, Australian and German laws” (2015) International Company and Commercial Law Review. 26(7), 224–235. 29 The Insurance Act 2015 (UK), s.4(2)(b)-(3)(b). 30 See also HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] Lloyd’s rep. I.R. 230. 31 Rob Merkin, Colinvau’s Law of Insurance (11th edn., Sweet and Maxwell 2016) para. 16-059.

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are where an employee of the broker has obtained confidential information by dealings with a person not connected to the insurance and where the broker has himself or herself been guilty of fraud against the insured in a manner that might be material to the insurance.32 At the pre-contract stage, while the proposer is making disclosure of material facts to the broker, the broker is prohibited by the Insurance Law to do anything to prevent the proposers from fulfilling their obligation of making truthful disclosure or inducing them not to fulfil such an obligation.33 According to the Contract Law of the Civil Code,34 where the broker intentionally conceals any material fact or provided false information in connection with the conclusion of the proposed contract, thereby harming the proposer’s interests, it shall be liable for damages. If the broker intentionally falsifies the material facts disclosed by the proposer and forwards the manufactured false information to the insurer, the broker should be liable to the proposer for damages which the proposer has sustained from the broker’s fraud. 14.6.2 The duty to disclose information of the broker itself and of insurance products A broker is required to disclose to customers information such as the terms and conditions of business between themselves and the customer, the relationship they have with the insurers with whom they deal, and information on the basis of which they are remunerated where a potential conflict of interest exists. The Provisions of Brokers (art.50) provides that in the process of carrying out business, an insurance broker shall develop and produce a standard client notification letter. A client notification letter shall, at a minimum, include the following items: (1) the broker’s name, business premises, scope of business and contact methods; (2) the methods for an insurance broker to obtain remuneration, including whether it has collected commissions from an insurance company; (3) whether there is any affiliation relationship between the insurance broker, its senior executive, and an insurance company or insurance intermediary institution related to its brokerage business, and (4) the channels of filing complaints and the methods of settling disputes.35 In addition to disclosing matters relating to brokers themselves, brokers are required to disclose information on insurance products offered to customers. An insurance broker shall, according to the requirements of the CBIRC, disclose information on insurance products to proposers,36 and shall not conceal from the proposers material information relevant to the insurance contracts.37

32 Ibid. 33 The Insurance Law, art.131. 34 The Contract Law of the Civil Code, art.962(2). 35 For an example of such a standard letter, see the Letter to Clients by the Southern China Airline Brokerage Co. Ltd. (see accessed on 8 June 2020). 36 The Provisions on the Supervision and Administration of Insurance Brokers 2018, art.53(2). 37 The Insurance Law, art.131.

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An important part of information on insurance products is what risks are covered and what are not covered by the insurance product. The Insurance Law requires the insurer to explain the content of the insurance policies and clearly explain the exclusion clauses to the proposers before concluding the contract.38 It is unclear whether an insurance broker is required to clearly explain the exclusion clauses to the proposer. If the insurer entrusts an insurance broker to explain the exclusion clauses, the broker may also act as the insurer’s agent in that respect while acting on the proposer’s behalf to effect a contract with the insurer. In practice, most insurance brokers stipulate a clause in the contract of insurance brokerage such as: Please read the insurance terms carefully, focusing on insurance liability, liability exemption, insured’s rights and obligations, calculation of deductible or deductible rate, the probation period of health insurance products, and so on, and may require the company’s business personnel to explain them in detail.39

This clause in the insurance brokerage contract meets the requirement of the Contract Law which requires the party supplying the standard terms for the contract to inform the other party to note the exclusion or restriction of its liabilities in a reasonable way and to explain the standard terms upon being requested by the other party.40 That is because the insurance brokerage contract is not an insurance contract but a general contract. The point here is that the broker acts on behalf of the proposer for concluding an insurance contract. Although it is well known that an insurance broker should be a qualified intermediary person for the insurance transaction with expertise of insurance law and insurance knowledge, the Insurance Law does not requires a broker to clearly explain the exclusion clauses in a policy to the proposer. The question that arises is this: if the insurer clearly explains the exclusion clauses to the broker, is the broker bound to pass the explanation to the proposer? It is submitted that express rules should be provided by the Insurance Law or the Provisions of Brokers on this point. 14.6.3 The duty to provide advice to the proposers The Provisions of Brokers (art.53) requires that an insurance broker which puts forward an insurance proposal to a proposer shall, according to the proposer’s demand, recommend an insurance product in conformity with the proposer’s interests on the basis of objective analysis on the same kind of insurance products on the market. This can assist the proposer to become aware of the types of products available to him or her and understand their purpose, how they work, and their key features, including cost. This understanding helps consumers to compare 38 Ibid., art.17. 39 For instance, see Clause 2 of the Insurance Brokerage Contract of the Southern China Airline Brokerage Co Ltd. (see accessed on 8 September 2020). 40 The Contract Law of the Civil Code, art.496, provides that: where standard terms are adopted in concluding a contract, the party supplying the standard terms shall inform the other party to note the exclusion or restriction of its liabilities in a reasonable way, and shall explain the standard terms upon being requested by the other party.

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products and to purchase insurance products that meet their needs. This can undoubtedly help the proposer make better informed decisions about the product he or she is to purchase and address a core consumer protection concern about asymmetries of information between the insurers and the proposers to whom the products are sold. The improved understanding by consumers of the terms and benefits they can expect from insurance products may also lead to a reduction in complaints against the insurers. 14.6.4 The duty to collect premiums from the proposers and transfer them to the insurers Insurance brokers have no duty to pay premiums; it is the duty of the proposer to pay premiums where an insurance contract is concluded.41 But the brokers have a duty to collect premiums paid by the proposers and pass them to the insurers. An insurance broker shall open an independent special account for the proposers’ funds, in which only the following funds may be deposited: (1) the premiums paid to insurance companies by insurance applicants; and (2) the surrender values and insurance premiums collected on behalf of insurance applicants, the insured, and beneficiaries.42 Under English law, if a marine policy is effected through a broker, the broker is directly responsible for the payment of premiums: Unless otherwise agreed, where a marine policy is effected on behalf of the assured by a broker, the broker is directly responsible to the insurer for the premium, and the insurer is directly responsible to the assured for the amount which may be payable in respect of losses, or in respect of returnable premium.43

14.7 Insurance brokers’ liability for loss and damages caused to the proposers Proposers rely on insurance brokers to find a suitable insurance product for them. If insurance brokers carry out their business negligently and cause losses or damages to the proposers, they are liable to the proposers. The Insurance Law provides that an insurance broker shall be liable for losses and damages caused to the proposer or the insured due to its fault.44 An insurance broker is liable for compensation for its wrongdoing if the following circumstances are satisfied.45 First, the insurance broker must have a subjective fault. Fault refers to a subjective state of insurance brokers in carrying out the insurance brokerage business, including both intentional and negligent states of mind. Intentional act means that 41 The Insurance Law, art.14 for non-marine insurance.The Maritime Code 1992, art.234 for marine insurance. 42 The Provisions on the Supervision and Administration of Insurance Brokers 2018, art.43. 43 The Marine Insurance Act 1906, s.53(1). 44 The Insurance Law, art.128. 45 The interpretation of the provisions of the Insurance Law in respect of Insurance Agents and Insurance Broker by the National People’s Congress of China (see accessed on 15 October 2020).

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the insurance broker knows or should know that its actions will cause damage to the insured and hopes or allows the consequences of such damage to occur. Negligence means that the insurance broker breached its duty to take care, and as a result of that breach, damage has been caused to the proposer. A negligent act refers to that committed by the broker who should have foreseen that its actions would possibly entail harmful consequences to the proposer but the broker fails to foresee, or the broker has foreseen the consequences but unreasonably believes that they may not occur or can be avoided, the broker may be liable for the damage caused by its negligent act. Second, there is a causal connection between the loss of the proposer, the insured, and the beneficiary and the faulty behaviour of the insurance broker. Causation is an objective and inevitable connection between certain facts and certain actions. If the loss is not caused by the faulty behaviour of the insurance broker, the insurance broker will not be liable for compensation. Third, where the faulty behaviour of the insurance broker has caused losses to the proposer, the insured, or the beneficiary, such losses should generally be limited to economic losses in the insurance brokerage business, including direct losses and indirect losses. Direct loss refers to the reduction of the existing property and benefits of the proposer, the insured or the beneficiary. Indirect loss refers to the benefits that the proposer, the insured or the beneficiary should get or can get, but for the broker’s faulty act. The question of how to measure damages arises here. For example, as mentioned earlier, an insurance broker has the duty to pass to the insurer any material information as to the risks disclosed by the proposer. If the broker fails to do so and the insurance contract has been rescinded by the insurer by reason of non-disclosure or misrepresentation, the broker should be liable for damages to the proposer or the insured to the extent that the proposer would have enjoyed under the insurance policy if the insurance policy would not have been rescinded. The English law approach to this question of measure of damages is that if a broker is liable in damages to the proposer or the insured, the measure of damages will usually be that sum which the insured would have recovered from the insurer had the latter been liable.46 If the breach of duty by the broker is a failure to effect insurance at all, the question has arisen whether it is open to him or her to say that even if he or she had obtained the coverage, the insurer would still not have been liable, and hence he or she should not be liable, because of some breach by the insured. This point arose neatly in an English case Fraser v Furman,47 where the broker had failed in his or her duty to effect employer’s liability coverage for the claimant. The broker argued, however, that the insurer would not have been for the loss that subsequently occurred, because the claimant would have been in breach of a condition in the policy to take reasonable precautions to avoid loss. The Court of Appeal held that the broker was liable for the full amount of loss suffered by the claimant. Even if the defence would have been available to the insurer, the fact was that in the circumstances the insurer in question would not 46 John Birds, Birds’ Modern Insurance Law (10th edn., Sweet and Maxwell 2016) para. 12.6.4, p. 227. 47 Fraser v Furman [1976] 1 W.L.R. 898.

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have repudiated liability. Therefore, the question depends on the likely attitude of the insurer rather than the strict point as to whether the insurer would have been legally liable.48 An insured, who is left without insurance coverage, or whose insurance coverage is inadequate, has an action against the broker responsible for the shortfall in the sum which would have been recovered under the policy. The further question is whether the broker can be liable for additional loss suffered by the insured. To take a typical example, the insured may have instructed his or her broker to obtain property insurance for a small business: if the broker fails to do so and the premises are destroyed, and the insured does not have the financial resources to fund the rebuilding of the premises in the absence of any insurance proceeds, the insured may lose the entire business. Is the broker liable for such loss?49 Under English law, the impecuniosity of the insured is no longer to be regarded as the proximate cause of the loss in such a situation: the authority for that earlier proposition, Liesbosch Dredger v Edison (The Liesbosch),50 was overruled by the House of Lords in Lagden v O’Connor.51 However, that does not automatically mean that the insured is entitled to recover consequential loss. The test for recovery is that laid down by the House of Lords in South Australia Asset Management Corp Respondents v York Montague Ltd. (SAAMCO),52 namely, whether the loss claimed was that in respect of which the broker’s duty of care was owed. Accordingly, as long as this test is satisfied, the broker may in principle be liable for a sum greater than that which was insured under the insurance policy.53 In Arbory Group Ltd. v West Craven Insurance Services,54 the brokers’ negligent conduct failed to place adequate business interruption coverage for the insured’s business. The insured’s premises were damaged by fire, but the insured was, in the absence of insurance proceeds, unable to reinstate the premises from his or her own resources, so significant financial loss was sustained. HH Hudge Grenfell QC, applying SAAMCO, held that the duty of care accepted by the brokers was to preserve the insured from the type of loss that he or she had actually suffered, namely, business interruption loss, and that the broker was liable not just for the uninsured sum but also for the consequential loss suffered by the insured.Therefore,

48 But the position may be different if the insurance which the broker should have effected would have been void: Thomas Cheshire and Co. v Vaughan Bros and Co. [1920] 3 K.B. 240, and if the claimant is in fact virtually uninsurable, the damages payable by the broker are likely to be reduced: O and R Jewellers v Terry [1999] Lloyd’s Rep. I.R. 436. 49 Rob Merkin, Colinvaux’s Law of Insurance (11th edn., Sweet and Maxwell 2016) para. 16-079, p. 1005. 50 Liesbosch Dredger v Edison (The Liesbosch) [1933] A.C. 449. 51 Lagden v O’Connor [2004] Lloyd’s Rep. I.R. 315. 52 South Australia Asset Management Corp Respondents vYork Montague Ltd (SAAMCO)[1997] A.C. 191. 53 In accordance with Sprung v Royal Insurance [1999] Lloyd’s Rep. I. R. 111, had they been liable but refused to pay in a timely fashion. See Aneco Reinsurance Underwriting Ltd v Johnson & Higgins [2002] Lloyd’s Rep.I.R. 91; Arbory Group Ltd v West Craven Insurance Services [2007] Lloyd’s Rep. I.R. 491. The contrary had been suggested by Parker LJ in Ramwade v WJ Emson & Co [1987] R.T.R. 72. 54 Arbory Group Ltd v West Craven Insurance Services [2007] Lloyd’s Rep. I.R. 491.

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the insured was entitled to recover not just the proceeds of the policy but also consequential loss which fell within the scope of the duty accepted by the broker.55 Under Chinese law, the issue of consequential loss caused by the broker’s fault has not yet been raised. It may be possible that an insurance broker should be made liable for the consequential loss within the scope of the duty accepted by the broker, as this kind of loss is recognized by the Insurance Law (art.23) in the case of the insurer’s late payment of a valid claim.56 This issue needs to be addressed by the SPC or the CBIRC in the future. But one thing is certain: the insurance broker is only liable for the losses caused to the proposer, the insured, or the beneficiary by its wrongful conduct but not liable for the legal consequences arising from the insurance contract. The broker only plays an intermediary role in accordance with the interests of the proposer for the conclusion of the insurance contract between the proposer and the insurer. It is not a party to the insurance contract, so should not be responsible for the performance and the consequences of the insurance contract.57 14.8 Regulatory rules for insurance brokers The main regulation of insurance brokers is the Provisions on the Supervision and Administration of Insurance Brokers 2018.58 It consists of 109 articles in eight chapters: Chapter 1 (arts. 1–5) provides general provisions. Chapter 2 (arts. 6–34) is concerned with formation of insurance brokers. Chapter 3 (arts. 35–67) sets out rules for business operation. Chapter 4 (arts. 68–73) concerns rules on market exit. Chapter 5 (arts. 74–76) puts forward rules on industrial self-regulation. Chapter 6 (arts. 77– 83) is concerned with supervisions and inspection. Chapter 7 (arts. 77–103) stipulates legal liability. Chapter 8 (arts. 103–109) refers to supplemental provisions. In this section, we consider these regulatory rules in detail. 14.8.1 General provisions For the purposes of regulating the operations of insurance brokers; protecting the lawful rights and interests of the insurance applicants, insured, and beneficiaries;

55 Rob Merkin, Colinvaux’s Law of Insurance (11th edn., Sweet and Maxwell 2016) para. 16-079. P. 1006. 56 Zhen Jing, “The Insurer’s Primary Obligation to Pay Valid Claims in a Timely Manner” (2015) Journal of Business Law, 37–67. 57 The interpretation of the provisions of the Insurance Law in respect of Insurance Agents and Insurance Broker by the National People’s Congress of China (see accessed on 10 September 2020). 58 These Provisions came into force on 1 May 2018 and repealed the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the CIRC Order No. 6 [2009]) issued by the CIRC on 25 September 2009, the Measures for the Supervision and Administration of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners (the CIRC Order No. 3 [2013]) issued by the CIRC on 6 January 2013, and the Decision of the CIRC on Amending the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the CIRC Order No. 6 [2013]) issued by the CIRC on 27 April 2013.

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and maintaining the market order; these Provisions are developed in accordance with the Insurance Law and other laws and administrative regulations.59 In the Provisions, “insurance brokers” means institutions that provide intermediary services, in the interests of insurance applicants, for insurance applicants to enter into insurance contracts with insurance companies and collect commissions according to the law, including insurance brokerage companies and their branches. “Insurance brokerage practitioner” means an employee of an insurance broker who drafts insurance application proposals; handles the insurance application formalities for insurance applicants or the insured; assists insurance applicants or the insured in claiming compensation; provides clients with disaster, loss prevention, or risk assessment or management consulting services; or engages in reinsurance brokerage, among others.60 “Professional insurance intermediary institutions” includes full-time insurance agents, insurance brokers, insurance adjustment institutions, and insurance adjustors. “Insurance intermediary institutions” includes professional insurance intermediary institutions and sideline insurance agencies.61 To engage in the insurance brokerage business within the territory of China, an insurance brokerage shall satisfy the requirements prescribed by the CBIRC and obtain an insurance brokerage business permit (hereinafter, the permit).62 An insurance broker shall comply with laws, administrative regulations, and the relevant provisions issued by the CBIRC and follow the principles of free will, good faith, and fair competition.63 The CBIRC supervises and administers insurance brokers as authorized by the State Council in accordance with the Insurance Law. The local offices of the CBIRC perform their regulatory duties as authorized by the CBIRC.64 Foreign-funded insurance brokers formed with the approval of the CBIRC to carry out insurance brokerage business are governed by these Provisions, except as otherwise specified in the relevant international treaties to which China has acceded or specified by the CBIRC. These Provisions shall apply, mutatis mutandis, to the formation and management of insurance brokers adopting the organizational form other than the company system, except as otherwise specified by the CBIRC.65 14.8.2 Market access (a) Business permit Except as otherwise specified by the CBIRC, an insurance broker shall adopt either of the following forms of organization: limited liability company or joint-stock limited company.66

59 60 61 62 63 64 65 66

The Provisions on the Supervision and Administration of Insurance Brokers 2018, art.1. Ibid., art.2. Ibid., art.104. Ibid., art.3. Ibid., art.4. Ibid., art.5. Ibid., art.105. Ibid., art.6.

895

REGULATION OF INSURANCE BROKERS

To carry out an insurance brokerage business, an insurance brokerage company shall meet the following conditions:67 (1) Its shareholders satisfy the requirements of these Provisions and make contribution with self-owned, true, and legal funds other than bank loans or any other form of non-self-owned capital. (2) Its registered capital satisfies the requirements of article 10 of these Provisions and is under custody according to the relevant provisions issued by the CBIRC. (3) The business scope recorded in its business license complies with the relevant provisions issued by the CBIRC. (4) Its by-laws comply with the relevant provisions. (5) Its name satisfies the requirements of these Provisions. (6) Its senior executives meet the office qualifications as set forth in these Provisions. (7) It has a governance structure and internal control system in compliance with the provisions issued by the CBIRC and a scientific and reasonable business model. (8) It has a fixed domicile suitable for its scale of business. (9) It has business and financial information management systems in compliance with the provisions issued by the CBIRC. (10) Other conditions as set forth in laws, administrative regulations, and the provisions issued by the CBIRC. An entity or individual falling under one of the following circumstances shall not become a shareholder of any insurance brokerage company:68 (1) The entity or individual has been subject to criminal punishment or major administrative punishment in the most recent five years. (2) The entity or individual is under investigation by the relevant department for being suspected of involvement in any serious violation of law or the commission of a crime. (3) The entity or individual is determined by a relevant entity of the state as an object subject to joint punishment for serious dishonesty and shall be subject to corresponding penalties in the insurance field or has other bad records of serious dishonesty within the most recent five years. (4) The entity or individual can’t invest in any enterprise according to the laws and administrative regulations. (5) Other circumstances under which the entity or individual is inappropriate to become a shareholder of the insurance brokerage company as recognized by the CBIRC under the principle of prudential regulation. Where an employee of an insurance company or a practitioner of a professional insurance intermediary institution makes investment in an insurance brokerage company, a written certification showing that his or her employer is aware of the 67 Ibid., art.7. 68 Ibid., art.8.

896

REGULATION OF INSURANCE BROKERS

investment shall be provided, and where a director, supervisor, or senior executive of an insurance company or professional insurance intermediary institution makes investment in an insurance brokerage company, the consent of the shareholders’ meeting or the general meeting of shareholders shall be obtained according to the relevant provisions.69 The minimum registered capital of an insurance brokerage company whose business area is not limited to the province, autonomous region, municipality directly under the Central Government, or city under separate state planning where industrial and commercial registration formalities are undergone shall be ¥50 million yuan. The minimum registered capital of an insurance brokerage company whose business area is the province, autonomous region, municipality directly under the Central Government, or city under separate state planning where industrial and commercial registration formalities are undergone shall be ¥10 million yuan. The registered capital of an insurance brokerage company must be paid-in monetary capital.70 The name of an insurance broker shall include the words “insurance brokerage.” The identifier of an insurance broker shall not be the same as that of an existing professional insurance intermediary institution except when an insurance broker has a same actual controller as the professional insurance intermediary institution.71 To apply for engaging in insurance brokerage business, an insurance brokerage company shall, after obtaining a business license, submit the application materials in a timely manner in accordance with the requirements of the CBIRC and disclose the relevant information. The CBIRC and its local office shall implement administrative licensing according to their statutory duties and procedures.72 After receiving an application for engaging in an insurance brokerage business, the CBIRC and its local office shall, by interview, correspondence, on-site acceptance, and other means, understand and examine the business records of the applicant’s shareholders and the applicant’s market development strategy, business development plan, internal control system building, personnel structure, information system configuration, operation, and other relevant matters and conduct risk testing and warning.73 The CBIRC and its local office making a decision of approving an insurance brokerage company to engage in the insurance brokering business shall issue a permit to the applicant. Only after obtaining a permit may an applicant engage in the insurance brokerage business, and an applicant shall register the relevant information in the regulatory information system as set forth by the CBIRC in a timely manner.74 Where the CBIRC and its local office decide to disapprove the application, a written decision shall be made and the reasons shall be explained. An applicant shall, within 15 working days of the date of receiving a written decision of the CBIRC 69 70 71 72 73 74

Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14.

897

REGULATION OF INSURANCE BROKERS

and its local office, report to the administrative department for industry and commerce where the industrial and commercial registration formalities are undergone. A company that is allowed to survive but not allowed to engage in insurance brokerage business shall not engage in insurance brokerage business, handle the industrial and commercial modification registration of its name, business scope and by-laws, among others, according to the law, and ensure that there are no such words as “insurance brokerage” in its name.75 An insurance brokerage company whose business area is not limited to the province, autonomous region, municipality directly under the Central Government, or city under separate state planning where industrial and commercial registration formalities are undergone may carry out insurance brokerage activities within the territory of China.76 Where an insurance brokerage company whose business area is limited to the province, autonomous region, municipality directly under the Central Government, or city under separate state planning where industrial and commercial registration formalities are undergone dispatches insurance brokerage practitioners to a place other than the industrial and commercial registration places to provide services for insurance business whose insurance applicants and insured are natural persons shall form a local branch. To form a branch, a provincial branch company shall be formed first and be designated to handle the matters concerning application for administrative licensing, regulatory report, and submission of statements, among others and to be responsible for managing other branches.77 The branches of an insurance brokerage company shall include branch companies and business departments.78 To form a new branch to carry out insurance brokerage business, an insurance brokerage company shall meet the following conditions:79 (1) The insurance brokerage company and its branch have not been subject to criminal punishment or major administrative punishment in the most recent year. (2) The insurance brokerage company and its branch are not under investigation by the relevant department for being suspected of involvement in any violation of law or the commission of a crime. (3) The insurance brokerage company and its branch have not caused any mass visits and complaints involving 30 or more persons or abnormal centralized surrender of policies involving 100 or more persons in the most recent year. (4) A branch formed in the most recent two years did not exit market after operation for less than one year. (5) It has sound branch management system. (6) A newly formed branch has qualified business premises, business financial information system, and other facilities matching the business operation. 75 76 77 78 79

Ibid. Ibid., art.15. Ibid. Ibid. Ibid., art.16.

898

REGULATION OF INSURANCE BROKERS

(7) The primary person in charge of a newly formed branch satisfies the office qualifications as set forth in these Provisions. (8) Other conditions as prescribed by the CBIRC. An insurance brokerage company that is determined by a relevant entity of the state as an object subject to joint punishment for serious dishonesty and is subject to corresponding penalties in the insurance field, or has other bad records of serious dishonesty within the most recent five years, shall not form any new branch to carry out insurance brokerage business. A branch of an insurance brokerage company shall, within 15 working days of the registration date recorded in the business license, report to the local office of the CBIRC in writing, register the relevant information in the regulatory information system as required by the CBIRC, make public disclosure in accordance with the relevant provisions, and submit the application materials or reporting materials on application for the confirmation of satisfaction of office qualifications of the primary person in charge.80 An insurance broker falling under one of the following circumstances shall, within five working days of occurrence of such circumstance, report through the regulatory information system as required by the CBIRC, and make public disclosure in accordance with the relevant provisions:81 (1) (2) (3) (4) (5) (6) (7) (8) (9)

Changing the name, domicile, or business premise; Changing the shareholders, registered capital, or organizational form; Changing the shareholder’s name, designation, or amount of contribution; Amending the by-laws; Making equity investment and forming an overseas insurance institution and non-business institution; Division, merger and dissolution of the insurance broker and termination of insurance brokerage business activities by a branch; Changing the primary person in charge of a branch other than provincial branch company; Being subject to administrative punishment or criminal punishment or under investigation for being suspected of involvement in any violation of law or the commission of a crime; Other reporting matters as prescribed by the CBIRC.

An insurance broker falling under the relevant circumstances as prescribed in the preceding paragraph shall comply with the relevant provisions issued by the CBIRC. An insurance brokerage company that makes any change involving any matter recorded in the permit shall handle registration of change in the permit according to the Measures for the Administration of Insurance Permits and other relevant provisions, surrender the original permit, obtain a new one, and make an announcement.82

80 Ibid., art.17. 81 Ibid., art.18. 82 Ibid., art.19.

899

REGULATION OF INSURANCE BROKERS

(b) Office qualifications (qualifications of senior personnel) For the purposes of these Provisions, “senior executive” of an insurance broker means the following persons:83 (1) The general manager and deputy general manager of an insurance brokerage company; (2) The primary person in charge of a provincial branch; (3) Other persons who exercise important functions and powers over the business operation and management of the company. A senior executive of an insurance broker shall, before taking office, obtain the office qualifications confirmed by the local office of the CBIRC.84 A senior executive of an insurance broker shall meet the following conditions:85 (1) He or she has an educational background of junior college or above. (2) He or she has three or more years of financial work experience or five or more years of economic work experience. (3) He or she has the business operation management capability required for performing duties and is familiar with the insurance laws, administrative regulations, and relevant provisions issued by the CBIRC. (4) He or she is honest, trustworthy, and has good conduct. A person with ten years or more of financial work experience may be exempted from the restriction of item (1) as mentioned earlier.86 A primary person in charge of a branch other than a provincial branch company appointed by an insurance broker shall meet the conditions as prescribed earlier.87 A person falling under one of the following circumstances shall not serve as senior executive of any insurance broker or primary person in charge of any branch other than a provincial branch company:88 (1) He or she serves as director, supervisor, or senior executive of an insurance company or insurance intermediary institution whose permit has been revoked for violation of laws and is personally or directly liable as a leader for the revocation of permit, and three years have not elapsed since the date of revocation of the permit. (2) He or she is director, supervisor, or senior executive of a financial institution who has been disqualified for taking office by the financial regulatory authority for his or her violation of laws or discipline, and five years have not elapsed since the date of disqualification.

83 84 85 86 87 88

Ibid., art.20. Ibid. Ibid., art. 21. Ibid. Ibid. Ibid., art.22.

900

REGULATION OF INSURANCE BROKERS

(3) He or she is prohibited from access to the financial industry during a certain period as decided by the financial regulatory authority, and the period has not expired. (4) Two years have not elapsed since a warning is granted or a fine is imposed by the financial regulatory authority. (5) He or she is under investigation by the judicial authority, the discipline inspection and supervision department, or the financial regulatory authority. (6) He or she is determined by a relevant entity of the state as an object subject to joint punishment for serious dishonesty and shall be subject to corresponding penalties in the insurance field or has other bad records of serious dishonesty within the most recent five years. (7) Other circumstances as set forth in laws, administrative regulations, and the provisions issued by the CBIRC. An insurance broker shall establish labour relations with its senior executives and primary persons in charge of branches other than provincial branch companies and enter into written labour contracts therewith.89 Senior executives of an insurance broker and primary persons in charge of a branch other than the provincial branch company shall not concurrently serve as primary persons in charge of two or more branches.90 A senior executive of an insurance broker or a primary person in charge of a branch other than provincial branch company concurrently taking other business management offices shall have necessary time to perform the duties.91 Without approval of the shareholders’ meeting or general meeting of shareholders, a senior executive of an insurance broker or a primary person in charge of a branch other than the provincial branch company shall not concurrently take any office in any institution having conflict of interest with the insurance broker.92 An insurance broker applying to the local office of the CBIRC for confirmation of satisfaction of office qualifications for senior executives shall faithfully enter the application form and submit the relevant materials. The local office of the CBIRC may investigate or interview the proposed senior executives of an insurance broker.93 The senior executives of an insurance broker shall pass the examinations on insurance laws and regulations and relevant knowledge as recognized by the CBIRC.94 A senior executive of an insurance broker that is transferred to or concurrently holds another post in the same institution is not required to be subject to confirmation of satisfaction of office qualifications. To adjust the posts of a senior executive and primary person in charge of a branch other than a provincial branch company or remove the aforesaid persons from office, an insurance broker shall, within five

89 90 91 92 93 94

Ibid., art.23. Ibid., art.24. Ibid. Ibid., art.25. Ibid., art.26. Ibid., art.27.

901

REGULATION OF INSURANCE BROKERS

working days of the date of making a decision, register relevant information in the regulatory information system as prescribed by the CBIRC.95 Where a senior executive of an insurance broker or a primary person in charge of a branch office other than a provincial branch company is prosecuted for any suspected crime, the insurance broker shall, within five working days of the date when he or she is prosecuted, register the relevant information in the regulatory information system as prescribed by the CBIRC.96 A senior executive of an insurance broker or a primary person in charge of a branch office other than a provincial branch company shall be removed from office or his or her office qualification shall be automatically invalidated under any one of the following circumstances:97 (1) After being confirmed to satisfy office qualifications, he or she is not appointed for over two months. (2) He or she leaves the insurance broker. (3) The CBIRC imposes the administrative punishment of prohibition from access to the insurance industry on him or her. (4) It has not been five years since he or she finished serving a criminal sentence for corruption, acceptance of bribes, embezzlement of property, appropriation of property, or disturbance of the socialist market order, or it has not been five years since he or she finished serving a criminal sentence with deprival of political rights for any crime. (5) It has not been three years since the completion of the bankruptcy liquidation of a company or enterprise in which he or she serves as director, factory director, or manager, and he or she was personally liable for the bankruptcy liquidation of the company or enterprise. (6) It has not been three years since a company or enterprise in which he or she serves as legal representative forfeited its business license if the company or enterprise forfeited its business license for any violation of law and was ordered to close down, and he or she was personally liable for the forfeiture and closedown. (7) He or she has a relatively large amount of personal debts which have not been paid off upon maturity. An insurance broker falling under one of the following circumstances may appoint a temporary person in charge for a maximum of three months and shall not continuously appoint the temporary person in charge for a same position:98 (1) The original person in charge resigns or is removed from office. (2) The original person in charge is unable to normally perform his or her duties for any illness, accident, or other reason. (3) Any other special circumstances as recognized by the CBIRC.

95 96 97 98

Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31.

902

REGULATION OF INSURANCE BROKERS

The temporary person in charge shall have the capability appropriate for performing his or her duties and satisfy the relevant requirements of articles 21 and 22 of these Provisions. To appoint a temporary person in charge, an insurance broker shall, within five days of the date of making a decision, register relevant information in the regulatory information system as prescribed by the CBIRC.99 (c) Practitioners An insurance broker shall employ insurance brokerage practitioners with good moral character. An insurance broker shall not employ any insurance brokerage practitioner falling under any of the following circumstances:100 (1) It has not been five years since he or she finished serving a criminal sentence for corruption, bribery, embezzlement of property, appropriation of property, or disturbance of the socialist market economic order. (2) He or she has been prohibited from access to the financial industry during a certain period as decided by the financial regulatory authority, and the period has not expired. (3) He or she is determined by a relevant entity of the state as an object subject to joint punishment for serious dishonesty and shall be subject to corresponding penalties in the insurance field or has other bad records of serious dishonesty within the most recent five years. (4) Other circumstances as prescribed by laws, administrative regulations, and the provisions issued by the CBIRC. An insurance brokerage practitioner shall have the professional capability required for engaging in insurance brokerage business. An insurance broker shall strengthen the pre-post training and follow-up education for insurance brokerage practitioners, which shall at least include the business knowledge, legal knowledge, and professional ethics.101 An insurance broker may entrust the self-regulation organizations or other institutions of the insurance intermediary industry to organize training.102 An insurance broker shall establish complete archives on the training of insurance brokerage practitioners.103 An insurance broker shall conduct practicing registration for its insurance brokerage practitioners in accordance with the relevant provisions. Practicing registration shall only be conducted for insurance brokerage practitioners through one insurance broker.104 Where an insurance brokerage practitioner alters his or her insurance broker, the new insurance broker shall conduct practicing registration for him or her, and the original insurance broker shall cancel the practicing registration in a timely manner.105

99 100 101 102 103 104 105

Ibid. Ibid., art.32. Ibid., art.33. Ibid. Ibid. Ibid., art.34. Ibid.

903

REGULATION OF INSURANCE BROKERS

14.8.3 Operation rules An insurance brokerage company shall put its permit and business license in a conspicuous place of its domicile or business premises. A branch of an insurance brokerage company shall put a photocopy of the permit of the company to which the official seal of the legal person to which it is subordinate and the business license in a conspicuous position of its business premises. No insurance broker may forge, alter, lease, lend, or transfer its permit.106 An insurance broker may engage the following business, in whole or in part:107 (1) Drafting insurance application proposals, selecting insurance companies, and handling the insurance application formalities for insurance applicants. (2) Assisting the insured or beneficiaries in claiming compensation. (3) Reinsurance brokerage business. (4) Providing clients with disaster or loss prevention or risk assessment or management consulting services. (5) Other business relevant to insurance brokerage as prescribed by the CBIRC. The insurance brokerage business carried out by an insurance broker shall not exceed the business scope and the business area of the underwriting insurance company, except insurance brokerage business involving co-insurance outside its business territory, insurance underwritten outside its business territory, or master policies as otherwise specified by the CBIRC.108 Insurance brokers and their employees shall not sell non-insurance financial products, except non-insurance financial products approved by the relevant financial regulatory departments.109 Insurance brokers and their employees shall, before selling qualified non-insurance financial products, have the corresponding qualification requirements.110 An insurance broker shall, in accordance with laws, administrative regulations, and the relevant provisions issued by the CBIRC, and under the principles of specifying responsibilities, strengthening balance, and strengthening risk management, establish sound corporate governance structure and rules; and clarify the management and control responsibilities, build a compliance system, focus on self-restraint, strengthen internal accountability, and ensure steady operation.111 An insurance brokerage practitioner shall carry out business activities within the scope authorized by his/her insurance broker.112 Insurance brokers shall carry out business activities via Internet in compliance with the provisions issued by the CBIRC.113

106 Ibid., art.35.The business scope of an insurance broker covers the whole life cycle of an insurance contract, much wider than what is stipulated in art.118 of the Insurance Law. 107 Ibid., art.36. 108 Ibid., art.37. 109 Ibid., art.38. 110 Ibid. 111 Ibid., art.39. 112 Ibid., art.40. 113 Ibid., art.41.

904

REGULATION OF INSURANCE BROKERS

An insurance broker shall establish special account books to record the revenues and expenditures of the insurance brokerage business.114 An insurance broker shall open an independent account specially for clients’ funds, only in which may the following funds be deposited:115 (1) The premiums paid to insurance companies by insurance applicants. (2) The surrender values and insurance premiums collected on behalf of insurance applicants, the insured, and beneficiaries. An insurance broker shall open an independent account to collect commissions. An insurance broker shall open and use other bank accounts in compliance with the provisions issued by the CBIRC.116 An insurance broker shall establish complete and standardized business archives, including the following at a minimum:117 (1) Basic information on the insurance policies signed through the institution, including the designations or names of insurers, insurance applicants, and the insured, number of insurance policies, names of products, insured amounts, insurance premiums, methods of payment, date of purchasing insurance policies and insurance period, among others. (2) The amount of commissions and collection methods corresponding to the insurance contracts, and so on. (3) The information on payment of insurance premiums to insurance companies and information on the collection and payment of insurance premiums or surrender values on behalf to insurance applicants, the insured, or beneficiaries. (4) The names the practitioners providing brokerage services for the signing of the insurance contracts, the amount of remuneration and the accounts for collecting remuneration, among others. (5) Other business information as prescribed by the CBIRC. The records of an insurance broker shall be true and complete. An insurance broker shall carry out reinsurance brokerage business in accordance with the provisions issued by the CBIRC. To engage in reinsurance brokerage business, an insurance broker shall set up a special department to isolate the business flow, financial management, risk control and other respects from other insurance brokerage business.118 To engage in reinsurance brokerage business, an insurance broker shall establish complete and regulated business archives, including the following at a minimum: (1) the confirmation letter on reinsurance arrangements; and (2) the ceded proportion that the reinsurer accepts.119

114 115 116 117 118 119

Ibid., art.42. Ibid., art.43. Ibid. Ibid., art.44. Ibid., art.45. Ibid., art.46.

905

REGULATION OF INSURANCE BROKERS

An insurance broker shall respectively establish account books for reinsurance brokerage business and other insurance brokerage businesses to record its business income and expenditure.120 An insurance broker shall provide insurance companies with true and complete information on purchase of insurance policies, and shall, according to the law, agree with insurance companies on the confidentiality, reasonable use and other matters of the information on purchase of insurance policies.121 To engage in the insurance brokerage business, an insurance broker shall enter into entrustment contracts with clients,122 and agree on the rights and obligations of both parties and other relevant matters according to the law. An entrustment contract shall not violate laws, administrative regulations or relevant provisions issued by the CBIRC.123 An insurance broker carrying out insurance brokerage business involving the payment of insurance premium to or receipt of commissions from insurance companies shall agree with the insurance companies on the insurance premiums to be paid upon agreement with the insurance companies, the time limit for paying commissions, the liability for liquidated damages and other matters.124 In the process of carrying out business, an insurance broker shall develop and produce a standard client notification letter. A client notification letter shall, at a minimum, include the following items:125 (1) Its name, business premises, scope of business and contact methods. (2) The methods for an insurance broker to obtain remuneration, including whether it has collected commissions from an insurance company. (3) Whether there is any affiliation relationship between the insurance broker and its senior executive and an insurance company or insurance intermediary institution related to its brokerage business. (4) The channels of filing complaints and the methods of settling disputes. An insurance broker shall properly preserve its business archives, account books, business ledgers, client notification letter, original vouchers of the commission revenue and other relevant materials for not less than five years if the duration of insurance is not more than one year and for not less than ten years if the duration of insurance is longer than one year, starting from the day when the insurance contract is terminated.126 Where an insurance broker provides services for the policy-related insurance business and government entrustment business, the collection of commissions shall not violate the provisions issued by the CBIRC.127 120 Ibid. 121 Ibid., art.47. 122 For an example of such a contract, see accessed on 10 September 2020. 123 The Provisions on the Supervision and Administration of Insurance Brokers 2018, art.48. 124 Ibid., art.49. For a sample of the contract between the insurer and the insurance broker, see accessed on 10 September 2020. 125 The Provisions on the Supervision and Administration of Insurance Brokers 2018, art.50. 126 Ibid., art.51. 127 Ibid., art.52.

906

REGULATION OF INSURANCE BROKERS

An insurance broker that puts forward an insurance proposal to an insurance applicant shall, according to the client’s demand and risk tolerance, and so on, recommend an insurance product in conformity with its interests on the basis of objective analysis on the same kind of insurance products on the market. An insurance broker shall, according to the requirements of the CBIRC, disclose information on insurance products to insurance applicants.128 An insurance brokerage company shall, according to the relevant provisions, pay the regulatory fees into an account designated by the CBIRC.129 An insurance brokerage company shall, within 20 working days of obtaining a permit, purchase professional liability insurance policies or deposit margin. An insurance brokerage company shall, within ten days of purchasing a professional liability insurance policy or depositing margin, submit a photocopy of the professional liability insurance policy or a photocopy of the margin deposit agreement and a photocopy of the original voucher of deposit of the margin to the local office of the CBIRC, and register relevant information in the regulatory information system prescribed by the CBIRC.130 An insurance brokerage company that purchases professional liability insurance policy shall ensure the continuing validity of the insurance. The compensation limit for each accident under the professional liability insurance policy purchased by an insurance brokerage company shall not be less than 1 million yuan, and the cumulative compensation limit under a one-year policy shall not be less than ¥10 million yuan and not be less than two times the insurance broker’s operating revenue in the previous year.131 An insurance brokerage company depositing margin shall deposit the margin at 5% of its registered capital; and an insurance brokerage company increasing registered capital shall increase the amount of margin accordingly. An insurance brokerage company shall deposit margin in full.The margin of an insurance brokerage company shall be deposited in commercial banks in the form of bank deposit or be deposited in any other form recognized by the CBIRC.132 Under any of the following circumstances, an insurance brokerage company may use the margin:133 (1) (2) (3) (4)

Its registered capital is reduced. Its permit is cancelled. It purchases qualified professional liability insurance policies. Other circumstances as prescribed by the CBIRC.

Within five days after using the margin, an insurance brokerage company shall report to the CBIRC in writing.134

128 129 130 131 132 133 134

Ibid., art.53. Ibid., art.54. Ibid., art.55. Ibid., art.56. Ibid., art.57. Ibid., art.58. Ibid.

907

REGULATION OF INSURANCE BROKERS

An insurance brokerage company shall, after the end of each accounting year, retain an accounting firm to audit its assets, liabilities, profits and other financial conditions, and shall, within four months after the end of each accounting year, submit the relevant audit reports to the local office of the CBIRC. An insurance brokerage company shall submit a special external audit report to the local office of the CBIRC according to the relevant provisions.135 An insurance broker shall, according to the relevant provisions issued by the CBIRC, submit reports, statements, documents and materials in a timely, accurate, and complete manner, and submit the relevant electronic texts as required. The reports, statements, documents and materials submitted by an insurance broker shall bear the signatures of the legal representative or the primary person in charge or persons authorized thereby and the seal of the institution.136 An insurance broker shall not entrust any individual that has not undergone the formalities of practicing registration with the institution to carry out insurance brokerage business.137 An insurance broker shall conduct administration of practicing registration information on insurance brokerage practitioners, and register the personal information, scope of authorization and other matters, acceptance of punishment, and termination of employment relationships in a timely manner, to ensure the authenticity, accuracy and integrity of the practicing registration information.138 An insurance broker and its practitioners shall not commit any of the following acts in the handling of the insurance business:139 (1) Cheating the insurer, insurance applicant, insured or beneficiary; (2) Concealing important information on the insurance contract; (3) Obstructing an insurance applicant from faithfully performing or inducing any insurance applicant not to perform the obligation of notification; (4) Providing or promising to provide any insurance applicant, insured or beneficiary with any benefit not under the contract; (5) Forcing or inducing an insurance applicant to enter into or restrict an insurance applicant from entering into an insurance contract, by taking advantage of administrative power, post or profession or by any other improper means; (6) Forging or modifying without permission the insurance contract, or providing false certifications to the parties to the insurance contract; (7) Misappropriating, withholding or embezzling insurance premiums or insurance benefits. (8) Seeking improper benefits for any other institution or individual by taking advantage of its business;

135 Ibid., art.59. 136 Ibid., art.60. 137 Ibid., art.61. 138 Ibid., art.62. 139 Ibid., art.63. The list of the prohibited conduct is the same as provided in art.131 of the Insurance Law.

908

REGULATION OF INSURANCE BROKERS

(9) Fraudulently obtaining insurance benefits by colluding with any insurance applicant, insured, or beneficiary; (10) Disclosing any trade secret of an insurer, insurance applicant or insured known in the process of business activities. An insurance broker and its practitioners shall not demand or accept any remuneration or other property not under the contract from any insurance company or any employee thereof or seek any other illegal benefits by taking advantage of executing any insurance brokerage business in the process of carrying out insurance brokerage business.140 An insurance broker shall not damage the goodwill of competitors by fabrication or spreading false facts, nor disrupt the insurance market order by false advertisements, false publicity, or any other act of unfair competition.141 An insurance broker shall not carry out insurance brokerage business with any institution or individual which illegally engages in insurance business or insurance intermediary business.142 An insurance broker shall not recruit practitioners on condition of their payment of fees or purchase of insurance products, promise unreasonably high returns, or use the number of directly or indirectly recruited persons or sale performance as the main basis for computing the remuneration of practitioners.143 14.8.4 Market exit The validity period of a permit of an insurance brokerage company for carrying out the insurance brokerage business shall be three years. An insurance brokerage company shall, 30 working days before the expiry of the permit, apply to the local office of the CBIRC for renewal of the permit as required.144 Where an insurance brokerage company applies for renewal of its permit, the local office of the CBIRC shall, before expiry of the permit, comprehensively review and assess the insurance broker’s operations in the previous three years and make a decision of approving or disapproving the renewal. In the case of disapproval, it shall provide a written explanation of the reasons for the disapproval.145 Where an insurance brokerage company fails to meet the conditions for engaging in the insurance brokerage business as prescribed in art.7 of these Provisions or fails to meet the conditions for continuing the insurance brokerage business licensing as prescribed in the laws and administrative regulations or as prescribed by the CBIRC, the local office of the CBIRC shall not extend the validity period of the permit.146 An insurance brokerage company shall, within ten days of the date of disapproving the renewal of the validity period of a permit, surrender the original permit to

140 141 142 143 144 145 146

Ibid., art.64. Ibid., art.65. Ibid., art.66. Ibid., art.67. Ibid., art.68. Ibid., art.69. Ibid.

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REGULATION OF INSURANCE BROKERS

the local office of the CBIRC; and shall obtain a new permit within ten days of the date of receiving a decision, where renewal of the validity period is approved.147 An insurance brokerage company shall, when withdrawing from the insurance brokerage market, abide by the laws, administrative regulations and other relevant provisions. Where an insurance brokerage company falls under one of the following circumstances, the local office of the CBIRC shall cancel its permit according to the law, and issue an announcement:148 (1) The permit is not renewed upon expiry; (2) The permit is retracted, cancelled, or revoked according to the law; (3) It is terminated according to the law due to dissolution or being declared bankrupt in accordance with the law or any other reason; (4) Other circumstances as set forth in laws and administrative regulations. An insurance brokerage company whose permit is cancelled shall surrender the original permit in a timely manner; and where a permit is unable to be surrendered, the local office of the CBIRC shall explain it in the announcement.149 An insurance brokerage company whose permit is cancelled shall terminate its insurance brokerage business activities, and shall, within 15 days of the date of cancellation of the permit, submit a written report to the administrative department for industry and commerce in the place where industrial and commercial registration is handled. If the company survives, it shall not engage in the insurance brokerage business, and shall modify its industrial and commercial registration of the name, business scope, by-laws and other matters according to the law, to ensure that there is no “insurance brokerage” in its name.150 Under one of the following circumstances, an insurance broker shall cancel the practicing registration of an insurance brokerage practitioner within five working days: (1) An insurance brokerage practitioner is subject to any administrative punishment of prohibition from access to the insurance industry;151 (2) An insurance brokerage practitioner terminates practice for other reasons; (3) An insurance broker stops engaging in the insurance brokerage business for close-down, dissolution or other reasons; (4) Other circumstances as prescribed by laws, administrative regulations, and the provisions issued by the CBIRC. An insurance broker terminating the insurance brokerage business shall appropriately handle the debtor-creditor relationship and shall not impair the lawful rights and interests of any insurance applicant, insured or beneficiary.152

147 148 149 150 151 152

Ibid., art.70. Ibid., art.71. Ibid. Ibid. Ibid., art.72. Ibid., art.73.

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14.8.5 Industrial self-regulation Insurance brokers shall voluntarily join the self-regulation organization of the insurance intermediary industry.153 The self-regulation organization in the insurance intermediary industry shall, according to the law, develop self-regulation rules for insurance brokers, and conduct self-regulation management of insurance brokers in accordance with laws, regulations and self-regulation rules.154 The self-regulation organization in the insurance intermediary industry shall develop by-laws according to the law, and submit the by-laws to the CBIRC or its local office for recordation as required.155 A self-regulation organization of the insurance intermediary industry shall, in accordance with laws and regulations, the relevant provisions issued by the state and the by-laws of the self-regulation organization, organize education and training of the member entities and their insurance brokerage practitioners.156 The self-regulation organizations in the insurance intermediary industry shall strengthen information disclosure through the Internet and other channels, and may organize members to study the development, operation and relevant contents of the insurance brokerage industry, collect, review and issue information on insurance brokerage, provide service for members, and organize industry exchange.157 14.8.6 Supervision and inspection The local offices of the CBIRC shall, under the territorial principle, take charge of the supervision and administration of insurance brokers within their jurisdictions. The local offices of the CBIRC shall pay attention to the supervision of the acts of insurance brokers within their respective jurisdictions, conduct on-site inspection and off-site supervision according to the law, impose administrative penalties and take other regulatory measures.158 The CBIRC and its local offices may, according to the needs of supervision, hold regulatory interviews with the senior executives and relevant personnel of insurance brokers, requiring them to provide explanations on the major issues in the operation activities.159 The CBIRC and its local offices may, according to the supervision needs, designate supervisors to attend the shareholders’ meetings, general meetings of shareholders or meetings of the board of directors of the insurance brokerage companies.160 Where a branch of an insurance brokerage company has chaos in business operation and management and has major violation of laws and regulations, the insurance 153 Ibid., art.74.There has been so far no insurance intermediaries association in the nationwide scale in China, but there are insurance intermediaries associations at city and provincial scale. 154 Ibid. 155 Ibid. 156 Ibid., art.75. 157 Ibid., art.76. 158 Ibid., art.77. 159 Ibid., art.78. 160 Ibid., art.79.

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brokerage company shall, in accordance with the regulatory requirements of the CBIRC and its local office, take measures such as taking corrective action with a specified time limit, suspending operation and cancellation against the branch.161 The CBIRC and its local offices shall conduct on-site inspection of insurance brokers according to the law, which shall mainly include the following contents:162 (1) Whether the business licensing and relevant matters are approved according to the law and the notification obligations are performed; (2) Whether its capital is true and adequate; (3) Whether the margin complies with the relevant provisions; (4) Whether the professional liability insurance complies with the provisions; (5) Whether its operations are lawful; (6) Whether it is in good financial condition; (7) Whether the reports, statements, and materials submitted to the CBIRC and its local offices are timely, complete and authentic; (8) Whether its internal control rules comply with the relevant provisions issued by the CBIRC; (9) Whether senior executives and primary person in charge of a branch other than provincial branch company are employed in compliance with the provisions; (10) Whether it has effectively performed the duty of managing its practitioners; (11) Whether the external announcements are issued in a timely and authentic manner; (12) Whether the business and financial information management systems comply with the relevant provisions issued by the CBIRC; (13) Other matters as prescribed by the CBIRC. The CBIRC and its local offices shall performance of their duties according to the law, and the entities and individuals under inspection and investigation shall cooperate therewith.163 In the process of an on-site inspection, the CBIRC and its local office may engage an accounting firm and other private intermediary institutions to provide the relevant services; and if so, shall enter into written engagement agreements with them. The CBIRC and its local office shall inform the inspected insurance broker under inspection of the entrustment.164 14.8.7 Legal liability Any illegal operation of the insurance brokerage business without a permit shall be banned by the CBIRC, and the CBIRC and its local office shall confiscate any illegal income and impose a fine of not less than the amount nor more than five

161 Ibid., art.80. 162 Ibid., art.81. The procedure of on-site inspection is provided in the On-site Inspection Measures of the CBIRC (for Trial Implementation) (the CBIRC Order No. 7 [2019]). 163 Ibid., art.82. 164 Ibid., art.83.

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times the amount of the illegal income on the violator or if there is no illegal income or the amount of illegal income is less than ¥50,000 yuan, impose a fine of not less than ¥50,000 yuan nor more than ¥300,000 yuan on the violator.165 Where an administrative licensing applicant conceals relevant information or provides false materials in the application for a permit for insurance brokerage business or for any other administrative licensing, the CBIRC and its local office shall reject or disapprove its application and issue a warning to it, and the applicant shall not apply for the administrative licensing again within one year.166 Where a licensee obtains a permit for insurance brokerage business or other administrative licensing by fraud, bribery, or any other improper means, the CBIRC and its local office shall revoke the administrative licensing, and impose administrative penalties on the licensee according to the law; and the applicant shall not apply for the administrative licensing again within three years.167 Where an insurance broker appoints any person not satisfying the office qualifications, the CBIRC and its local office shall order it to make corrective action and impose a fine of not less than ¥20,000 yuan nor more than ¥100,000 yuan on it; and shall issue a warning to and impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan on the directly liable person in charge or other directly liable person of the institution, and revoke his or her office qualifications under serious circumstances.168 An insurance broker failing to employs any primary person in charge of a branch other than provincial branch company as required or failing to appoint a temporary person in charge as required shall be ordered to make corrective action, be given a warning and be fined not more than ¥10,000 yuan by the CBIRC and its local office; and the directly liable person in charge and other directly liable person of the institution shall be give a warning and be fined not more than ¥10,000 yuan. An insurance broker failing to employ any insurance brokerage practitioner as required or conduct practicing registration or management as required shall be ordered to make corrective action, be given a warning and be fined not more than ¥10,000 yuan by the CBIRC and its local office; and the directly liable person in charge and other directly liable person of the institution shall be give a warning and be fined not more than ¥10,000 yuan.169 Where an insurance broker leases, lends, or transfers its permit, the CBIRC and its local office shall order it to make corrective action and impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan on it; if the circumstances are serious, order it to suspend business for an overhaul or revoke its permit; and issue a warning to the directly liable person in charge or any other directly liable person of the institution and impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan thereupon, and revoke his or her office qualifications under serious circumstances.170 165 166 167 168 169 170

Ibid., art.84. Ibid., art.85. Ibid., art.86. Ibid., art.87. Ibid., art.88. Ibid., art.89.

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Where an insurance broker falls under any of the following circumstances in the process of using a permit, the CBIRC and its local office shall order it to make corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on it if there is any illegal income; and issue a warning to the directly liable person in charge or any other directly liable person of the institution and impose a fine of not more than ¥10,000 yuan thereupon:171 (1) Failing to put its permit or photocopy thereof at its domicile or business premises as required; (2) Failing to undergo the modification registration of its permit as required; (3) Failing to surrender its permit as required; (4) Failing to issue announcements as required. Where an insurance broker falls under one of the following circumstances, the CBIRC and its local office shall order it to make corrective action and impose a fine of not less than ¥20,000 yuan nor more than ¥100,000 yuan on it; if the circumstances are serious, order it to suspend business for an overhaul or revoke its permit; and issue a warning to the directly liable person in charge or other directly liable person of the institution and impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan thereupon, and revoke his or her office qualifications under serious circumstances:172 (1) Failing to deposit margin or purchase professional liability insurance policy as required; (2) Failing to establish the special account books to record its business revenues and expenditures as required. Where an insurance broker conducts business beyond the prescribed scope of business and carries out business activities beyond the operating area, or conducts insurance brokerage transactions with an entity or individual which illegally engages in insurance business or insurance intermediary business, the CBIRC and its local office shall order it to make corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it if there is no illegal income or impose a fine of not more than ¥30,000 yuan on it if there is any illegal income; and issue a warning to the directly liable person in charge or other directly liable person of the institution, give a warning thereto and impose a fine of not more than ¥10,000 yuan thereupon.173 Where an insurance broker violates article 37 of these Provisions, the CBIRC and its local office shall order it to make corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it if there is any illegal income or impose a fine of not more than three times the amount of illegal income nor more than ¥30,000 yuan on it if there is any illegal income; and issue a warning to the 171 Ibid., art.90. 172 Ibid., art.91. 173 Ibid., art.92.

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directly liable person in charge or other directly liable person of the institution, give a warning thereto and impose a fine of not more than ¥10,000 yuan thereupon.174 Where an insurance broker violates article 47 of these Provisions, the CBIRC and its local office shall order it to make corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it; and issue a warning to the directly liable person in charge or other directly liable person of the institution and impose a fine of not more than ¥10,000 yuan thereupon.175 Where an insurance broker violates art.50 of these Provisions, the CBIRC and its local office shall order it to make corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it; and issue a warning to the directly liable person in charge or other directly liable person of the institution and impose a fine of not more than ¥10,000 yuan thereupon.176 Where an insurance broker falls under one of the following circumstances as set forth in art.63 of these Provisions, the CBIRC and its local office shall order it to make corrective action and impose a fine of not less than ¥50,000 yuan nor more than ¥300,000 yuan on it; if the circumstances are serious, revoke its permit; and issue a warning to the directly liable person in charge or other directly liable person of the institution and impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan thereupon, and revoke his or her office qualifications under serious circumstances.177 Where an insurance broker violates art.64 of these Provisions, the CBIRC and its local office shall order it to make corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it; and issue a warning to the directly liable person in charge or other directly liable person of the institution and impose a fine of not more than ¥10,000 yuan thereupon.178 Where an insurance broker violates articles 65 and 67 of these Provisions, the CBIRC and its local office shall order it to make corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it if there is any illegal income or impose a fine of not more than three times the amount of illegal income nor more than ¥30,000 yuan on it if there is any illegal income; and issue a warning to the directly liable person in charge or other directly liable person of the institution, give a warning thereto and impose a fine of not more than ¥10,000 yuan thereupon.179 Where an insurance broker fails to submit or preserve the reports, statements, documents or materials under these Provisions or fails to provide the relevant information or materials as required, the CBIRC and its local office shall order it to make corrective action during a specified period; if insurance broker fails to do so, impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan on it; and issue a warning to the directly liable person in charge or other directly liable person of the institution and impose a fine of not less than ¥10,000 yuan 174 175 176 177 178 179

Ibid., art.93. Ibid., art.94. Ibid., art.95. Ibid., art.96. Ibid., art.97. Ibid., art.98.

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nor more than ¥50,000 yuan thereupon, and revoke his or her office qualifications under serious circumstances:180 Where an insurance broker falls under any of the following circumstances, the CBIRC and its local office shall order it to make corrective action and impose a fine of not less than ¥100,000 yuan nor more than ¥500,000 yuan on it; and if the circumstances are serious, may restrict its scope of business, order it to stop accepting new business, or revoke its permit; and issue a warning to the directly liable person in charge or other directly liable person of the institution and impose a fine of not less than ¥10,000 yuan nor more than ¥100,000 yuan on him or her, and revoke his or her office qualifications under serious circumstances:181 (1) Preparing or providing any false reports, statements, documents, or materials. (2) Refusing or obstructing any legally conducted supervisory inspection. Where an insurance broker falls under any of the following circumstances, the CBIRC and its local office shall order it to make corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on it if there is any illegal income; and issue a warning to the directly liable person in charge or any other directly liable person of the institution and impose a fine of not more than ¥10,000 yuan thereupon:182 (1) Failing to conduct custody of registered capital as required; (2) Failing to form a branch to carry out insurance brokerage business as required; (3) Failing to carry out Internet insurance brokerage business as required; (4) Failing to carry out reinsurance brokerage business as required; (5) Failing to create or manage business archives as required; (6) Failing to use bank accounts as required; (7) Failing to use the margin in violation of the provisions; (8) Failing to disclose information according to the provisions; (9) Failing to pay the regulatory fees as required. For a violation of any law or administrative regulation with serious circumstances, the CBIRC and its local offices may prohibit the relevant liable persons from access to the insurance sector for a certain period or even for life.183 Where it is discovered after a senior executive of an insurance broker, or a primary person in charge or practitioner of a branch other than provincial branch company resigns that such a person violated the relevant provisions issued by the CBIRC and its local offices during his or her former service in the insurance broker, the person shall be held liable according to the law.184

180 181 182 183 184

Ibid., art.99. Ibid., art.100. Ibid., art.101. Ibid., art.102. Ibid., art.103.

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14.9 Foreign-funded insurance brokers At the end of 2017, there are 13 foreign-funded insurance intermediaries in China, of which 6 are brokers, five insurance agents and two insurance adjusters.185 In order to further expand the opening-up of the insurance sector and promote development of the insurance brokerage industry in China, on 27 April 2018, the CBIRC released the Notice of the CBIRC on Expanding the Business Scope of Foreign-funded Insurance Brokerage Companies.186 The Notice stipulates that foreign-funded insurance brokerage companies may operate the same business as local insurance brokerage companies. Foreign insurance brokerage institutions that were granted license for conducting insurance brokerage business by the State Council’s insurance regulatory authority can operate the following insurance brokerage business in China: (1) formulating the insurance scheme for the policyholder, select the insurer, and handle the insurance application formalities; (2) assisting the insured or the beneficiary to make a claim; (3) conducting reinsurance brokerage business; (4) providing the client with disaster prevention, loss prevention or risk assessment and risk management consulting service; and (5) other businesses approved by the CBIRC.187 The scope of business for foreign-funded brokers is exactly the same as for the local insurance brokers.188 The Notice came into force as of the date of issuance. Whereas the contents of the Notice on Issuing the Contents Related to Insurance Industry in the Legal Documents of China’s Accession to WTO189 are inconsistent with this Notice, this Notice shall prevail.190 14.10 Conclusion In China, insurance brokers market is at its preliminary stage: the numbers of brokers are not large, the scope of business is limited, and the share in premium income is very small, less than 1%. The insurance agents take the lion share of the intermediary market.The imbalance in intermediary market composition is a major problem.

185 The Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Sciences Press, Beijing, China) p. 142. 186 Yin Bao Jian Fa No. 19 [2018] (see accessed on 2 September 2020. 187 The Notice of the CBIRC on Expanding the Business Scope of Foreign-funded Insurance Brokerage Companies 2018, art.1. 188 The Provisions on the Supervision and Administration of Insurance Brokers 2018, art.36. 189 Before the issuance of the Notice, the market access of foreign-funded insurance brokerage companies was in substance regulated by the Insurance Industry-related Content in the Legal Documents of China’s Accession to the World Trade Organization issued in March 2002.The Document stipulated that foreign-funded insurance brokerage companies were only allowed to: (i) provide insurance to international shipping, aviation, and transport businesses; (ii) broker “master policy” insurance and large-scale commercial insurance; and (iii) broker reinsurance in selected cities. 190 The Notice of the CBIRC on Expanding the Business Scope of Foreign-funded Insurance Brokerage Companies 2018, art.2.

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There are lacks of renovation in the ways of sales of insurance products. In property insurance, about 75% of the business came from motor vehicles insurance in 2018, but less attentions have been paid to other types of property insurance with small market share but large market potential (such as household insurance). The lack of renovation of the ways of selling insurance product by intermediaries cannot meet customers’ needs.191 There are lacks of personnel of professional insurance brokers, particularly technical and managerial specialists. Another problem is the non-compliance or violation of laws and regulations in the process of carrying out intermediary business. For example, in the first 8 months in 2018, the CBIRC imposed administration punishments on intermediaries in 359 cases, of which 60 intermediaries were punished by reason of fabricating false documents or information or facts, accounting for 1/6 of the cases.192 The self-regulatory associations for intermediaries have developed slowly. There has no nationwide insurance intermediaries association, although there are regional self-regulatory associations in 8 provinces or cities.193 A significant problem is that credit grading system has yet to be established for insurance intermediaries in China. This needs to be done to curb the misconduct, such as cheating the insured and inducing the proposer to buy insurance which does not meet his or her need.194 To deal with the problems, the intermediaries should improve their internal control and raise the level of risk management, improve their service, and using new technology such as big data, artificial intelligence, and so on to increase the ability of renovation. As to the regulation, the CBIRC have in recent years issued several sets of regulations. The most important thing is to implement these regulations. The CBIRC and its local offices should further strengthen the supervision of the intermediaries from market access, business operation and conduct, and market exit, to impose serious penalties to fraudulent acts and misconduct by the intermediaries and their employees so as to re-establish public trust to the intermediary service. With the further opening of brokerage market to foreign-funded insurance brokers, the competition will become more serious, so it is important to establish and maintain a fair competition, to this end, the CBIRC may need to develop new rules for regulating competition.

191 The Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Sciences Press, Beijing, China) p. 138. 192 Ibid., p. 138. 193 They are Beijing City, Chongqing City, Shenzhen City, Hunan Province, Hubei Province, Shandong Province, Zhejiang Province and Jiangsu Province. Ibid., p. 137; 194 The Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Sciences Press, Beijing, China) p. 137.

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CHAPTER 15

Regulation of insurance adjusters

15.1 Introduction In chapters 13 and 14 we have considered the regulation on insurance agents and brokers which are the main insurance intermediaries. In this chapter we consider the regulation on insurance adjusters which act as another kind of insurance intermediaries. The statutory laws which provide rules for insurance adjustment include the Insurance Law and the Assets Appraisal Law of China.1 Currently, two major departmental regulations are in place to govern the behaviours of insurance adjusters in China. The first is the Provisions on the Supervision and Administration of Insurance Adjusters which was issued by the China Insurance Regulatory Commission (the CIRC, the former insurance regulatory authority) on 1 February and came into force of 1 May 2018 (hereinafter, the Provisions of Insurance Adjusters 2018).2 The second is the Basic Rules for Insurance Adjusting which was issued by the China Banking and Insurance Regulatory Commission (the CBIRC, the current banking and insurance regulatory authority) on 2 May 2018 and became effective on the same day.3 These two pieces of regulations are examined in detail in this chapter. In article 2 of the Provision of Insurance Adjusters 2018, insurance adjustment is defined as an appraisal institution and its appraisal professionals who accept the entrustment to conduct appraisal, survey, identification, loss adjustment4 and relevant risk assessment of the subject matter of insurance or insurance accidents. Insurance adjusters referrer to appraisal institutions specifically engaging in the aforesaid business, including insurance adjusters and their branches. Insurance adjusters can be insurance adjustment companies or insurance adjustment partnerships.5 1 The Asset Appraisal Law of China was enacted on 2 July 2016 and came into force on 1 December 2016 (see accessed on 15 October). 2 The CIRC Order No. 2 [2018] (see accessed on 15 October 2020). 3 Yin Bao Jian Fa No. 21 [2018] (see accessed on 19 May 2020). 4 In the UK, those who are entrusted by insurers to carry out loss adjustment are often called loss adjusters; while those entrusted by the insured are conveniently called loss accessors. 5 Provisions on the Supervision and Administration of Insurance Adjusters 2018, art.2.

DOI: 10.4324/9781351122863-15

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According to article 129 of the Insurance Law, the parties to insurance activities may authorize insurance adjustment institutions or other legally established independent assessment institutions or persons with relevant expertise to conduct assessment and identification for the insured incidents.6 Either the insurer or the insured may entrust an insurance adjuster to carry out insurance adjustment. Institutions and persons authorized to conduct assessment and identification for the insured incidents shall conduct assessment and identification in a legal, independent, objective and fair manner, free from intervention by any other entity or individual.7 Insurance adjustment can take place before and after the insurance contract is entered into. It often occurs after an insured accident happens. A loss adjuster is then appointed and paid by an insurance company to investigate the accident and the loss. They are responsible for establishing the cause and the amount of a loss and determining whether the loss is covered by the insurance policy. They need to visit the site of the loss in order to gather evidence and assess damage and then provide the insurance company with a report, recommending appropriate payment based on their independent valuation of the loss. The conduct of the insurance adjusters must follow a standard set of rules. An insurance adjustment institution or person as aforementioned which causes any loss to an insurer or insured intentionally or negligently shall assume compensatory liability.8 15.2 The development of insurance adjusters Insurance adjustment is a relatively new practice in China. In March 1993, Eastern Adjustment Institution was established in Shanghai. In 1994, another three adjusters, namely, Northern Adjustment Institution in Tianjin, Zhejiang Adjustment Institution in Hangzhou, and Mintai Adjustment Institution in Shenzhen, were opened. They conducted business on assets adjustment, not specifically on insurance adjustment.9 After the issuance of the first regulation of the Provisions on Administration of Insurance Adjusters (Trial Implementation) by the CIRC in 2000, insurance adjustment institutions were gradually set up one after another, there were 158 insurance adjusters by the end of 2003.10 The first foreign insurance adjuster which opened business of insurance adjustment was GAB Robins from the UK in January 2003. By the end of 2003, a total of 158 insurance adjusters set up their business in China. Insurance adjustment has been gradually increased; there were 353 insurance adjusters by the end of 2018 in China11 6 The Insurance Law, art.129(1). 7 Ibid., art.129(2). 8 Ibid., art.129(3). 9 The Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Science Press, Beijing, China 2018) p. 7. 10 Ibid. 11 See financial news, 8 May 2019 accessed on 15 October 2020.

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15.3 The Provisions on the Supervision and Administration of Insurance Adjusters The Insurance Law provides only one article (art.129) on insurance adjustment. As mentioned above, article 129 of the Insurance Law sets out the general principles for insurance adjustment, there are no detailed rules in the Insurance Law. In order to regulate the activities of insurance adjustment, the CIRC issued the Provisions on Administration of Insurance Adjusters (Trial Implementation) in 2000. The Provisions on the Supervision and Administration of Insurance Adjustment Institutions was issued by the CIRC on 25 September 2009.12 The 2009 Provisions were amended and updated on 1 February 2018 by the CIRC. The Provisions of Insurance Adjusters 2018 provide detailed rules regulating the activities of insurance adjusters, which are considered in the next section. The Provisions of Insurance Adjusters 2018 consist of 111 articles in 8 chapters, including general provisions (arts 1 to 8), operation conditions (arts 9 to 41, operation rules (arts 42 to 67), market exit (arts 68 to 71), industrial self-regulation (arts 72 to 76), supervision and inspection (arts 77 to 82), legal liability (arts 83 to 104), and supplemental provisions (arts 105 to 111). An insurance adjuster engaging in the asset appraisal business which involves the administration of any other appraisal administrative department as prescribed by any law, administrative regulation or the State Council shall be governed by other relevant provisions. Asset appraisal institutions and appraisal professionals in a specialized field that are administered by other appraisal administrative departments and engage in the insurance adjustment business shall be subject to the supervision and administration of the CBIRC, mutatis mutandis to, these Provisions.13 Foreign-funded insurance adjusters engaging in insurance adjustment business shall be governed by these Provisions, except as otherwise specified in the relevant international treaties to which China has acceded or specified by the CBIRC.14 15.3.1 General provisions To engage in insurance adjustment business within the territory of China, an insurance adjuster shall satisfy the requirements as prescribed in the Asset Appraisal Law, meet the conditions as prescribed by the CBIRC, and undergo the business recordation formalities with the CBIRC and its local office.15

12 13 14 15

The CIRC Order No. 7 [2009]. Provisions on the Supervision and Administration of Insurance Adjusters 2018, art.106. Ibid., art.107. Ibid., art.5.

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Insurance adjusters and their practitioners16 shall comply with the laws, administrative regulations, and the relevant provisions issued by the CBIRC, and follow the principles of independence, objectiveness and impartiality.17 The insurance adjustment business legally carried out by insurance adjusters and their practitioners shall be protected by the law, and no entity or individual may interfere therewith.18 15.3.2 Operating conditions (a) Business recordation Insurance adjusters shall, in accordance with the law, adopt the partnership or corporate form, employ insurance adjustment practitioners to carry out the insurance adjustment business.19 An insurance adjuster adopting the form of partnership shall have two or more adjusters; and two thirds or more of its partners shall be the adjusters who have three or more years of work experience and have not been subject to the punishment of suspension of practice in the most recent three years.20 An insurance adjuster adopting the corporate form shall have eight or more adjusters21 and two or more shareholders; and two thirds or more of its shareholders shall be the adjusters who have three or more years of work experience and have not been subject to the punishment of suspension of practice in the most recent three years.22 Where an insurance adjuster has two partners or shareholders, two partners or shareholders shall be adjusters who have three or more years of work experience and have not been subject to punishment of suspension of practice in the most recent three years.23 To form an insurance adjuster, the applicant shall apply to the administrative department for industry and commerce for registration.24 The registered capital of an insurance adjuster shall be the amount of subscribed capital contribution registered with the enterprise registration authority.25 16 According to art.3 of the Provisions of Insurance Adjusters 2018, “insurance adjustment practitioners” mean employees of an insurance adjuster who engage in the inspection, valuation and risk assessment of the subject matter of insurance before and after insurance is underwritten, and engage in the survey, inspection, loss adjustment and handling of the residual value of the subject matter of insurance in which an insured incident occurs, risk management consulting and other business.The insurance adjustment practitioners shall include the adjustment practitioners and other appraisal practitioners with professional knowledge and practical experience in adjustment. 17 Provisions on the Supervision and Administration of Insurance Adjusters 2018, art.6. 18 Ibid., art.7. 19 Ibid., art.9(1). 20 Ibid., art.9(2). 21 According to art.4 of the Provisions of Insurance Adjusters 2018, “adjusters” mean insurance adjustment practitioners that have passed the qualification examination for adjusters. Citizens that have an educational background of junior college or higher may participate in the national uniform examination for the qualification of adjusters. 22 Provisions on the Supervision and Administration of Insurance Adjusters 2018, art.9(3). 23 Ibid., art.9(4). 24 Ibid., art.10. 25 Ibid., art.11.

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An entity or individual falling under one of the following circumstances shall not become a shareholder or partner of any insurance adjuster:26 (1) The entity or individual has been subject to criminal punishment or major administrative punishment in the most recent five years. (2) The entity or individual is under investigation by the relevant department for being suspected of involvement in any serious violation of law or crime. (3) The entity or individual is determined by a relevant entity of the state as an object subject to joint punishment for serious dishonesty and shall be subject to corresponding penalties in the insurance field, or has other bad records of serious dishonesty within the most recent five years. (4) The entity or individual cannot invest in any enterprise according to the laws and administrative regulations. (5) Other circumstances under which the entity or individual is inappropriate to become a shareholder or partner of the insurance adjuster as recognized by the CBIRC under the principle of prudential regulation. Where an employee of an insurance company or a practitioner of a professional insurance intermediary institution27 makes investment in an insurance adjuster, a written certification showing that his or her employer is aware of the investment shall be provided. Where a director, supervisor or senior executive of an insurance company or professional insurance intermediary institution makes investment in an insurance adjuster, the consent of the shareholders’ meeting or the general meeting of shareholders of the company shall be obtained according to the relevant provisions.28 The name of an insurance adjuster shall include the words “insurance adjustment.” The identifier of an insurance adjuster shall not be the same as that of an existing professional insurance intermediary institution, except when an insurance adjuster has a same actual controller as the professional insurance intermediary institution.29 Insurance adjusters shall be classified into national insurance adjustment institutions and regional insurance adjustment institutions. A national insurance adjustment institution may carry out business within the territory of China (excluding Hong Kong, Macao and Taiwan regions), and form branches outside the territory of the province, autonomous region, municipality directly under the Central Government or city under separate state planning where the industrial and commercial registration is conducted. A regional insurance adjustment institution may only carry out business and form branches in the province, autonomous region, municipality directly under the Central Government or city under separate state planning where the industrial and commercial registration is conducted, unless as otherwise prescribed by the CBIRC.30

26 Ibid., art.12. 27 According to art.105 of the Provisions of Insurance Adjusters 2018, “Professional insurance intermediary institutions” includes full-time insurance agencies, insurance brokers and insurance adjusters. 28 Provisions on the Supervision and Administration of Insurance Adjusters 2018, art.13. 29 Ibid., art.14. 30 Ibid., art.15(1).

923

REGULATION OF INSURANCE ADJUSTERS

Where an insurance adjustment institution adopts the corporate form, a national institution shall undergo the business recordation formalities with the CBIRC, and a regional institution shall undergo the business recordation formalities with the local office of the CBIRC at the place where industrial and commercial registration is conducted. An insurance adjustment institution adopting the form of partnership shall undergo the recordation formalities with the CBIRC.31 To carry out insurance adjustment business, an insurance adjustment company shall meet the following conditions:32 (1) Its shareholders or partners satisfy the requirements of these Provisions and make contribution with self-owned, true and legal funds, other than bank loans or any other form of non-self-owned capital. (2) According to the business development plan, it has the working capital required for routine business operation and assumption of risks. A national institution shall have working capital not less than ¥2 million yuan and a regional institution shall have working capital not less than ¥1 million yuan. (3) The custody of its working capital complies with the relevant provisions issued by the CBIRC. (4) The business scope recorded in the business license does not exceed the scope as prescribed in article 43 of these Provisions. (5) Its by-laws or partnership agreements comply with the relevant provisions. (6) Its enterprise name satisfies the requirements of these Provisions. (7) Its chairman of the board of directors, executive director and senior executives meet the prescribed conditions. (8) It has a governance structure and internal control system in compliance with the provisions issued by the CBIRC, and scientific and reasonable business model. (9) It has a fixed domicile suitable for its scale of business. (10) It has business and financial information management systems in compliance with the provisions issued by the CBIRC. (11) Other conditions as set forth in laws, administrative regulations, and the provisions issued by the CBIRC. An insurance adjustment institution that forms a branch in a province, autonomous region, municipality directly under the Central Government or city under separate state planning other than the place where the industrial and commercial registration is conducted shall designate a branch as a provincial branch to be responsible for handling the formation and recordation of the branches within its jurisdiction, submitting regulatory reports and statements and other relevant matters, and be responsible for managing other branches.The branches of an insurance adjustment institution shall include branches and business departments.33 To form a new branch to carry out insurance adjustment business, an insurance adjustment company shall meet the following conditions:34 31 32 33 34

Ibid., art.15(2). Ibid., art.16. Ibid., art.17. Ibid., art.18.

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REGULATION OF INSURANCE ADJUSTERS

(1) The insurance adjustment institution and its branch have not been subject to criminal punishment or major administrative punishment in the most recent year. (2) The insurance adjustment institution and its branch are not under investigation by the relevant department for being suspected of involvement in any violation of law or crime. (3) A branch formed in the most recent two years did not exit market after operation for less than one year. (4) It has a sound branch management system. (5) A newly formed branch has qualified business premises, business financial information system, and other facilities matching the business operation. (6) Other conditions as prescribed by the CBIRC. An insurance adjustment institution that is determined by a relevant entity of the state as an object subject to joint punishment for serious dishonesty and shall be subject to corresponding penalties in the insurance field, or has other bad records of serious dishonesty within the most recent five years shall not form any new branch to carry out insurance adjustment business. To engage in insurance adjustment business, an insurance adjustment institution shall, within 30 working days of the date of obtaining the business license, undergo the recordation formalities with the CBIRC and its local office through the regulatory information system prescribed by the CBIRC, and at the same time submit paper materials as required.35 A branch of an insurance adjustment institution shall, within ten working days of the date of obtaining a business license for branch, undergo the recordation formalities with the local office of the CBIRC through the regulatory information system prescribed by the CBIRC, and concurrently submit paper materials as required.36 The CBIRC and its local offices shall conduct recordation in accordance with the division of regulatory duties. When an insurance adjuster submits the recordation materials, the CBIRC and its local office shall, by interview, correspondence, on-site inspection and other means, understand and examine the business records and business motive of the shareholders or partners, the market development strategy, business development plan, internal control system building, personnel structure, information system configuration, operation and other relevant matters, and conduct risk testing and warning.37 Where the recordation materials are complete and satisfy the requirements, the CBIRC and its local offices shall, on the website of the CBIRC, announce the recordation information to the public and undergo the recordation formalities. After making an announcement of recordation, an insurance adjuster may download the recordation form for the insurance adjustment business (hereinafter referred to as the “recordation form”), and shall not carry out insurance adjustment business before making an announcement of recordation.38 35 36 37 38

Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

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REGULATION OF INSURANCE ADJUSTERS

An insurance adjuster falling under one of the following circumstances shall, within five working days of the date of modifying its industrial and commercial registration or making a resolution of change, report through the regulatory information system as required by the CBIRC and make public disclosure in accordance with the relevant provisions:39 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

The name, domicile or business premises is changed. A shareholder or partner is changed. The registered capital or organizational form is changed. A shareholder or partner changes the name or designation and amount of contribution. The by-laws or partnership agreement is amended. Equity investment is made, and an overseas insurance institution and nonfor-profit institution are formed. The insurance adjuster is split up, merged, and dissolved, and a branch terminates the insurance adjustment business activities. Its chairman of the board of directors, executive director, or senior executive is changed. The insurance adjuster is subject to administrative punishment, criminal punishment, or under investigation for being suspected of involvement in any violation of law or the commission of a crime. Other reporting matters as prescribed by the CBIRC.

An insurance adjuster falling under the relevant circumstances as prescribed in the preceding paragraph shall comply with the relevant provisions issued by the CBIRC. To undergo the formalities of modification, an insurance adjustment institution in the form of partnership that is changed into an insurance adjustment institution in the corporate form or an insurance adjustment institution in the corporate form that is changed to an insurance adjustment institution in the form of partnership shall submit to the CBIRC or its local office the resolution of transformation adopted at the partners’ meeting or the shareholders’ meeting. A resolution of transformation shall specify the succession relationship of the institution after transformation and before transformation in terms of creditors’ rights and debts, archives safekeeping, adjustment business, and practicing responsibilities, among others.40 During the process of carrying out the insurance adjustment business, an insurance adjuster shall not engage in any of the following:41 (1) Seeking illicit benefits by taking advantage of its business; (2) Permitting another institution to carry out business in the name of the institution or carrying out business by illegally using the name of another institution; (3) Soliciting business by illicit means such as maliciously beating down prices, offering kickbacks, conducting false publicity, or disparaging or defaming any other adjustment institution; 39 Ibid., art.23. 40 Ibid., art.24. 41 Ibid., art.25.

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REGULATION OF INSURANCE ADJUSTERS

(4) Accepting any business to which it is an interested party; (5) Accepting the authorization of both parties to the conflict of interest respectively and conducting appraisal of the same appraisal object; (6) Issuing any false adjustment report or any adjustment report with material omission; (7) Retaining or designating a person who does not comply with the provisions to carry out the adjustment business; and (8) Committing any other violation of law or administrative regulation. (b) Practitioners An insurance adjuster shall employ insurance adjustment practitioners with good conduct. An insurance adjuster shall not employ any person falling under any of the following circumstances:42 (1) He or she is given a criminal punishment due to intentional crime or criminal negligence in appraisal, finance, accounting, and auditing activities, and it has not been five years since the date of completion of the sentence. (2) He or she has been prohibited from access to the financial and asset appraisal industry during a certain period as decided by the regulatory authority, and the period has not expired. (3) He or she is determined by a relevant entity of the state as an object subject to joint punishment for serious dishonesty and shall be subject to corresponding penalties in the insurance field or has other bad records of serious dishonesty within the most recent five years. (4) Other circumstances as prescribed by laws, administrative regulations, and the provisions issued by the CBIRC. An insurance adjustment practitioner shall have the professional capability required for engaging in insurance adjustment business. An insurance adjuster shall strengthen the pre-post training and follow-up education for insurance adjustment practitioners, which shall at least include the insurance adjustment business knowledge, legal knowledge, and professional ethics. An insurance adjuster may entrust the self-regulation organizations or other institutions in the insurance intermediary industry to organize training. An insurance adjuster shall establish complete archives on the training of insurance adjustment practitioners.43 An insurance adjustment practitioner carrying out the insurance adjustment business shall join an insurance adjustment institution. An insurance adjuster shall conduct practicing registration for its insurance adjustment practitioners in accordance with the relevant provisions. An insurance adjustment practitioner may only carry out business in one insurance adjuster, and may only conduct practicing registration through one insurance adjuster. Where an insurance adjustment practitioner alters his or her insurance adjuster, the new insurance adjuster shall conduct practicing registration for him or her, and the original insurance adjuster shall cancel the practicing registration in a timely manner.44 42 Ibid., art.26. 43 Ibid., art.27. 44 Ibid., art.28.

927

REGULATION OF INSURANCE ADJUSTERS

An insurance adjustment practitioner shall enjoy the following rights:45 (1) Requiring the principal to provide the relevant ownership certificate, financial accounting information, and other materials, including necessary assistance required for the implementation of fair appraisal procedures; (2) Consulting documents, certificates, and materials required for conducting business from the relevant state authority or any other organization in accordance with the law; (3) Rejecting illegal intervention in the adjustment acts and adjustment results of the principal or any other organization or individual; (4) Signing adjustment reports in accordance with the law; (5) Other rights as prescribed by laws and administrative regulations. An insurance adjustment practitioner shall perform the following obligations:46 (1) Having good faith and legally conducting business in an independent, objective, and impartial manner; (2) Abiding by the appraisal standards, performing the investigation functions, conducting independent analysis and estimates, and carrying out business in a diligent and prudential manner; (3) Completing required continuing education and maintaining and improving professional capability; (4) Checking and verifying the authenticity, accuracy, and integrity of relevant documents, certificates, and materials used in adjustment activities; (5) Keeping confidential state secrets, trade secrets, and personal privacy to which he or she has access in the adjustment activities; (6) Disqualifying himself or herself if he or she is an interested person with respect to the principal or any other relevant party or the adjustment object. (7) Accepting the self-regulation management of the self-regulation organization in the insurance intermediary industry and performing the obligations prescribed by the by-laws; (8) Performing other obligations prescribed by laws and administrative regulations. During the process of carrying out the adjustment business, an insurance adjustment practitioner shall not commit any of the following conducts:47 (1) Accepting authorization in private to engage in business or collect fees without permission. (2) Engaging in business for two or more insurance adjusters concurrently; (3) Soliciting business by illicit means such as fraud, inducement, or coercion or by disparaging or defaming any other appraisal professional; (4) Permitting any other person to conduct business in his or her own name or conducting business by illegally using any other person’s name;

45 Ibid., art.29. 46 Ibid., art.30. 47 Ibid., art.31.

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REGULATION OF INSURANCE ADJUSTERS

(5) Signing any adjustment report on business not undertaken by him or her; (6) Demanding or accepting in any disguised form remuneration and property other than those agreed upon in contracts or seeking other illicit benefits; (7) Signing any false adjustment report or any adjustment report with major omissions; and (8) Committing any other conduct in violation of any law or administrative regulation. (c) Senior executives Senior executives of an insurance adjuster refer to the following persons:48 (1) The general manager and deputy general manager of an insurance adjustment company; (2) The executive partner of an insurance adjustment partnership; (3) The primary person in charge of a branch; and (4) Executives who have the same power as the aforesaid personnel. A chairman of the board of directors, executive director, and senior executive of an insurance adjuster shall meet the following conditions:49 (1) He or she has an educational background of junior college or above. A person with ten years or more of financial or asset appraisal work experience may be exempted from this condition. (2) He or she has three or more years of financial work experience, has three or more years of experience in the relevant work of asset appraisal, or has five or more years of experience in economic work. (3) He or she has the management capability required for performing his or her duties and is familiar with insurance laws and administrative regulations and the relevant provisions issued by the CBIRC. (4) He or she is honest and trustworthy and has good conduct. A person who falls into any of the following circumstances shall not serve as the chairman of the board of directors, executive director, or senior executive of any insurance adjuster:50 (1) He or she serves as director, supervisor, or senior executive of an insurance company or professional insurance intermediary institution whose permit has been revoked for violation of laws and is personally or directly liable as a leader for the revocation of permit, and three years have not elapsed since the date of revocation of permit. (2) He or she is director, supervisor, or senior executive of a financial institution who has been disqualified for taking office by the financial regulatory authority for his or her violation of laws or discipline, and five years have not elapsed since the date of disqualification.

48 Ibid., art.32. 49 Ibid., art.33. 50 Ibid., art.34.

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REGULATION OF INSURANCE ADJUSTERS

(3) He or she is prohibited from access to the financial industry during a certain period as decided by the financial regulatory authority, and the period has not expired. (4) The practicing qualification of the person as a former professional of an institution such as an asset appraisal institution or verification institution has been revoked for his or her violation of laws or discipline, and it has not been more than five years since the revocation. (5) It has not been more than two years since the person was issued a warning or fined by the financial regulatory authority. (6) He or she is under investigation by the judicial authority, the disciplinary inspection and supervision department, or the financial regulatory authority. (7) He or she is determined by a relevant entity of the state as an object subject to joint punishment for serious dishonesty and shall be subject to corresponding penalties in the insurance field or has other bad records of serious dishonesty within the most recent five years. (8) A partner has debts of a partnership that have not been paid off. (9) Other circumstances as prescribed by laws, administrative regulations, and the provisions issued by the CBIRC. An insurance adjuster shall establish employment relationships with its senior executives by entering into written labour contracts with them.51 A chairman of the board of directors, executive director, or senior executive of an insurance adjuster shall not concurrently serve as the primary person in charge of two or more branches.52 Without approval of the shareholders’ meeting or meeting of partners, a director or senior executive of an insurance adjuster shall not concurrently hold any position in an institution with any conflict of interest. A partner of an insurance adjuster shall not, independently or by cooperation with others, carry out any business in competition with the institution.53 To appoint the chairman of the board of directors, executive director, or senior executive, an insurance adjuster shall, within five days of the date of making a decision, faithfully submit the materials as required and register the relevant information in the regulatory information system as prescribed by the CBIRC.54 The local offices of the CBIRC may investigate or interview the chairman of the board of directors, executive directors, and senior executives employed by an insurance adjuster. The local offices of the CBIRC may require an insurance adjuster to replace its chairman of the board of directors, executive director, or senior executive who fails to meet the prescribed conditions.55 Where the chairman of the board of directors, executive director, or senior executive of an insurance adjuster is prosecuted for any suspected crime, the insurance 51 52 53 54 55

Ibid., art.35. Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39.

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REGULATION OF INSURANCE ADJUSTERS

adjuster shall register the relevant information in the regulatory information system as prescribed by the CBIRC respectively within five days after the prosecution is instituted and within five days after the case is closed. Where a director, executive supervisor, or senior executive of an insurance adjuster is suspected of involvement in any serious violation of law or in the commission of a crime and is under formal investigation by an administrative authority or judicial authority, the insurance adjuster shall suspend the office of the relevant person, and register the relevant information in the regulatory information system as prescribed by the CBIRC.56 An insurance adjuster falling under one of the following circumstances may appoint a temporary person in charge for a maximum of three months and shall not continuously appoint the temporary person in charge for a same position:57 (1) The original person in charge resigns or is removed from office; (2) The original person in charge is unable to normally perform his or her functions for any illness, accident, or other reason; (3) Any other special circumstances as recognized by the CBIRC. The temporary person in charge shall have the capability appropriate for performing his or her duties and satisfying the relevant requirements of articles 33 and 34 of these Provisions. To appoint a temporary person in charge, an insurance adjuster shall, within five days of the date of making a decision, register relevant information in the regulatory information system as prescribed by the CBIRC. 15.3.3 Operation rules An insurance adjuster shall put its recordation form and business license in a conspicuous place of its domicile or business premises. A branch of an insurance adjustment institution shall put the recordation form of the institution to which the official seal of the institution to which it is subordinate and the business license in a conspicuous position of its business premises.58 An insurance adjuster may engage the following business, in whole or in part:59 (1) The inspection, valuation, and risk assessment of the subject matter of insurance before and after insurance is underwritten; (2) The survey, inspection, and loss adjustment of the subject matter of insurance after an insured event occurs and the handling of the residue value of the subject matter of insurance; (3) Risk management consulting; (4) Other business as prescribed by the CBIRC. An insurance adjuster shall, in accordance with laws, administrative regulations, and the relevant provisions issued by the CBIRC, and under the principles of 56 57 58 59

Ibid., art.40. Ibid., art.41. Ibid., art.42. Ibid., art.43.

931

REGULATION OF INSURANCE ADJUSTERS

specifying responsibilities, strengthening balance, and strengthening risk management, establish sound corporate governance structure and rules; clarify the management and control responsibilities; build a compliance system; focus on self-restraint; strengthen internal accountability; and ensure steady operation.60 For accepted insurance adjustment business, an insurance adjuster shall designate two insurance adjustment practitioners at a minimum to undertake the insurance adjustment business.61 Insurance adjustment practitioners shall, in an appropriate manner, select appraisal methods. The insurance adjuster shall conduct internal examination of the adjustment report.62 An insurance adjustment report shall be signed by at least two insurance adjustment practitioners who undertake the business and be affixed with the seal of the insurance adjustment institution. An insurance adjuster and its practitioners shall lawfully assume liability for the adjustment reports issued thereby.63 An insurance adjuster shall establish special account books to record the revenues and expenditures of the insurance adjustment business.64 He or she shall open an independent account specifically for capital to collect remuneration for insurance adjustment business. He or she must open and use other bank accounts in compliance with the provisions issued by the CBIRC.65 An insurance adjuster shall establish complete and standardized adjustment archives, including the following at a minimum:66 (1) The basic information involved in its insurance adjustment business, including but not limited to the names or designations of the clients and other parties, the subject matters of insurance, the types of accident, and the adjusted value of loss; (2) The remuneration and collection of the adjustment business; (3) Other business information as prescribed by the CBIRC. The adjustment archives of an insurance adjuster shall be authentic and complete. To engage in the insurance adjustment business, an insurance adjuster shall enter into entrustment contracts with clients67 and agree on the rights and obligations of both parties and other relevant matters such as confidentiality and reasonable use of information according to the law. An entrustment contract shall not violate laws, administrative regulations, or relevant provisions issued by the CBIRC.68 Where a client refuses to provide or fails to faithfully provide the ownership certificate, financial accounting information, and other materials required for carrying out the adjustment business, an insurance adjuster shall have the right to 60 Ibid., art.44. 61 Ibid., art.45. 62 Ibid., art.46. 63 Ibid., art.47. 64 Ibid., art.48. 65 Ibid., art.49. 66 Ibid., art.50. 67 See a sample contract at accessed on 16 October 2020. 68 Provisions on the Supervision and Administration of Insurance Adjusters 2018, art.51.

932

REGULATION OF INSURANCE ADJUSTERS

reject its requirements of performing a contract according to the law.Where a client requests issuance of a false adjustment report or illegally intervenes in the adjustment results, the insurance adjuster shall have the right to terminate the contract.69 An insurance adjuster shall develop a standard client notification letter70 and present it to clients when carrying out business. Such a notification letter shall, at a minimum, include the name, recordation information, business premises, scope of business, contact method, complaint channels, dispute resolving methods, and other basic matters of the insurance adjuster.71 An insurance adjuster shall, after the end of each accounting year, retain an accounting firm to audit its assets, liabilities, profits, and other financial conditions and shall, within four months after the end of each accounting year, submit the relevant audit reports to the local office of the CBIRC. An insurance adjuster shall submit a special external audit report to the local office of the CBIRC according to the relevant provisions.72 Where an insurance adjuster provides services for the policy-related insurance business, government entrustment business, and business entrusted by social organizations, the collection of remuneration shall not violate the provisions issued by the CBIRC.73 An insurance adjuster and its practitioners shall diligently perform their duties in the insurance adjustment business. If an insurance adjustment report involves the amount of claim payment, the insurance clauses on which the amount is based shall be specified.74 The insurance adjuster shall develop and improve the internal management rules, oversee its insurance adjustment practitioners’ compliance with laws, administrative regulations, and basic insurance adjustment standards and be responsible for their practicing activities.75 An insurance adjuster shall, according to the relevant provisions, pay the regulatory fees into an account designated by the CBIRC.76 An insurance adjuster shall, within 20 working days of the date of the recordation announcement and based on business needs, establish an occupational risk fund, or purchase the occupational liability insurance policy, and improve the risk prevention procedures.77 He or she shall, within ten working days of the date of establishing occupational risk funds or purchasing a professional liability insurance policy, submit the photocopy of the deposit agreement on the occupational risk funds, the photocopy of the original voucher of deposit of the occupational risk funds, or the photocopy of the professional liability insurance policy to the

69 Ibid., art.52. 70 For a sample of such a letter, see accessed on 16 October 2020. 71 Provisions on the Supervision and Administration of Insurance Adjusters 2018, art.53. 72 Ibid., art.54. 73 Ibid., art.55. 74 Ibid., art.56. 75 Ibid., art.57. 76 Ibid., art.58. 77 Ibid., art.59.

933

REGULATION OF INSURANCE ADJUSTERS

local office of the CBIRC and register the relevant information in the regulatory information system as prescribed by the CBIRC.78 An insurance adjuster shall establish occupational risk funds and shall deposit 5% of the main business income of the previous year for the funds. It shall increase the amount of occupational risk funds, where the annual main business income is increased. It is not required to increase the occupational risk funds, where the deposit amount of the occupational risk funds reaches ¥1 million yuan.The deposit of the occupational risk funds shall be made in full in the first quarter each year. The occupational risk funds of an insurance adjuster shall be deposited in a special account opened with a commercial bank in the form of bank deposit or be deposited in any other form recognized by the CBIRC. To use the occupational risk fund, an insurance adjuster must comply with the relevant provisions of the CBIRC.79 An insurance adjuster that purchases a professional liability insurance policy shall ensure the continuing validity of the insurance. The compensation limit for each accident under the professional liability insurance policy purchased by an insurance adjuster shall not be less than ¥1 million yuan, and the cumulative one-year compensation limit shall not be less than ¥10 million yuan and not less than the insurance adjuster’s main business income in the previous year.80 An insurance adjuster shall, according to the relevant provisions issued by the CBIRC, submit reports, statements, documents, and materials in a timely, accurate, and complete manner and submit the relevant electronic texts as required. The reports, statements, documents, and materials submitted by an insurance adjuster shall bear the signatures of the legal representative or the primary person in charge or persons authorized thereby and the seal of the institution.81 An insurance adjuster shall not entrust any individual that has not undergone the formalities of practicing registration with the institution to carry out the insurance adjustment business.82 An insurance adjuster shall conduct administration of practicing registration information on insurance adjustment practitioners and register the personal information, scope of authorization, and other matters; acceptance of punishment; and termination of employment relationships in a timely manner to ensure the authenticity, accuracy, and integrity of the practicing registration information.83 An insurance adjuster shall not carry out the insurance adjustment business with any institution or individual which illegally engages in the insurance business or the insurance adjustment business.84

78 Ibid., art.60. 79 Ibid., art.61. 80 Ibid., art.62. According to art.129(3) of the Insurance Law, “an insurance adjustment institution or person as aforementioned which causes any loss to an insurer or insured intentionally or negligently shall assume compensatory liability”.The liability insurance is for the purpose of compensating the client for the loss caused to the client by the insurance adjuster’s negligence. An intentional act is not covered by the liability insurance. 81 Provisions on the Supervision and Administration of Insurance Adjusters 2018, art.63. 82 Ibid., art.64. 83 Ibid., art.65. 84 Ibid., art.66.

934

REGULATION OF INSURANCE ADJUSTERS

During the process of carrying out the adjustment business, an insurance adjuster and its insurance adjustment practitioners shall not commit any of the following conduct, besides the conduct as prescribed in articles 25 and 31 of these Provisions:85 (1) Concealing or fabricating any important information related to the insurance contract; (2) Fraudulently obtaining insurance benefits by colluding with any client or relevant party; (3) Disclosing any trade secret or individual privacy of a client or relevant party known in its operation; (4) Falsely issuing invoices or exaggerating the amount of adjustment remuneration. 15.3.4 Market exit Under one of the following circumstances, an insurance adjuster shall, within five working days, cancel the practicing registration of an insurance adjustment practitioner:86 (1) An insurance adjustment practitioner is subject to administrative punishment of suspension of practice; (2) An insurance adjustment practitioner terminates practice for other reasons; (3) An insurance adjuster stops engaging in the insurance adjustment business for close-down, dissolution, or other reasons; (4) Other circumstances as prescribed by law, administrative regulations, and the provisions issued by the CBIRC. Insurance adjustment institutions shall implement the annual reporting system. An insurance adjustment institution shall, before 31 January of each year, submit the report of the previous year to the CBIRC and its local office. For insurance adjustment institutions which fail to submit their annual reports on schedule, the CBIRC and its local offices shall disclose their abnormal operation information to the public. For an insurance adjustment institution whose annual reporting matters fail to satisfy the regulatory requirements, the CBIRC and its local offices shall take corresponding regulatory measures.87 Where a branch of an insurance adjustment institution has chaos in business operation and management and has major violations of law and regulations, the insurance adjustment institution shall, in accordance with the regulatory requirements of the CBIRC and its local office, take measures such as requiring rectification within a specified time limit, suspending operation, and cancellation against the branch.88 An insurance adjuster terminating the insurance adjustment business shall appropriately handle the debtor-creditor relationship and shall not impair the lawful rights and interests of any client or any other relevant party.89 85 86 87 88 89

Ibid., art.67. Ibid., art.68. Ibid., art.69. Ibid., art.70. Ibid., art.71.

935

REGULATION OF INSURANCE ADJUSTERS

15.3.5 Industrial self-regulation The self-regulation organization in the insurance intermediary industry shall, according to the law, develop self-regulation rules and conduct self-regulation management of insurance adjusters and insurance adjustment practitioners in accordance with laws, regulations. and self-regulation rules. By-laws shall be developed according to the law and submitted to the CBIRC for recordation. Insurance adjusters and insurance adjustment practitioners shall voluntarily join the selfregulation organizations in the insurance intermediary industry, equally enjoy the powers as prescribed in the by-laws, and perform the obligations as prescribed in the by-laws. Self-regulation organizations in the insurance intermediary industry include national and local self-regulation organizations in the insurance intermediary industry.90 A self-regulation organization in the insurance intermediary industry shall perform the following functions:91 (1) Developing measures for the self-regulation management of members and conducting self-regulation management of members; (2) Organizing continual education and professional training for members; (3) Establishing members’ credit archives, including the information on members’ compliance with laws, administrative regulations, and adjustment standards in credit archives and disclosing them to the public; (4) Inspecting members’ establishment of the risk prevention mechanism; (5) Accepting complaints and tip offs against members, accepting members’ petitions, and mediating members’ practice disputes; (6) Regulating members’ practice, inspecting adjustment reports issued by members on a regular basis, rewarding and punishing members according to the provisions of the by-laws, and reporting the reward and punishment information to the CBIRC; (7) Guaranteeing members’ legal business operation and protecting members’ lawful rights and interests; (8) Performing other functions prescribed by law, administrative regulations and by-laws. A self-regulation organization in the insurance intermediary industry shall, on the basis of the basic standards for insurance adjustment, develop the adjustment practicing standards, the standards for professional ethics, and the code of conduct of practitioners. The self-regulation organizations shall establish the communication, cooperation, and information-sharing mechanisms and announce the list of the insurance adjusters and practitioners that have joined the organizations. The self-regulation organizations shall strengthen information disclosure via the internet and other channels to facilitate the public’s consultation of insurance adjusters’ recordation information, business scope, credit records, administrative punishments, and 90 Ibid., art.72. 91 Ibid., art.73.

936

REGULATION OF INSURANCE ADJUSTERS

other matters. Information disclosure shall also include the information about the insurance practitioners, such as the insurance adjuster to which the practitioners are subordinate, the insurance practitioners’ scope of authorization, credit records, administrative punishments, and other matters.92 The self-regulation organization shall, according to the provisions issued by the state, organize the implementation of the national uniform qualification examination for the adjusters.93 The self-regulation organizations may organize members to study the development, operation, and relevant contents of the insurance adjustment industry; collect, review, and issue information on insurance adjustment; provide service for members; and organize industry exchange.94 15.3.6 Supervision and inspection The local offices of the CBIRC shall, under the territorial principle, take charge of the supervision and administration of insurance adjusters and their insurance adjustment business activities within their jurisdictions. The local offices of the CBIRC shall pay attention to the supervision and administration of the acts of insurance adjusters within their respective jurisdictions, conduct on-site inspection and off-site supervision and administration according to the law, impose administrative penalties, and take other regulatory measures.95 The CBIRC and its local offices may, according to the supervision and administration needs, hold regulatory interviews with the chairman of the board of directors, executive directors, and senior executives of an insurance adjuster, requiring them to provide explanations on the major issues in operations.96 The CBIRC and its local offices may, according to the supervision needs, designate supervisors to attend the general meetings of shareholders, meetings of partners, or meetings of the board of directors of the insurance adjusters as nonvoting delegates.97 The CBIRC and its local offices shall conduct on-site inspection of insurance adjusters according to the law, which shall mainly include the following contents:98 (1) Whether recordation has been conducted or the reporting obligations have been fulfilled as required; (2) Whether the professional insurance fund or the professional liability insurance complies with the provisions; (3) Whether its operations are lawful; (4) Whether it is in good financial condition;

92 93 94 95 96 97 98

Ibid., art.74. Ibid., art.75. Ibid., art.76. Ibid., art.77. Ibid., art.78. Ibid., art.79. Ibid., art.80.

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REGULATION OF INSURANCE ADJUSTERS

(5) Whether the reports, statements, documents, and materials submitted to the CBIRC and its local offices are timely, complete, and authentic; (6) Whether its internal control rules comply with the relevant provisions issued by the CBIRC; (7) Whether the formation, management, and control of branch offices comply with the provisions; (8) Whether the appointment of its chairman of the board of directors, executive directors, and senior executives complies with the relevant provisions; (9) Whether it has effectively performed the duty of managing its practitioners; (10) Whether the business and financial information management systems comply with the relevant provisions issued by the CBIRC; (11) Whether the conditions as prescribed in article 15 of the Assets Appraisal Law are continuously met;99 (12) Other matters as prescribed by the CBIRC. An insurance adjuster shall, according to the following requirements, cooperate with the CBIRC and its local offices in an on-site inspection and shall not refuse or obstruct the supervisory inspection legally conducted by the CBIRC and its local offices:100 (1) It shall provide the relevant documents and materials as required and shall not fabricate, delay the provision of, displace, or conceal them. (2) Its relevant managers, financial staff members, and practitioners shall appear on the site to provide explanations and answer questions as required. In the process of an on-site inspection, the CBIRC and its local office may engage an accounting firm and other private intermediary institutions to provide the relevant services and may enter into written engagement agreements with them. The CBIRC and its local office shall inform the insurance adjuster under inspection of the entrustment.101 15.3.7 Legal liability Where an insurance adjustment institution fails to undergo recordation formalities with the CBIRC or its local office in accordance with art.19 of these Provisions or 99 Article 15 of the Assets Appraisal Law 2016 provides: An appraisal institution shall adopt the form of partnership or corporate in accordance with the law, and retain appraisal professionals to conduct appraisal. An appraisal institution of the partnership form shall have two or more appraisers.Two thirds or more of its partners shall be appraisers who have three or more years of work experience and have not been given the punishment of suspending practice in the last three years. An appraisal institution of the corporate form shall have eight or more appraisers and two or more shareholders, of whom two thirds or more shareholders shall be appraisers who have three or more years of work experience and have not been given the punishment of suspending practice in the last three years. Where an appraisal institution has two partners or shareholders, two partners or shareholders shall be appraisers who have three or more years of work experience and have not been given the punishment of suspending practice in the last three years.

100 Provisions on the Supervision and Administration of Insurance Adjusters 2018, art.81. 101 Ibid., art.82.

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fails to meet the conditions as prescribed in art.9 of these Provisions, the CBIRC and its local office shall order the violator to take corrective action and order the violator to suspend business and may impose a fine of not less than ¥10,000 yuan nor more than ¥50,000 yuan thereupon, if the violator refuses to take corrective action.102 For an insurance adjustment institution forming a branch and failing to undergo the recordation formalities according to article 20 of these Provisions, the local office of the CBIRC shall order the violator to take corrective action, give a warning to the violator, and impose a fine of not more than ¥10,000 yuan on the violator if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on the violator if there is any illegal income.103 For an insurance adjustment institution carrying out adjustment business in violation of article 16 of these Provisions, the CBIRC and its local office shall order the violator to take corrective action, issue a warning to the violator, and impose a fine of not more than ¥10,000 yuan on the violator if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on the violator if there is any illegal income.104 For an insurance adjuster concealing relevant information, providing false materials, and undergoing the recordation formalities by deception, bribery, and other illicit means, the CBIRC and its local office shall cancel the recordation of the violator, give a warning to the violator, and impose a fine of not more than ¥10,000 yuan on the violator if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on the violator if there is any illegal income.105 Where an insurance adjuster employs an unqualified chairman, executive director, or senior executive, the CBIRC and its local office shall order the violator to take corrective action, issue a warning to the violator, and impose a fine of not more than ¥10,000 yuan.106 An insurance adjuster failing to conduct practicing registration and administration of insurance adjustment practitioners as required, the CBIRC and its local office shall order the violator to take corrective action, issue a warning to the violator, and impose a fine of not more than ¥10,000 yuan.107 For an insurance adjuster falling under any of the following circumstances, the CBIRC and its local office shall order the violator to take corrective action, issue a warning to the violator, and impose a fine of not more than ¥10,000 yuan on the violator:108 (1) Failing to establish the occupational risk funds as required or purchase the professional liability insurance policy as required;

102 103 104 105 106 107 108

Ibid., art.83(1). Ibid., art.83(2). Ibid., art.84. Ibid., art.85. Ibid., art.86. Ibid., art.87. Ibid., art.88.

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(2) Failing to use the occupational risk funds or maintain the effectiveness and continuity of professional liability insurance as required; (3) Failing to establish as required the special account books to record its business revenues and expenditures. Where an insurance adjuster carries out business activities beyond the business scope for which recordation formalities have been undergone or conducts insurance adjustment transactions with any institution or individual which illegally engages in the insurance business or insurance intermediary business, the CBIRC shall order it to take corrective action, give a warning to it, and impose a fine of not more than ¥10,000 yuan on it if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on it if there is any illegal income.109 Where an insurance adjuster or its practitioner violates articles 53 or 56 of these Provisions, the CBIRC and its local office shall order the violator to take corrective action, give a warning to the insurance adjuster, and impose a fine of not more than ¥10,000 yuan on the violator if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on the violator if there is any illegal income.110 Where an insurance adjuster violates these Provisions and falls under any of the following circumstances, the CBIRC and its local office shall give a warning thereto and may order the violator to suspend practice for not less than one month nor more than six months, confiscate its illegal income and impose a fine of not less than one time the amount of illegal income nor more than five times the amount of illegal income thereupon if there is any illegal income, hold the violator criminally liable in accordance with the law, where a crime is constituted, and the administrative department for industry and commerce shall revoke the business license of the violator under serious circumstances:111 (1) Seeking illicit benefits by taking advantage of its business; (2) Permitting another institution to carry out business in the name of the institution or carrying out business by illegally using the name of another institution; (3) Soliciting business by illicit means such as maliciously beating down prices, offering kickbacks, conducting false publicity, or disparaging or defaming any other adjustment institution; (4) Accepting any business to which the insurance adjuster is an interested party; (5) Accepting the authorization of both parties with the conflict of interest respectively and conducting appraisal of the same object; (6) Issuing any adjustment report with material omission; (7) Failing to preserve any adjustment archival within the prescribed time limit; (8) Retaining or designating a person who does not comply with the provisions of the Asset Appraisal Law to carry out adjustment business; 109 Ibid., art.89. 110 Ibid., art.90. 111 Ibid., art.91.

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REGULATION OF INSURANCE ADJUSTERS

(9) An adjustment practitioner of this institution is negligent in the management and has caused adverse consequences. Where an insurance adjuster issues a false adjustment report, the CBIRC and its local office shall order it to suspend business for not less than six months nor more than one year, confiscate its illegal income and impose a fine of not less than one time the amount of illegal income nor more than five times the amount of illegal income thereupon if there is any illegal income, and hold the violator criminally liable in accordance with the law, where a crime is constituted; the administrative department for industry and commerce shall revoke the business license of the violator, under serious circumstances.112 Where an insurance adjuster or its practitioner falls under one of the circumstances as prescribed in article 67 of these Provisions, the CBIRC and its local office shall order the violator to take corrective action, give a warning to the insurance adjuster, and impose a fine of not more than ¥10,000 yuan on the violator if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on the violator if there is any illegal income.113 For an insurance adjuster falling under any of the following circumstances, the CBIRC and its local office shall order the violator to take corrective action, issue a warning to the violator, and impose a fine of not more than ¥10,000 yuan on the violator:114 (1) Failing to submit the relevant reports, statements, documents, or materials as required; (2) Developing or providing any false reports, statements, documents, or materials; (3) Refusing or obstructing any legal supervisory inspection. For an insurance adjuster falling under any of the following circumstances, the CBIRC and its local offices shall order the violator to take corrective action, issue a warning to the violator, and impose a fine of not more than ¥10,000 yuan on the violator if there is no illegal income or impose a fine of not more than three times the amount of illegal income but not exceeding ¥30,000 yuan on the violator if there is any illegal income:115 (1) Failing to (2) Failing to required; (3) Failing to (4) Failing to required; (5) Failing to 112 113 114 115

conduct custody of working capital as required; form a branch to carry out insurance adjustment business as appoint a temporary person in charge as required; put its recordation form at its domicile or business premises as create or manage business archives as required;

Ibid., art.92. Ibid., art.93. Ibid., art.94. Ibid., art.95.

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(6) Failing to use bank accounts as required; (7) Failing to obtain remuneration as required; (8) Failing to carry out the adjustment work according to the statutory requirements; (9) Failing to disclose information as required; (10) Failing to pay the regulatory fees as required. Where a practitioner of an insurance adjuster has stake in the entrusting party or other relevant parties and public adjustment objects and fails to disqualify itself according to the law, the CBIRC and its local office shall order it to make corrective action, issue a warning to it, and impose a fine of not more than ¥10,000 yuan on it if there is any illegal income or impose a fine of not more than three times the amount of illegal income nor more than ¥30,000 yuan on it if there is any illegal income.116 Where an insurance adjustment practitioner violates these Provisions and falls under any of the following circumstances, the CBIRC and its local office shall give a warning thereto, and may order him or her to suspend practice for not less than six months nor more than one year; confiscate his or her illegal income, if there is any illegal income; order him or her to suspend practice for not less than one year nor more than five years, under serious circumstances; and hold him or her criminally liable in accordance with the law, where a crime is constituted:117 (1) Accepting authorization in private to engage in business or collect fees; (2) Engaging in business for two or more insurance adjusters concurrently; (3) Soliciting business by such improper means as fraud, inducement, or coercion, or disparaging or defaming any other adjustment practitioner; (4) Permitting any other person to conduct business in his or her own name, or conducting business by illegally using any other person’s name; (5) Signing any adjustment report on business not undertaken by him or her or any adjustment report with major omissions; (6) Demanding or accepting in any disguised form remuneration and property other than those agreed upon in contracts or seeking other illicit benefits. Where an insurance adjustment practitioner signs a false adjustment report, the CBIRC and its local office shall order him or her to suspend practice for not less than two years nor more than five years; confiscate his or her illegal income, if there is any illegal income; order him or her to suspend practice for not less than five years nor more than ten years, under serious circumstances; and hold him or her criminally liable in accordance with the law and prohibit him or her from engaging in adjustment business for a lifetime, where a crime is constituted.118 Where an insurance adjuster or an insurance adjustment practitioner is ordered to suspend practice and be subject to punishment other than suspension of practice accumulatively for three times due to violation of provisions within one year, the

116 Ibid., art.96. 117 Ibid., art.97. 118 Ibid., art.98.

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REGULATION OF INSURANCE ADJUSTERS

CBIRC and its local office may order the violator to suspend business or practice for not less than one year nor more than five years.119 Where an insurance adjustment practitioner violates the relevant provisions and causes loss to the client or any other relevant party, the insurance adjuster where he or she works shall assume the liability for compensation in accordance with the law. After performing the liability for compensation, an insurance adjuster may recover the indemnity from an insurance adjustment practitioner with intent or gross negligence.120 Where an insurance adjuster violates these Provisions, the CBIRC shall, in addition to punishing the institution, issue a warning to and impose a fine of not more than ¥10,000 yuan on the directly liable supervising executive or any other liable person in charge of the institution.121 Where it is discovered after a director or senior executive of an insurance adjuster resigns that such a person violated the relevant provisions issued by the CBIRC during his or her former service in the insurance adjuster, the person shall be held liable according to the law.122 The CBIRC and its local offices shall impose administrative punishments on the insurance adjusters and their practitioners for their illegal acts according to the law, inform the self-regulation organizations in the insurance intermediary industry of the punishments in a timely manner, and disclose them the public in accordance with the law.123 A self-regulation organization in the insurance intermediary industry that violates the relevant provisions shall be given a warning and be ordered to take corrective action; if it refuses to take corrective action, the registration authority shall be notified and impose penalties thereupon according to the law.124 15.4 The basic rules for insurance adjusting In accordance with the Asset Appraisal Law of the PRC (2016)125 and other relevant laws and regulations, the CBIRC formulated the Basic Rules for Insurance Adjusting on 2 May 2018 (Basic Rules 2018)126 for the insurance adjusters to follow in carrying out their business activities.127 The Basic Rules 2018 are composed of 32 articles in six chapters: the general provisions, basic rules, insurance adjusting procedures, insurance adjusting report, insurance adjusting archives, and the supplementary provisions. We consider these rules in this section.

119 Ibid., art.99. 120 Ibid., art.100. 121 Ibid., art.101. 122 Ibid., art.102. 123 Ibid., art.103. 124 Ibid., art.104. 125 The Asset Appraisal Law of the People’s Republic of China was enacted on 2 July 2016 and came into force on 1 December 2016. 126 Yin Bao Jian Fa No. 21 [2018]. The Basic Rules came into force on 2 May 2018. 127 The Basic Rules for Insurance Adjusting 2018, art.1.

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REGULATION OF INSURANCE ADJUSTERS

The Basic Rules 2018 stipulate that in the case of any discrepancy between the Basic Rules and the Guidelines for the Professional Ethics of Public Insurance Adjusting Practitioners 2004128 and the Basic Service Standards for Public Insurance Adjusting Institutions 2013129 the Basic Rules 2018 shall prevail.130 15.4.1 General provisions An insurance adjuster may accept the entrustment of a natural person, legal person, or any other organization to conduct the assessment, survey, identification, loss assessment, and adjustment of the subject matter of insurance or an insurance accident as well as the relevant risk assessment.131 Where any matter involving the specific target of assessment or public interest, among others, shall be subject to adjusting as prescribed by any law or administrative regulation (hereinafter, statutory adjusting), an insurance adjuster shall be legally entrusted to conduct assessment.132 The insurance adjuster and its practitioners that conduct the insurance adjusting business shall comply with the Basic Rules 2018.The insurance adjuster shall, under the principles of clear functions and responsibilities, reinforcing accountability, and strengthening risk management, establish and improve internal management rules and a system of service quality control standards, specify management and control responsibilities, build a regulatory compliance system, focus on self-restraint, and promote stable operation.133 The insurance adjuster shall oversee its insurance adjusting practitioners’ compliance with laws, administrative regulations, the Provisions of Insurance Adjusters 2018 and the Basic Rules 2018, and be responsible for their practice.134 The CBIRC shall perform regulatory functions over public insurance adjusters in accordance with the Insurance Law, the Asset Appraisal Law and the authorization of the State Council. Local offices of the CBIRC shall perform their regulatory functions within the scope authorized by the CBIRC.135 Where an insurance adjuster conducts the asset appraisal business, which involves the administration of any other appraisal administrative department as prescribed by any law, administrative regulation, or the provisions of the State Council, it shall also be governed by other relevant provisions.136 The Provisions of Insurance Adjusters 2018 and the Basic Rules 2018 shall apply, mutatis mutandis, to the CBIRC’s supervision and administration of asset appraisal institutions and appraisal professionals in the specialized fields administered by 128 Bao Jian Fa No. 143 [2004] (see accessed on 15 October 2020). 129 Bao Jian Fa No. 3 [2013] (see accessed on 15 October 2020). 130 The Basic Rules for Insurance Adjusting 2018, art.32. 131 Ibid., art.2. 132 Ibid. 133 Ibid. 134 Ibid. 135 Ibid., art.3. 136 Ibid.

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other appraisal administrative departments that conduct the insurance adjusting business.137 15.4.2 Basic rules An insurance adjuster and its practitioners shall abide by laws, administrative regulations, the Provisions of Insurance Adjusters 2018, the relevant provisions of the CBIRC, and the Basic Rules 2018 and observe the principles of independence, objectiveness, and impartiality.138 The insurance adjuster and its practitioners that conduct the insurance adjusting business in accordance with the law shall be protected by law, and no entity or individual may interfere with it.139 The insurance adjuster and its practitioners shall conduct investigation, analysis, and assessment independently and form professional opinions; shall not make commitments to the principal or the parties to insurance adjusting on the predetermined insurance adjusting conclusion; shall not conduct any business to which they are parties of interest; and shall not seek any illicit benefit.140 No insurance adjuster may have insurance adjusting business relations with any institution or individual unlawfully engaged in the insurance business or insurance intermediary business.141 Insurance adjusting practitioners shall, when conducting the insurance adjusting business, enjoy the rights prescribed in the Provisions of Insurance Adjusters 2018 in accordance with the law, fulfil the obligations prescribed in the Provisions of Insurance Adjusters 2018, shall not commit any conduct prohibited in the Provisions of Insurance Adjusters 2018, strictly abide by the professional ethics, consciously maintain their professional image, and shall not conduct any activity that damages their professional image.142 Insurance adjusting practitioners shall, in the course of conducting the insurance adjusting business, abide by laws and regulations, practice independently, be professional and competent, objective and impartial, honest and in good faith, diligently perform their functions, prudently conduct the business, have friendly cooperation, compete in a fair manner, and keep secrets confidential.143 An insurance adjusting practitioner who conducts the insurance adjusting business shall join the insurance adjuster. The insurance adjuster shall, according to the relevant provisions, conduct practice registration for its insurance practitioners and guarantee the authenticity, accuracy, and integrity of the practice registration information.144

137 138 139 140 141 142 143 144

Ibid. Ibid., art.4. Ibid. Ibid. Ibid. Ibid., art.5. Ibid. Ibid., art.6

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REGULATION OF INSURANCE ADJUSTERS

The insurance adjusting practitioner may register with only one insurance adjuster and conduct the adjusting business for this one insurance adjuster.145 Where the insurance adjusting practitioner changes the insurance adjuster with which he or she is registered, the new insurance adjuster to which the practitioner is affiliated shall conduct practice registration for him or her, and the former insurance adjuster to which he or she was affiliated shall cancel his or her practice registration in a timely manner.146 The insurance adjuster shall not entrust an individual that fails to pass the practice registration of the institution to conduct the insurance adjusting business.147 Insurance adjusting practitioners shall have the corresponding professional knowledge and practical experience, be competent for the insurance adjusting business to be carried out, and maintain and improve their professional competence.148 The insurance adjuster shall strengthen the pre-post training and follow-up education for insurance adjusting practitioners and may entrust the self-disciplinary organizations or other institutions of the insurance intermediary industry to organize training.149 A national self-disciplinary organization of the insurance intermediary industry shall, according to the provisions of the state, organize the implementation of the national uniform examination for the qualification of insurance adjusters.150 15.4.3 Insurance adjusting procedures An insurance adjuster that conducts the insurance adjusting business shall perform the following basic procedures:151 (1) Determining the adjusting entrustment relationship; (2) Conducting survey and investigation, collecting materials, inspection and verification, evaluation and estimation; (3) Preparing, reviewing, and issuing adjusting reports; (4) Closing the case and reviewing and collecting adjusting archives. The insurance adjuster and its practitioners shall not reduce the basic procedures for insurance adjusting at will.152 These procedures shall apply, mutatis mutandis, to the insurance adjuster’s acceptance of entrustment to conduct other businesses prescribed by the CBIRC.153 An insurance adjuster shall, before accepting the adjusting business, specify the following basic items of the adjusting business:154

145 146 147 148 149 150 151 152 153 154

Ibid. Ibid. Ibid. Ibid., art.7. Ibid. Ibid. Ibid., art.8. Ibid. Ibid. Ibid., art.9.

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REGULATION OF INSURANCE ADJUSTERS

(1) The relationship of rights and obligations of the principal and the parties to adjusting activities; (2) The purpose of the adjusting entrustment; (3) The adjusting object and the service scope of the adjusting entrustment; (4) The adjusting plan, including the main process, time schedule, and personnel arrangement, among others, of the adjusting business; (5) The method of submitting the adjusting report; (6) Adjusting expenses, payment methods, and time limit of payment; (7) The important matters that shall be specified by the principal, other relevant parties, and the insurance adjuster in such aspects as work cooperation and assistance. The insurance adjuster shall comprehensively analyze and evaluate its professional competence, independence and business risks. The acceptance of the adjusting business shall satisfy the requirements for professional competence, independence, and business risk control, otherwise it shall not be accepted.155 Where an insurance adjuster lacks specific professional knowledge, experience or capability when carrying out a specific adjusting business, it shall take remedial measures, including work with the professional institution or experts, among others.156 When conducting the insurance adjusting business, an insurance adjuster shall enter into an entrustment contract with the principal or obtain a power of attorney on adjusting issued by the principal, agree on the rights and obligations of the insurance adjuster and the principal, the confidential and reasonable use of information, liability for the breach of contract, settlement of disputes, and other content. The adjusting entrustment shall not violate any law, administrative regulation, or the relevant provisions of the CBIRC.157 An insurance adjuster shall designate at least two insurance adjusting practitioners to undertake the accepted insurance adjusting business. The insurance adjuster that conducts the statutory adjusting business shall designate at least two adjusters of the corresponding specialty to undertake the business. The practice activities of insurance adjusting practitioners shall be conducted within the scope of power entrusted.158 An insurance adjuster shall prepare a standard client notification during the course of business operations. The insurance adjuster shall present the notification in the course of business development, on-site survey, e-mail contact, and other business operation, obtain the written acknowledgement to which the client affixes his or her signature or the electronic voucher known by the client or the insurance adjuster shall inform the principal in a timely manner and make written records.159 The client notification shall at least cover the name, recordation information, business premises, business scope, contact information, complaint channels, dispute resolution methods, and other basic matters of the insurance 155 156 157 158 159

Ibid. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13.

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adjuster.160 The insurance adjuster shall, through the enterprise’s website and other information release channels, publish the content of the client notification of the adjusting institution.161 An insurance adjuster and its practitioners shall, according to the actual circumstances of the adjusting business, properly select assessment methods on the basis of objective facts, conduct an on-site survey, investigation, evaluation, and estimation through lawful and professional technical means and consult the documents, certificates, and materials required for conducting the business at the relevant state organs or other organizations in accordance with the law and guarantee that the adjusting work is conducted in a timely, comprehensive, and scientific manner.162 Insurance adjusting practitioners shall, based on the actual case circumstances, provide a list of public assessment materials in a timely manner and collect the relevant adjusting materials.163 The principal and other relevant parties shall legally provide and guarantee the authenticity, completeness, and legality of adjusting materials.164 Insurance adjusting practitioners shall check and verify the adjusting materials used in the course of conducting the adjusting business in accordance with the law.165 The insurance adjuster shall answer the inquiries raised by the principal and clients involving the adjusting business in a timely manner and organize the relevant parties to communicate and negotiate with each other when necessary.166 If an on-site survey is not required as specified in an insurance contract or public adjusting entrustment contract, the insurance adjuster is not required to conduct an on-site survey.167 Where the principal or the relevant party refuses to provide or fails to truthfully provide the ownership certificate, financial accounting information, and other materials required for the implementation of the adjusting business, the insurance adjuster shall be entitled to legally reject its request for fulfilling the contract, and the principal or the relevant party shall assume the relevant legal liability.168 An insurance adjuster and its practitioners shall form an adjusting conclusion on the basis of survey, evaluation, and estimation and prepare an adjusting report in a timely manner. The insurance adjuster shall conduct internal examination of the adjusting report and issue an adjusting report on time. Where the principal has any objection to the adjusting report, the principal may require the insurance adjuster to make an explanation.169 After the insurance adjuster completes the entrusted business on schedule, the principal shall pay the adjusting fee in a timely manner. As agreed upon in the adjusting entrustment contract and according to the actual case circumstances, the settlement of the adjusting fee may be conducted in the form of advance 160 161 162 163 164 165 166 167 168 169

Ibid. Ibid. Ibid., art.14. Ibid. Ibid. Ibid. Ibid. Ibid. Ibid., art.15. Ibid., art.16.

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payment, instalment payment, or one-off payment. The principal shall, within 30 working days after receiving the invoice of the adjusting fee, complete the payment of the adjusting fee, unless it is otherwise agreed upon in the entrustment contract. The principal shall not delay the payment of the adjusting fee without any justifiable reason; if there is a delay, the insurance adjuster may collect the corresponding overdue fine as agreed upon.170 Where the insurance adjuster provides services for the policy-related insurance business, the business entrusted by the government or the business entrusted by a social group, the collection of remuneration shall not violate the provisions of the CBIRC.171 Self-regulatory organizations of the insurance intermediary industry shall, based on the actual development of the insurance adjusting industry, promote standardized and transparent adjusting service charges.172 An insurance adjuster shall establish a special account to record the revenues and expenditures of the insurance adjusting business.The insurance adjuster shall open an independent fund account for the purpose of collecting the remuneration for the insurance adjusting business. Where the insurance adjuster opens or uses any other bank account, it shall comply with the relevant provisions of the state.173 After completing the fulfilment of relevant entrustment matters set forth in the adjusting entrustment contract and the receipt of adjusting fee, the insurance adjuster may close the case and put it on file.174 The insurance adjuster shall develop rules for the management of adjusting archives; review and archive the working papers, adjusting reports and other relevant materials of adjusting entrustment cases; establish complete and standard adjusting archives; and appropriately retain them in accordance with the requirements of the Basic Rules 2018.175 Where the principal has particular requirements in the adjusting entrustment contract that the insurance adjuster shall destroy or return the relevant adjusting materials or information after the provision of adjusting services, it may be handled as agreed upon in the adjusting entrustment contract, but it shall not violate the provisions of any relevant law, regulation, or policy of the state. The insurance adjuster shall retain the written evidence for the relevant destructed or returned documents.176 15.4.4 Insurance adjusting reports Insurance adjusting reports issued by an insurance adjuster and its practitioners shall comply with laws, administrative regulations, and other relevant provisions.177 170 171 172 173 174 175 176 177

Ibid., art.17. Ibid. Ibid. Ibid., art.18. Ibid., art.19. Ibid. Ibid. Ibid., art.20.

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The main content of an insurance adjusting report shall cover the case name, serial number, abstract, text, and annex.178 The body of an insurance adjusting report involving insurance claim settlements shall cover:179 (1) an overview, which mainly includes information on the principal, subject matter of assessment, adjusting entrustment scope, and other information; (2) a summary of the policy content; (3) a brief introduction of the insured and the subject matter of insurance adjusting; (4) process of the accident and claim compensation status; (5) principles, means, assessment, and calculation methods on which insurance adjusting activities are based; (6) on-site survey and investigation of the cause of accident; (7) loss assessment; (8) an analysis of full insurance, repetitive insurance, insurance concurrence, third-party liability, claim for compensation, and other circumstances; (9) adjustment of claim payment or insurance benefits; (10) insurance adjusting conclusion; (11) an explanation on restricting the use of the insurance adjusting report; and (12) signatures of insurance adjusting practitioners who undertake the said business, the seal of the insurance adjusting institution, the date of issuance of the insurance adjusting report, and the list of annexes to the insurance adjusting report. At the request of the principal, the insurance adjuster may provide the analysis and suggestion on the determination of liability.180 According to the specific requirements of the assessment entrustment, the insurance adjuster may issue other various kinds of survey reports, claim adjustment books, loss assessment reports, risk assessment reports, and other reports conforming to the formats and contents as agreed upon in the adjusting entrustment contract.181 An insurance adjuster and its practitioners shall, when handling the insurance entrustment involving insurance claim settlement, choose appropriate assessment methods; accurately apply the insurance and relevant industry standards and criteria to conduct the assessment and analysis; issue written adjusting, loss assessment, and adjustment opinions in a scientific, reasonable, and impartial manner in insurance adjusting reports; and explain in details the basis and standards for adjusting, loss assessment, and adjustment to the principal and the parties to the case. Where the insurance adjusting report involves the amount of claim payment or insurance benefits, it shall indicate the corresponding insurance clauses on which the amount of claim payment or insurance benefits is based.182

178 179 180 181 182

Ibid., art.21. Ibid., art.22. Ibid. Ibid. Ibid., art.23.

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The explanation on restricting the use of an insurance adjusting report shall indicate:183 (1) the use scope; (2) if the principal or any other user of the insurance adjusting report fails to use the insurance adjusting report in accordance with the provisions of any law or administrative regulation or the scope of use indicated on the insurance adjusting report, the insurance adjuster and its practitioners shall not assume the liability; and (3) any institution or individual other than the principal, the parties to the insurance contract, the interested party, any other user of an insurance adjusting report as agreed upon in the insurance adjusting entrustment contract, and users of adjusting reports prescribed by laws and administrative regulations shall not be the user of the insurance adjusting report. An insurance adjuster shall develop rules for the internal examination of adjusting reports, establish the examination process, and record the examination process and results.184 The procedures for the internal examination of insurance adjusting reports shall be performed, and insurance adjusting practitioners that undertake such business shall affix their signatures and the seal of the insurance adjusting institution. The procedures for the internal examination of adjusting reports on the statutory adjusting business shall be performed, and adjusters that undertake such business shall affix their signatures and the seal of the insurance adjusting institution. The insurance adjuster and its practitioners shall, in accordance with the law, assume responsibility for the adjusting report issued by it.185 15.4.5 Insurance adjusting archives An insurance adjuster shall develop rules for the management of adjusting archives and establish complete and standard adjusting archives for each adjusting entrustment. The adjusting archives shall at least cover:186 (1) the archives on the insurance adjusting business, including the main information involved in the insurance adjusting business, adjusting working papers, adjusting reports, and other relevant materials; (2) the remuneration for the adjusting business and the collection thereof; and (3) other business information prescribed by the CBIRC. The adjusting archives of the insurance adjuster shall be true and complete. The adjusting archives shall be retained by the insurance adjuster in an appropriate manner.187 The main information involved in the insurance adjusting business shall

183 184 185 186 187

Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid.

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include the title or name of the principal and other parties, the subject matter of insurance, the type of the accident, and the amount of loss assessed, among others.188 Adjusting working papers shall be true and complete, give prominence to the key points, have clear records, be able to reflect the implementation of adjusting procedures, and support the adjusting conclusion. Adjusting working papers are categorized into management working papers189 and operating working papers.190 The adjusting report and other relevant materials shall include the adjusting report issued by the insurance adjuster according to the adjusting entrustment contract and the annexes thereto and internal examination documents of the adjusting report.191 The information on the remuneration for the adjusting business and the collection thereof mainly includes the photocopies of adjusting bills and invoices, bills, and other materials.192 An insurance adjuster shall properly manage and retain adjusting archives and retain them in an electronic or paper form. Adjusting archives shall be retained for not less than 15 years and shall be retained for not less than 30 years if they fall under the statutory adjusting business.193 Strict confidentiality rules shall be implemented for the administration of adjusting archives, and no adjusting archive may be provided to others except under the following circumstances:194 (1) The archives are consulted by insurance regulatory departments, finance and taxation departments, audit departments, and other state organs in accordance with laws and regulations. (2) Self-disciplinary organizations of the insurance industry and insurance intermediary industry organize consulting in accordance with laws and regulations. (3) The principal and relevant parties consult the archives as agreed upon in the consulting entrustment contract. (4) Other circumstances where archives are consulted in accordance with laws and regulations. The national self-disciplinary organizations of the insurance intermediary industry shall, in accordance with the Asset Appraisal Law 2016, the Provisions of the Insurance Adjusters 2018,195 and the Basic Rules 2018, develop adjusting practice 188 Ibid., art.28. 189 According to art.28 of the Basic Rules for Insurance Adjusting 2018, “management working papers” means the work records and relevant materials formed in the course of implementing the adjusting business for the acceptance, planning, control, and management of the adjusting business, such as letters, adjusting entrustment contracts, memorandums, meeting minutes, and other materials. 190 According to art.28 of the Basic Rules for Insurance Adjusting 2018, “operating working papers” means the work records and relevant materials formed in the process of performing survey, investigation, assessment, collection of adjusting materials and other procedures, such as survey and inquiry records, photos, videos, audio recordings, electronic data, documents and materials, samples, special detection and identification reports, and legal consulting opinions, among others. 191 The Basic Rules for Insurance Adjusting 2018, art.28. 192 Ibid. 193 Ibid., art.29. 194 Ibid., art.30. 195 The Provisions of the Insurance Adjusters 2018 was fully examined earlier in section 15.3.

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rules, codes of professional ethics, the codes of conduct of practitioners, and the relevant detailed implementation rules. Adjusting practice rules include all kinds of specific rules, guidelines, and guiding opinions.196 15.5 Foreign investors are permitted to operate loss adjusting business in China In order to further expand the opening of the insurance industry to the outside world and promote the development of the insurance adjusting market, the CBIRC issued the Notice on Permitting Foreign Investors to Operate Loss Adjusting Business in China on 19 June 2018 (hereinafter, the Notice on Foreign Investors).197 Previously, foreign investors were not permitted to operate loss adjusting business in China but only allowed to invest in no more than 25% of the shares of loss adjusting entities owned by Chinese companies/individuals. Such restrictions have now been removed by the Notice on Foreign Investors. The Notice on Foreign Investors permits foreign loss adjusters, which have operated loss adjusting business outside China for over three years, to establish a foreign-invested insurance adjuster in China.198 The Notice on Foreign Investors also allows foreign-invested insurance companies, which have operated insurance business in China for over three years, to establish a loss adjusting business in China. Such loss adjusters shall make business filings and operate the loss adjusting businesses in accordance with the Provisions on Supervision and Administration of Insurance Adjusters 2018.199 The Notice on Foreign Investors significantly opens up China’s loss adjusting market to foreign investors. Thus, foreign investors can be treated exactly the same as Chinese investors on both establishment and operation of loss adjusting business in China.This change is a major step forward in China’s reform and opening policy. 15.6 Factors which affect legal effect of an insurance adjusting report An insurance adjusting report is the fruit of the activities of an insurance adjuster. The report issued by the insurance adjuster must comply with law, administrative regulations, and other relevant provisions.200 Both the Provisions of Insurance Adjusters 2018 and the Basic Rule for the Insurance Adjusting 2018 have set out detailed requirements for insurance adjusters to comply with in conducting their business activities. Insurance adjusters and their employees shall form a conclusion on the basis of survey, assessment, and estimation and prepare an adjusting report in a timely manner. The insurance adjuster and its practitioners shall be liable for the adjusting report issued by it in accordance with law. Insurance adjusting report plays an important role in the process of insurance claims; its validity will have a 196 The Basic Rules for Insurance Adjusting 2018, art.31. 197 Yin Bao Jian Fa No. 29 [2018] (see accessed on 15 October 2020). 198 The Notice on Permitting Foreign Investors to Operate Loss Adjusting Business in China 2018, s.1. 199 Ibid., s.2. 200 The Basic Rules for Insurance Adjusting 2018, art.20.

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direct impact on the results of insurance claims. In this section, we consider the circumstances under which an insurance adjusting report may be rendered invalid. 15.6.1 The insurance adjusters or the insurance adjusting practitioners do not have the relevant adjusting qualification According to the Provisions of Insurance Adjusters 2018, insurance adjusters operating insurance adjusters within the territory of China should meet the requirements of the Asset Appraisal Law 2016 and the conditions stipulated by the CBIRC. Adjusters refer to insurance adjustment practitioners that have passed the qualification examination for adjusters.201 Insurance adjusters can engage in the inspection, valuation, and risk assessment of the insurance subject matter before and after the insurance is underwritten for the principal and conduct the survey, inspection, and loss adjustment of the insurance subject matter after the insured event occurs and the handling of the residual value of the insurance subject matter, risk management consulting, and other business.202 If an insurance adjusting institution or the adjusting practitioners do not possess the relevant appraisal qualifications, the insurance adjusting report may be rendered invalid according to art.40(1) of the Supreme People’s Court Provisions on Civil Litigation Evidence 2019.203 This can be illustrated by the case of the BOC Insurance Co., Ltd.Wuxi Central Branch Company v Jiangyin Weierpai New Material Technology Co., Ltd.204 On 6 March 2012, a fire at the Weierpai Co. Ltd. spread to its neighbouring Jiangyin Liansheng Sanitary Materials Co., Ltd., resulting in damage to a large number of warehouse items. After the accident, BOC Insurance Company entrusted Fanhua Insurance Adjusting Co., Ltd. to conduct an assessment of the damage caused by the fire to the warehouse items. Mr Shi, as the adjusting practitioner, was sent to investigate the loss caused by the fire. The evidence showed that Mr Shi passed the insurance adjustment practitioner qualification examination on 9 December 2007 and obtained the insurance adjustment practitioner qualification certificate. The qualification certificate was valid for three years, until December 2010. When Mr Shi carried out the adjusting work and wrote the adjusting report, his certificate of adjuster had expired. The court held that due to the fact that Shi did not hold a legal and valid qualification certificate for the adjusting work when conducting 201 The Provisions on the Supervision and Administration of Insurance Adjusters 2018, art.4. 202 Ibid., art.43. 203 The Provisions on Civil Litigation Evidence was enacted by the Supreme People’s Court on 25 December 2019 and came into force on 1 May 2020 (Fa Shi No. 19 [2019]) (see accessed on 15 October 2020). Article 40(1) of the Supreme People’s Court Provisions on Civil Litigation Evidence 2019 provides that if a party applies for a new appraisal and one of the following circumstances exists, the People’s Court shall permit a new appraisal to be carried out: (1) (2) (3) (4)

The appraiser does not have the corresponding qualifications; The appraising procedure is seriously illegal; The appraisal opinion is obviously lack of basis; Other situations where the appraisal opinion cannot be used as evidence.

204 This case was cited by the Deheng Law Firm (see accessed on 15 October 2020).

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surveying, inspection, loss adjustment, and other operations, and there were also some flaws in the report, the adjusting report was invalid according to art.40(1) of the Supreme People’s Court Provisions on Civil Litigation Evidence 2019, which provided that if the appraiser does not have the relevant valid qualification, a party can apply for a new appraisal. 15.6.2 The scope of the insurance adjusting is beyond the legally permitted business scope An insurance adjuster can be legally entrusted to conduct an assessment on matters involving the specific target of assessment or public interest, among others, as described by law or regulation.205 However, if the law specifically stipulates for adjusting to be carried out by certain statutory specified institutions, any loss adjustment carried out by other institutions (including insurance adjusters) has no legal effect. For example, fire accident investigation is a public management function, and no institution shall exercise this function without authorization from laws and administrative regulations. The Fire Protection Law of China 2008 (art.51), the Fire Accident Investigation Regulations 2009 (art.5),206 and the Regulations on Investigation and Handling of Marine Traffic Accidents (art.9[3]), clearly stipulate that the statutory agency for the investigation and handling of fire accidents is the public security and fire protection agency. Accordingly, other agencies (including insurance adjusters) are not authorized to perform this function. In China Pacific Property Insurance Co. Ltd. Hainan Branch (the insurer) v COSCO Shipping Co. Ltd.; (the insured),207 the insured carrier transported 611 cars from Hainan Island to Shanghai, a fire occurred, and 462 cars were damaged. The insured entrusted Shanghai Yuezhi Insurance Appraisal Co. Ltd. to conduct a loss adjusting.The adjusting report stated that the fire accident was caused by the spontaneous combustion of the vehicle itself. The court held that according to article 51 of the Fire Protection Law 2008 and article 5 of the Fire Accident Investigation Regulations 2009, the fire accident investigation and handling institution should be a public security fire prevention institution, and the investigators should have the corresponding post qualifications. The public security fire protection agency should, in accordance with the on-site investigation of the fire, produce in a timely manner a fire accident certification as evidence for handling the fire accident. The loss adjuster entrusted by the insured carrier was not a public security fire protection agency, and neither inspectors nor appraisers had the qualifications for fire accident appraisal. Thus, the adjusting report was not a valid evidence of the loss caused by the fire.

205 The Basic Rules for Insurance Adjusting 2018, art.2. 206 The Fire Accident Investigation Regulations was issued by the Ministry of Public Security on 30 April 2009. 207 This case was judged by Hainan Province High People’s Court (2010) Qing Min San Zhong Zi No. 2 Civil Judgment (see the case report accessed on 15 October 2020).

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15.6.3 The insurance adjusting procedure is in violation of relevant laws or regulations According to art.8 of the Basic Rules for Insurance Adjusting 2018, an insurance adjuster that conducts the insurance adjusting business must stick to the basic procedures:208 (1) determining the adjusting entrustment relationship; (2) conducting survey and investigation, collecting materials, inspection and verification, and evaluation and estimation; (3) preparing, reviewing, and issuing adjusting reports; and (4) closing the case and reviewing and collecting adjusting archives. The insurance adjuster and its practitioners are not permitted to freely reduce the basic procedures for insurance adjusting.209 An insurance adjuster must, before accepting the adjusting business, specify the following basic items of the adjusting business:210 (1) The relationship of rights and obligations of the principal and the parties to adjusting activities; (2) The purpose of the adjusting entrustment; (3) The adjusting object and the service scope of the adjusting entrustment; (4) The adjusting plan, including the main process, time schedule, and personnel arrangement, among others, of the adjusting business; (5) The method of submitting the adjusting report; (6) Adjusting expenses, payment methods, and time limit of payment; (7) The important matters that shall be specified by the principal, other relevant parties, and the insurance adjuster in such aspects as work cooperation and assistance. The insurance adjuster must comprehensively analyze and evaluate its professional competence, independence, and business risks. The acceptance of the adjusting business must satisfy the requirements for professional competence, independence, and business risk control or it shall not be accepted.211 If the aforesaid procedure is seriously violated, by virtue of art.40(1) of the Supreme People’s Court Provisions on Civil Litigation Evidence 2019, the adjusting report can become invalid. In a property insurance contract dispute between the People’s Insurance Company of China Shixing Branch v Shixing Tiezhai Forest Farm Co., Ltd.,212 when an accident occurred and caused loss to the insured, the insurer entrusted Foshan Xingchan Insurance Adjusting Co., Ltd. to assess the loss. It was found that the adjuster was unilaterally entrusted by the insurer (without the agreement of the insured). The insured refused to accept the conclusion of the adjusting report. When the adjuster inspected the site, Tiezhai Forest Farm had no staff at the site, and the insurer failed to provide evidence that Tiezhai Forest Farm had dispatched personnel to the scene. Article 11 of the Guangdong Province Forestry Insurance Claims Operation Regulations (Trial) (2012) stipulates that “the on-site survey conclusion is invalid if the insured or its agent was not at the site when the survey was being carried out”. Accordingly, the court held that the adjusting report was invalid.

208 209 210 211 212

The Basic Rules for Insurance Adjusting 2018, art.8. Ibid. Ibid., art.9. Ibid. This case was cited by the Deheng Law Firm.

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15.6.4 The entrusted insurance adjusting procedure is not standardized According to the Basic Rules for Insurance Adjusting 2018, when conducting the insurance adjusting business, an insurance adjuster shall enter into an entrustment contract with the principal or obtain a power of attorney on adjusting issued by the principal and agree on the rights and obligations of the insurance adjuster and the principal.213 If the purpose of entrustment contract is not properly specified, the adjusting report may become invalid. In the case of the People’s Insurance Company of China Chaozhou Branch v Guangdong Zezhou Arts & Crafts Co., Ltd.; (the insured),214 during the insurance period, a typhoon hit Chaozhou City, causing damage to the insurance subject matter. After the accident, the insurer entrusted Shenzhen Xincheng United Insurance Adjusting Co., Ltd. to conduct loss adjusting. The insured also entrusted the same adjuster to carry out the loss adjusting. In the entrustment contract between the insured and the adjuster, the insured failed to choose any purpose from the column of the “Principal’s Purpose”. The Guangdong Province High People’s Court held that the purpose of the entrustment was unclear. At the same time, after the on-site investigation by the adjuster, two sets of adjustment reports were separately prepared, and the total amount of loss was very different in each one, which could not be reasonably explained. So the court did not approve the adjusting report as an evidence of loss and requested the adjuster to redo the adjustment upon the application of the insured. 15.6.5 The conclusion of the adjusting report is lack of factual or legal basis The Provisions of Insurance Adjuster 2018 requires the insurance adjuster and its practitioners to diligently perform their duties in the insurance adjustment business. If an insurance adjustment report involves the amount of claim payment, the insurance clauses on which the amount is based shall be specified.215 In addition, article 23 of the Basic Rules for Insurance Adjusting 2018 further provides that an insurance adjuster and its practitioners shall, when handling the insurance entrustment involving insurance claim settlement, choose appropriate assessment methods; accurately apply the insurance and relevant industry standards and criteria to conduct the assessment and analysis; issue written adjusting, loss assessment, and adjustment opinions in a scientific, reasonable, and impartial manner in insurance adjusting reports; and explain in detail the basis and standards for adjusting, loss assessment, and adjustment to the principal and the parties to the case. Where the insurance adjusting report involves the amount of claim payment or insurance benefits, it shall indicate the corresponding insurance clauses on which the amount of claim payment or insurance benefits is based. If the adjusting report is obviously lacking in a factual and legal basis, the report can be held invalid in accordance with art.40(1) of the Supreme People’s Court

213 The Basic Rules for Insurance Adjusting 2018, art.11. 214 This case was cited by the Deheng Law Firm. 215 The Provisions on the Supervision and Administration of Insurance Adjusters, art.56.

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Provisions on Civil Litigation Evidence 2019. In practice, two situations often occur which can render the loss adjusting report invalid. The first one is that the insurance adjusting report does not have objective authenticity, and the second one is that the insurance clause on which the insurance adjusting report is based is invalid. The two situations can be explained by the following two cases respectively. In Shenyang Yulong Wood Products Co., Ltd.; (the insured) v the People’s Insurance Company of China Benxi City Branch,216 after occurrence of the accident, the insurer and the insured jointly entrusted Liaoning Yongsheng Insurance Adjusting Co., Ltd. to evaluate the amount of fire losses. The High People’s Court of Liaoning Province held that the basis and calculation method of the losses in the adjusting report issued by the adjuster did not have objective authenticity. The insured purchased two insurance policies at the same time, policies No. 41 and No. 42, and paid the insurance premium in full for the two policies. The damaged items were stored in warehouse No. 1 which were covered under the policy No. 41, but the losses of the damaged items were calculated on the basis of under-insured of the fixed asset as specified in the policy No. 42, according to the ratio of underinsured to the fully insured which was obviously not consistent with the actual situation. Therefore, the adjusting report did not objectively and truly reflect the actual losses suffered by the insured in the accident of the fire and was held to be of no evidentiary value by the court. In Lianshui Xinrongmei Textile Co., Ltd. v Tianan Property Insurance Co., Ltd. Huaian Central Branch,217 the insured’s houses, machinery, and equipment; stock raw materials; stock commodities; and semi-finished products were insured by the insurer. The insured value was determined by the replacement value at the time of insurance. There were other agreements in the insurance policy: (1) The absolute deductible for each accident was ¥5,000 yuan or 10% of the loss, whichever was higher; (2) If the amount was underinsured, the insurance indemnity would be paid according to the ratio of the underinsured amount to the fully insured amount; (3) The goods in the warehouse should be placed on the warehouse cushion board not less than 15cm above the ground, and if the insured failed to place the goods as required, the insurer would not be liable for the loss caused by the occurrence of typhoons, storms, rainstorms, or floods. During the insurance period, heavy rains fell in the Lianshui area, and the insured’s factory was flooded, causing damage to the equipment, raw materials, and finished products in the factory. The insurer and the insured jointly entrusted the Jiangsu Branch of Fanhua Insurance Adjusting Co., Ltd. to assess the insured’s losses due to the heavy rains. The Jiangsu Province High People’s Court held that after considering the scope of insurance liability stipulated in the insurance contract, the “other agreements” were to exempt the insurer’s liability for compensation within the scope of the insurance liability. The other agreements were in fact exception clauses. But the evidence provided by the insurer was insufficient to prove that the insurer had explained to the insured the exception clauses before entering into the contract, so the exception clauses were

216 This case was cited by the Deheng Law Firm. 217 Ibid.

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ineffective.218 The losses were determined by the adjuster on the basis of the effectiveness of the exception clauses. The basis of calculation of the losses was wrong, so the reported losses should not be used as the basis for compensation by the insurer to the insured. 15.6.6 Unilaterally entrusted loss adjusting by one party may be invalid where the other party can show reasonable evidence to rebut it Article 41 of the Supreme People’s Court Provisions on Civil Litigation Evidence 2019 stipulates that if one party entrusts the relevant agency or person to issue opinions on specific issues, and the other party has evidence or reason to refute and apply for reappraisal, the People’s Court shall grant permission. In the context of insurance adjustment, if the insurer or the insured unilaterally entrusts an adjuster to conduct loss adjusting, and the other party can show reasonable evidence to rebut part of the whole of the conclusion of the adjusting report, this may lead to the court’s refusal of the adjusting report as evidence. For example, in China Life Property Insurance Co., Ltd. Inner Mongolia Autonomous Region Branch Xing’an Central Branch v Shanghai Jingtong Construction (Group) Co., Ltd. Chongqing Branch (the insured),219 the insured entered into an all-risk contract with the insurer to cover the risk of a road under reconstruction. The name of the road was National Highway No. 334. During the insurance period, a heavy rain caused destruction of some parts of the road and facilities. After the accident, the insurer entrusted Fanhua Insurance Adjusting Co., Ltd. to evaluate the loss. The court of second instance found that the adjusting report issued by the adjuster was signed by the reporter Li Mingkun and also stamped with the official seal of the managerial department of the National Highway No. 334 of Shanghai Jingtong Construction (Group) Co., Ltd. In the insurance contract, the insured was Shanghai Jingtong Co., Ltd. Chongqing Branch, but not the Shanghai Jingtong Construction (Group) Co., Ltd. On the reported list of the losses, there was no signature of the insured; and Li Mingkun also had no power of attorney. Therefore, the loss adjusting report was regarded as unilaterally entrusted by the insurer, and the insured did not recognize the report, so it could not be used as the basis for the court’s decision. 15.7 Conclusion Insurance adjustment is a relative new practice in China, and the activities of insurance adjusters are regulated mainly by two regulations: the Provisions on the Supervision and Administration of Insurance Adjusters 2018 and the Basic Rules for Insurance Adjusting 2018. The Insurance Law provides only one article (art.129) for insurance adjustment. This one article is inadequate for regulating insurance adjusting business at the 218 According to art.17 of the Insurance Law, the insurer has a duty to clearly explain the exception clauses to the insured before entering into the contract, otherwise the exception clauses will be ineffective. 219 This case was cited by the Deheng Law Firm.

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statutory law level. It is suggested that new provisions regarding insurance adjusting should be introduced into the Insurance Law. The Provisions of Insurance Adjusters 2018 have several significant features as compared with the 2009 version.220 First, the Provisions stipulate the operating conditions. The Provisions implement the requirements as provided in Asset Appraisal Law 2016 for the establishment of the adjustment institution, stipulate that an insurance adjuster shall be established in the form of a company or a partnership, and set out the requirements for the ratio and the minimum number of adjusters in a company or a partnership.221 The insurance adjusting institutions are classified into two types, those carrying out business on a nationwide scale and those on a regional scale.222 The Provisions strengthen the review of the violations of laws, regulations, and integrity of shareholders and partners of insurance adjusting institutions in the form of negative lists223 and stipulate that an insurance adjuster who conducts adjusting business shall file a record with the CBIRC and its local office within a prescribed time after obtaining a business license.224 The insurance adjuster shall not start an insurance adjuster business before the filing announcement. From the practical consideration of the insurance adjusting operation, it is required to have a certain amount of working capital and the custody of its working capital complies with the relevant provisions issued by the CBIRC.225 Second, the Provisions strengthen in-event and post-event supervision. It is required that the insurance adjusters that have completed the recordation with the CBIRC shall continue to meet the relevant requirements of the Asset Appraisal Law 2016 and the Provisions 2018 and implement the annual report system of the insurance adjusters. The Provisions require optimizing the management of the adjusting institutions and effectively preventing the establishment of the branches by the insurance adjusting institutions with excessive risks and poor internal control.226 The Provisions make it clear that the insurance adjuster is the responsible body of the practice registration, and the practitioners should carry out the practice registration. The CBIRC’s local offices should strengthen behaviour supervision and keep the bottom line that no systemic risks occur. Third, the Provisions standardize the market management system. The Provisions clearly set out the prohibited conduct of insurance adjusters and their employees227 and increase the sanction for the issuance of false adjusting reports.228 The provisions require the adjusters to protect the client and related information security and standardize the adjusting procedure, requiring insurance adjusters to designate at least two insurance adjustment practitioners to undertake an adjustment

220 The 2009 version of the Provisions on the Supervision and Administration of Insurance Adjustment Institutions (the CIRC Order No. 7 [2009]). 221 The Provisions on the Supervision and Administration of Insurance Adjusters 2018, art.9. 222 Ibid., art.15. 223 Ibid., art.12. 224 Ibid., art.15. 225 Ibid., art.16. 226 Ibid., art.18. 227 Ibid., arts.25 and 31. 228 Ibid., art.98.

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assignment.229 The insurance adjusting report must be signed by at least two practitioners engaged in the operations and stamped with the adjuster’s seal.230 The risk prevention process requires insurance adjusters to establish occupational risk funds or take out professional liability insurance according to business needs.231 The Provisions put forward the percentage of the occupational risk fund deposit232 and the detailed requirements for professional liability insurance coverage.233 Fourth, the Provisions introduce new rules for industry self-discipline. The self-regulatory organizations of the insurance intermediary industry are required to formulate selfregulatory rules, implement self-regulatory management of insurance adjusters and insurance adjustment practitioners, and stipulate the scope of responsibilities of the industry self-regulatory organizations in accordance with to the Asset Appraisal Law. Insurance adjusters and insurance adjustment practitioners should voluntarily join the self-regulatory organizations in the insurance intermediary industry.234 An important question may be raised here: if an insurance adjustment institution or its employee causes loss to an insurer or insured intentionally or negligently, will it be liable for making compensation for the loss? The approaches to this question vary. Article 129(3) of the Insurance Law provides a positive answer: “An insurance adjustment institution or its employee [that] causes any loss to an insurer or insured intentionally or negligently shall assume compensatory liability”.235 Similarly, article 5 of the Provisions on the Supervision and Administration of Insurance Adjustment Institutions (2009 version) stipulates: “Where an insurance company or the insured sustains any damage due to the fault of an insurance adjustment institution in the process of adjustment, the insurance adjustment institution shall assume compensatory liability according to law.” The “fault” here means the intention or negligence of the insurance adjustment institution or its employee. The Provisions of Insurance Adjusters 2018 set forth a different approach (art.100): Where an insurance adjustment practitioner violates the relevant provisions and causes loss to the client or any other relevant party, the insurance adjuster where he or she works shall assume the liability for compensation in accordance with the law. After performing the liability for compensation, an insurance adjuster may recover the indemnity from an insurance adjustment practitioner with intent or gross negligence.

This new rule offers a stronger protection to the client, but the adjustment practitioners (the employees of the adjuster) may face problems if the person who carries out the adjusting duty intentionally or by gross negligence causes loss to the client. Sometimes it is not easy to determine the extent of negligence. There has so far been no reported case on the issue of the adjuster’s liability to compensate for loss, but there is no doubt that this is an area where disputes will occur, and thus the issue needs to be clarified. 229 230 231 232 233 234 235

Ibid., art.45. Ibid., art.47. Ibid., art.59. Ibid., art.61. Ibid., art.62. Ibid., art.72. The Insurance Law, art.129(3).

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CHAPTER 16

Health insurance

16.1 Introduction In China, the health security system is composed of three layers: basic health security system, supplementary health insurance, and commercial health insurance. The basic health security system is a kind of social health insurance with a wide range of protection provided by the government. The basic health security system consists of the urban employee basic medical insurance system,1 urban residents’ basic medical insurance system,2 the new rural cooperative medical care system,3 and the medical assistance system.4 The supplementary health insurance is a type of medical insurance that covers increased levels of medical costs above the scope of the basic medical insurance.5 Commercial health insurance is a layer of insurance above the basic medical insurance and the supplementary health insurance which operates in accordance with market and contract rules, has the characteristics of personalization, and can meet people’s higher medical needs. This chapter is concerned with the regulation of commercial health insurance in China. According to the Measures of the CBIRC for the Administration of Health Insurance 2019,6 health insurance refers to the insurance whereby an insurance

1 The basic medical insurance for urban employees refers to the basic medical insurance for individuals who have urban household registration and been employed. The basic medical insurance for urban employees is not only the earliest basic medical insurance established in China but also the most extensive basic medical insurance in China. 2 The basic medical insurance for urban residents is a medical insurance system in which urban minors who do not participate in the medical insurance for urban employees and residents who do not work are the main participants. 3 The new type of rural cooperative medical care refers to a system of mutual medical assistance for farmers that is organized, guided, and supported by the government, and participated in by farmers voluntarily.The funds for the system are raised from various sources, mainly by means of individual payment, collective support, and government funding. 4 Medical assistance refers the special assistance and support by the state and society to citizens who are incapable of treating diseases because of poverty. 5 Enterprise supplementary medical insurance is the main type of supplementary health insurance system which refers to the enterprise subsidized medical insurance. The enterprise, according to its own economic affordability and on the basis of voluntary principles, purchases insurance which covers the medical costs above the scope of the basic medical insurance. In principle, the enterprise pays the amount of premiums of no more than 4% of the employee’s salary. 6 The Measures for the Administration of Health Insurance (the CBIRC No. 3 [2019]) which were issued on 31 October 2019 and came into force on 1 December 2019 (see accessed on 15 October 2020), art.1.

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company makes indemnity payment to the insured due to his or her health cause or occurrence of the medical treatment, mainly including medical insurance, disease insurance, disability income loss insurance, care insurance, medical accident insurance, and so on. Before discussing the regulatory rules on commercial health insurance, we first take a look at the current position of this insurance in China. 16.2 The present position of commercial health insurance in China In recent years, the internal and external environment of China’s health insurance development has undergone profound changes. From an external viewpoint, China’s economy and society have made great progress, the medical and health system reform has been comprehensively deepened, the nationwide medical insurance system has basically been established, and medical technology and services have been continuously improved. The health insurance market has been growing rapidly. From 2012 to 2019, the original premium income of the health insurance business grew significantly, from ¥86.3 billion yuan in 2012 to ¥622.6 billion yuan in 2019,7 with a compound annual growth rate of 36.0%.The health insurance product structure, service connotation, and protection groups have undergone tremendous changes. In terms of functions, health insurance has become an important part of China’s multilevel medical security system and an important area for the insurance industry to serve people’s livelihood. In the context of rapid market growth, the number of health insurance companies continues to increase. At the end of 2018, the number of insurance companies that can operate health insurance businesses reached 179, including 91 personal insurance companies and 88 property insurance companies,8 providing 4,283 types of health insurance products.9 A number of regulations have been enacted by the State Council or the CIRC/ CBIRC to regulate the development of health insurance. These regulations are considered in this chapter. 16.3 An overview of the regulatory framework for commercial health insurance The regulatory framework for commercial health insurance consists of a number of regulations from the State Council and from other governmental departments. The State Council, in the Several Opinions on Accelerating the Development of the Modern Insurance Service Industry on 10 August 2014,10 puts forward the objectives 7 The published data by the CBIRC (see accessed on 15 October 2020). 8 Insurance Association of China, “Industry outlook under the newly revised ‘Measures for the Administration of Health Insurance’”, Chinese News Agency, 25 November 2019 (see accessed on 15 October 2020). 9 Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Science Press, Beijing 2018) p. 202. 10 The State Council No. 29 [2014], issued on 10 August 2014 and came into force on the same day (see accessed on 15 October 2020).

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for developing diversified health insurance services. Insurance companies are encouraged to vigorously develop all kinds of medical care insurance, sickness insurance, disability income insurance, and other commercial health insurance products and to be linked with the basic medical insurance. Long-term commercial care insurance shall be developed. The disease prevention, health maintenance, chronic disease management, and other health management services integrated with commercial health insurance products shall be provided. Insurance companies are supported in participating in the integration of the health service industrial chain and exploring the establishment of medical institutions and participation in the restructuring of public hospitals by such means as equity investment and strategic cooperation.11 Specific to health insurance, the State Council has published two more major pieces of regulation relating to commercial health insurance in recent years. The first one is the Several Opinions of the State Council on Promoting the Development of Health Service 2013.12 In these Opinions, the State Council set out the objectives to actively develop health insurance in two objectives:13 The first objective is to enrich commercial health insurance products. On the basis of perfecting the basic medical security system and steadily improving the level of basic medical security, commercial insurance companies are encouraged to provide diversified, multilevel, and standardized products and services. The development of commercial health insurance that is linked to basic medical insurance should be encouraged. Commercial insurance companies should be promoted to undertake insurance for serious diseases (critical illness) of urban and rural residents and to expand the coverage of the population. Long-term care commercial insurance and commercial health insurance products related to health management and pension services should be actively developed. Various forms of medical practice insurance, such as medical liability insurance and medical accident insurance should be promoted.14 The second objective is to develop diversified health insurance services: (1) to establish a mechanism for commercial insurance companies to cooperate with medical institutions, medical examinations, nursing, and other institutions; (2) to strengthen the supervision of medical behaviour and control of medical expenses, promote the standardization of medical service behaviour, and provide health risk assessment and health risk intervention services for the insureds; (3) on this basis, to explore new organizational forms such as health management organizations; and (4) to encourage the government to purchase services to entrust qualified commercial insurance companies to carry out various types of medical insurance handling services.15

11 The Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry 2014, s.6. 12 The State Council No. 40 [2013], was issued on 28 September 2013 and came into force on the same day (see accessed on 15 October 2020). 13 The Several Opinions of the State Council on Promoting the Development of Health Service 2013, s.2(3). 14 Ibid. 15 Ibid.

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The second piece of the State Council’s regulation is the Several Opinions of the General Office of the State Council on Accelerating the Development of Commercial Health Insurance 2014.16 This regulation will be considered in detail in section 16.4, as it is an important guideline more specific to commercial health insurance. In accordance with the Insurance Law and the State Council’s regulations, the CIRC or the CBIRC, together with other government departments, has formulated a number of pieces of departmental regulations for the development of health insurance in China. The following list shows the major pieces of State Council regulations and the departmental regulations. We will consider these regulations, some in detail and others in brief. (1) Several Opinions of the State Council on Promoting the Development of Health Services 2013. (2) Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry 2014. (3) Several Opinions of the General Office of the State Council on Accelerating the Development of Commercial Health Insurance 2014. (4) Opinions of the General Office of the State Council on the Comprehensive Implementation of Critical Illness Insurance for Urban and Rural Residents 2015.17 (5) Guiding Opinions on Carrying Out the Work of Critical Illness Insurance for Urban and Rural Residents 2012.18 (6) Notice of the CIRC on Issuing the Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013.19 (7) Notice of the CIRC on Issuing the Interim Measures for the Administration of the Health Insurance Business with Individual Tax Preferences 2015.20 (8) Notice of the General Office of the CIRC on Matters concerning the Health Insurance Business with Individual Tax Preferences 2016.21

16 The General Office of the State Council No. 50 [2014] was issued on 27 October 2014 and came into force on the same day (see accessed on 15 October 2020). 17 The General Office of the State Council No. 57 [2015], was issued on 28 July 2015 and came into force on the same day (see accessed on 15 October 2020). 18 National Development and Reform Commission No. 2605 [2012]; the Guiding Opinions were issued jointly by the National Development and Reform Commission, Ministry of Health, Ministry of Finance, Ministry of Human Resources and Social Securities, Ministry of Civil Affairs and the CIRC on 24 August 2012 (see accessed on 15 October 2020). 19 Bao Jian Fa No. 19 [2013] was issued on 12 March 2013 and came into force on the same day (see

accessed on 15 October 2020). 20 Bao Jian Fa No. 82 [2015] was issued on 10 August 2015 and came into force on the same day. (see

accessed on 15 October 2020). 21 The CIRC General Office No. 1 [2016] was issued on 4 January 2016 and came into force on the same day (see accessed on 15 October 2020).

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(9) The Notice of the Ministry of Finance, the State Administration of Taxation, and the CIRC on the Promotion of the Pilot Policy for Commercial Health Insurance with Individual Tax Preference to Nationwide Implementation 2017.22 (10) Notice of the CIRC on Issuing the Interim Measures for the Bidding of Insurance Companies for the Critical Illness Insurance for Urban and Rural Residents and Other Rules 2016.23 (11) The Measures for the Administration of Health Insurance 2019.24 (12) The Notice of the CBIRC General Office on Issues Concerning Premium Rate Adjustment of Long-term Medical Insurance Products 2020.25 (13) The Opinions on Promoting the Development of Commercial Insurance in Social Service 2020.26 16.4 The Opinions of the General Office of the State Council on Accelerating Development of Commercial Health Insurance 2014 On 27 October 2014, the Several Opinions of the General Office of the State Council on Accelerating Development of Commercial Health Insurance (hereinafter, the 2014 Opinions) were published in fulfilment of the requirement of the Opinions of the Central Committee of the Communist Party of China and the State Council on Deepening Reform of the Medical and Public Health System, and the Several Opinions of the State Council on Promoting Development of the Public Health Services 2013. In this section, we consider the 2014 Opinions in detail. 16.4.1 The significance of accelerating development of commercial health insurance The 2014 Opinions defines commercial health insurance as being an insurance in which commercial insurance institutions pay insurance benefits for losses caused by health reasons and acts of medical treatment, mainly including medical insurance, 22 The Ministry of Finance No. 39 [2017] was issued on 28 April 2017 and came into force on 1 July 2017 (see accessed on 14 October 2020). 23 Bao Jian Fa No. 86 [2016] was issued on 9 October 2016 and came into force on the same day (see

accessed on 15 October 2020). 24 The CBIRC No. 3 [2019] was issued on 31 October 2019 and came into force on 1 December 2019 (see accessed on 15 October 2020), 25 The CBIRC General Office [2020] was issued on 25 March 2019 and came into force on the same day (see accessed on 15 October 2020). 26 Yin Bao Jian Fa No. 4 [2020]; the CBIRC and other 12 Government departments jointly issued the Opinions on Promoting the Development of Commercial Insurance in Social Service on 23 January 2020 (see accessed on 15 October 2020).

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sickness insurance, disability income loss insurance, care insurance and relevant medical accident insurance, and medical liability insurance.27 Accelerating the development of commercial health insurance is conducive to the coordination and mutual complementarity among different policies of basic medical insurance; to the consolidation of the multilevel medical security system; to the satisfaction of the diversified demand of the masses of the people for health security; to promoting development of the health services industry, increasing the supply of medical care and public health services resources, and promoting perfection of the medical care and public health services system; to well-handling the relationship between the government and the market to improve the efficiency and quality of services of medical security; to innovating medical care and public health regulation systems and promoting the medical care and public health regulation capacity and the level of modernization thereof; and to stabilizing growth, promoting reform, readjusting the structure, and benefiting the people’s livelihood.28 16.4.2 Basic principles for accelerating development of commercial health insurance To speed up the development of commercial health insurance, three principles must be adhered to:29 First, putting people first and enriching health security. Improvement of the health quality of the people and promotion of the level of health security of the people shall be taken as the fundamental starting point and the basis for development of commercial health insurance. The functions of commercial health insurance in terms of satisfaction of the demand for diversified health security and services shall be brought into full play. A multilayer medical security system in conformity with the realities of China, with a rational structure and in high-efficiency operation, shall be established. Second, government guidance and bringing into play the role of the market. The duties of the government in systemic development, policy planning, market supervision, and so on shall be strengthened. By means of guidance with policies on finance, taxation, industries, and so on, the decisive role of the market in the distribution of resources shall be brought into play. Commercial insurance institutions shall be encouraged to keep increasing supply of health security and improve the quality and efficiency of their services. Third, reform and innovation and highlighting professional service. Reform of commercial health insurance systems and mechanisms shall be deepened, with application of modern science and technology, with innovation of health management services, with enlargement of the field of service provision, and with extension of the chain of service provision and the development of health insurance in integration with

27 The Opinions of the General Office of the State Council on Accelerating Development of Commercial Health Insurance 2014, s.1. 28 Ibid. 29 Ibid., s.2(2).

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the relevant industries, including medical services, health management, and health promotion shall be promoted. 16.4.3 Increase of commercial health insurance supply (1) Enrichment of commercial health insurance products. Commercial health insurance in close coordination with basic medical insurance shall be vigorously developed. Enterprises and individuals shall be encouraged to meet the demand for insurance other than basic medical insurance by means of participating in commercial insurance and various forms of additional insurance. Commercial insurance institutions shall be encouraged to actively develop health insurance products in connection with health management services, strengthen health risk assessment and intervention, and provide services of disease prevention, health examination, health consultation, chronic disease management, life cultivation, health preservation, and so on to lower health risks and to reduce losses from diseases. Commercial insurance institutions shall be supported in designing different health insurance products for different markets. In accordance with diversified demand for medical services, exploration shall be made for developing health insurance products for services of special-demand medical care, drugs, medical apparatuses and instruments, examination and testing, and so on. Insurance for adverse reaction to drugs shall be developed. Disability income loss insurance shall be developed. Income losses caused by diseases or accidental injury of in-service staff members shall be developed. To meet demand in connection with population ageing, changes in the structure of families, treatment of chronic diseases, and so on, operation of pilot projects of the system of long-term care insurance shall be vigorously launched, and development of multiform long-term commercial care insurance shall be accelerated. Products of insurance for life cultivation and health preservation and preventive treatment of diseases with traditional Chinese medicine shall be developed to satisfy diversified and multilevel social demand for services of traditional Chinese medicine. Products for healthy aging life meeting the demand of the elderly for security shall be actively developed, and the combination of security of medical treatment, care, rehabilitation, provision for the aged, and so on with services shall be realized. Operation of commercial insurance for rehabilitation, entrusted caring and nursing of the disabled, trust of property of families of mentally handicapped, and so on shall be encouraged.30 (2) Expansion of coverage of insurance for professional practice of medicine. Development of medical liability insurance and medical accident insurance shall be accelerated. Exploration shall be made for developing multiform insurance for professional practice of medicine, to share risks from professional practice of medicine, to promote defusing of disputes over medical treatment, to protect the legitimate rights and interests of both medical workers and 30 Ibid., s.3(1).

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patients, and to promote development of an equal and harmonious relationship between doctors and patients. Medical institutions and individual doctors shall be supported in purchasing insurance for the professional practice of medicine, and insurance for the professional practice of medicine purchased by individual doctors shall be applicable to any place of their professional practice of medicine. Promotion of the medical treatment proficiency of medical workers, the level of old-age security, and solution of problems of insurance for employment injuries of the medical profession and compensation for damages therefrom by means of commercial insurance and so on shall be encouraged.31 (3) Supporting innovation of science and technology for the health industry. Innovation and development of drugs, medical apparatuses, instruments, and medical technology shall be promoted, and preferential support shall be extended in terms of the proportion of payment of premiums for commercial health insurance, and so on to accelerate formation of strategic emerging industries. Exploration shall be made for establishing mechanisms for diversification of risks against high and new technology pharmaceutical enterprises and innovative health service enterprises and coverage of insurance therefor, to assist the enterprises concerned in solving difficult problems in financing and defusing risks in investment, financing, and innovation of technology.32 16.4.4 Promotion of improvement of the medical security services system (1) Full-scale promotion and regulation of operation by commercial insurance institutions of critical illness insurance for urban and rural residents. Experience therein shall be summed up. A certain proportion or amount shall be earmarked from medical and health care insurance funds for urban residents and new rural cooperative medical care funds as funds for critical illness insurance. The system of critical illness insurance for urban and rural residents shall be promoted nationwide. In compliance with the principles of balance between revenue and expenditure, and capital preservation with low margin profits, authorization of commercial insurance institutions to operate critical illness insurance for urban and rural residents shall be promoted on a full scale, with the role of the market mechanism therein brought into play, with promotion of the efficiency of critical illness insurance and with promotion of the level and quality of service provision therefor. Operation of services by commercial insurance institutions shall be regulated, and tender invitation and submission processes and insurance contracts shall be standardized, with definition of the standards for surplus rates and rates of return, with coordination with basic medical and health care insurance and basic medical assistance, and with provision of “one-stop” services therefor. The level of overall planning for critical illness insurance for urban and rural residents 31 Ibid., s.3(2). 32 Ibid., s.3(3).

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shall be gradually promoted, with establishment and perfection of management measures for independent accounting, control over medical expenses, and so on, and with strengthening of the risk-resistance capacity.33 (2) Steady promotion of participation by commercial insurance institutions in services of operating various types of medical insurance. Government efforts of service procurement shall be strengthened; in accordance with the requirement for separation of management from operation and separation of public institutions from administrative organs, mechanisms for competition shall be introduced, and by means of tender invitation and submission, qualified commercial insurance institutions shall be encouraged to participate in services of operation of various types of medical insurance to lower the cost of operation, to raise the efficiency of management, and to improve the quality of services. Agreements on services of operation thereof shall be standardized, and mechanisms for assessment with combination of stimulation with inhibition shall be established. Factors of the scale of funds, the number of insured persons, contents of services, and so on shall be taken into comprehensive consideration. Standards for costs of operation of basic medical insurance by commercial insurance institutions shall be scientifically set. Mechanisms for dynamic regulation linked to factors of costs of manpower, fluctuations of prices, and so on shall be established.34 (3) Improvement of mechanisms for cooperation between commercial insurance institutions and medical care and public health institutions. The various types of medical care institutions shall be encouraged to cooperate with commercial insurance institutions and become medical care institutions designated by commercial insurance institutions. The expertise of commercial health insurance companies shall be used to bring into play their role as thirdparty buyers and to help ease problems of asymmetry of information between medical care institutions and patents and disputes between medical care institutions and patients. The positive incentive role of the commercial health insurance premium rates adjustment mechanism to medical care expenses and risk management and control shall be brought into play to effectively lower irrational medical care expenses. In regions covered by the service of operation of critical illness insurance for urban and rural residents and operation of the various types of medical insurance, the supervision, control, and assessment by commercial insurance institutions of medical care expenses on the part of designated medical care institutions shall be strengthened to make the use of medical care insurance funds more scientific and more rational.35 16.4.5 Promotion of the level of management and service provision (1) Strengthening of construction of management systems. Systems of independent accounting, actuarial studies, risk management, underwriting, settlement 33 Ibid., s.4(1). 34 Ibid., s.4(2). 35 Ibid., s.4(3).

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of claims, data management, and so on with respect to health insurance shall be improved. Commercial insurance institutions shall establish independent income accounts and accounts of expenses for settlement of claims to strengthen independent accounting and to ensure the safety of funds. Construction of the system of assessment of services by the commercial health insurance industry shall be strengthened by regulation over standards for health insurance services. Systems of assessment and appraisal with the level of security and the extent of satisfaction by insured persons as the core shall be established as soon as possible. The system of integrity records of commercial insurance institutions shall be established and perfected by strengthening of construction of the system of integrity.36 (2) Practical promotion of the professional service capacity. Commercial insurance institutions shall strengthen health insurance management and development of professional and technical human resources, strengthen vocational education of their employees, and continue promoting their professional capacity. In accordance with the requirement for management and service provision with respect to operation of basic medical insurance and operation of critical illness insurance for urban and rural residents, and in compliance with the standards for operation of long-term health insurance, the organizational structure shall be improved by perfection of the regulatory framework and strengthening of staffing to promote the level of professional operation and service provision.37 (3) Striving to provide high-quality services. Commercial insurance institutions shall carefully do a good job of examination and verification of information and medical expenses, reimbursement, accounts settlement, payment, and so on with respect to receipt of medical treatment by insured persons; shall provide timely service of accounts settlement; and shall simplify the procedure for settlement of claims to ensure that insured persons will be able to enjoy medical treatment in a timely and convenient manner. The advantages of unified corporate management and networks of institutions shall be brought into play to launch services of referral for off-site services, off-site medical treatment, and accounts settlement therefor. All-round services of consultation, inquiry, and complaint shall be provided by multiple means, including telephone calls and websites. Modern technological means shall be applied to bring into play the advantages of telemedicine and health services platforms to share high-quality resources for medical treatment and continue innovation and enrichment of the methods of health services.38 (4) Promotion of the level of development of informatization. Commercial insurance institutions shall be encouraged to participate in construction of platforms for the business of population health data application. Commercial health insurance information systems shall be supported in launching necessary information sharing with basic medical insurance information systems and information systems of medical institutions. The relevant government 36 Ibid., s.5(1). 37 Ibid., s.5(2). 38 Ibid., s.5(3).

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departments and commercial insurance institutions shall practically strengthen protection of the security of personal information on insured persons and prevent any information divulgence or abuse. Commercial insurance institutions shall be supported in developing national or regional health insurance information systems with complete functions that are safe, highly efficient, and relatively independent. Commercial insurance institutions shall also apply modern information technology, including big data and the internet to enhance their population health data analysis and application capacity and their proficiency of smart processing of business operations.39 (5) Strengthening of supervision and management. Mechanisms for multi-department cooperation in regulation shall be improved, and supervision and inspection of commercial insurance institutions shall be strengthened in accordance with the division of duty, with timely handling and punishing in accordance with the law of acts in violation of the law or rules to ensure orderly competition. Insurance regulatory authorities shall continue perfecting the legislation and systems governing management over operation of commercial health insurance and improving the system of professional regulation. Efforts for supervision and inspection of commercial health insurance shall be strengthened, and regulation in the processes of sales, underwriting, settlement of claims, service provision, and so on shall be strengthened, with serious investigation and handling of acts of misleading in sales, irrational competition, and so on to regulate the operation of the commercial health insurance market. Systems with regard to market access and market exit for the operation of critical illness insurance for urban and rural residents and various types of medical security, tender invitation and submission, services of settlement of claims, and so on shall be improved. Commercial insurance institutions shall actively accept supervision by competent functional departments of the government and extend cooperation therein. Punishment for acts in violation of law or rules, including divulgence of privacy of insured persons, data of funds, and so on shall be strengthened. Whoever is in severe violation shall be disqualified from operation thereof and shall be publicized nationwide through bulletins. Anyone whose acts thereof have constituted crimes and who need to be investigated regarding their criminal responsibility shall be referred to judicial authorities for investigation and punishment.40 16.4.6 Improvement and development of policies on supporting commercial health insurance (1) Strengthening of organization and leadership and of interdepartmental coordination. All regions and all competent departments concerned shall enhance their understanding, make plans on an overall basis, and include acceleration of development of commercial health insurance into the general planning 39 Ibid., s.5(4). 40 Ibid., s.5(5).

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for deepening reform of the system of medical care and public health and promoting development of the health services industry. These regions and departments shall also strengthen communication and coordination, improve policies, innovate mechanisms, and solve major problems in development of commercial health insurance. These shall be done through coordination, under the leadership of the State Council and the local departments for deepening reform of the system of medical care and public health at all levels. The competent departments concerned shall, in accordance with the requirement of these Opinions, formulate support measures in a timely manner. The People’s Governments of all provinces (including autonomous regions and municipalities directly under the Central Government) shall, in accordance with the realities, formulate specific opinions on implementation thereof, to promote sustained and healthy development of the commercial health insurance services industry in their respective regions.41 (2) Guidance of investment in the health services industry. The advantages of long-term investment in commercial health insurance funds shall be brought into play, and commercial insurance institutions shall be encouraged to invest in establishing new service institutions for medical care, community provision for the aged, physical examination, and so on and undertake to provide services in connection with commercial insurance, in accordance with the principles of compliance with law, steadfastness, and safety, and by making investment in new construction thereof, and so on. All regions shall bring the demand for development of the health services industry under overall planning and strengthen the work of protection of land use for commercial health insurance with the nature of public interests.42 (3) Improvement of support policies, including finance and taxation. By reference to foreign experience and in light of the realities in China, tax policies relevant to health insurance shall be improved. Policies on insurance guarantee funds with respect to the business of critical illness insurance for urban and rural residents shall be improved on the basis of research. Policies on corporate income tax with respect to supplementary medical insurance premiums payable by enterprises for their employees shall be implemented and improved. Distribution of resources by the market shall be adhered to. Social capital, including capital of the health services industry and foreign-funded health insurance companies, shall be encouraged to make investment in establishing specialized health insurance companies. Development of the various types of specialized health insurance institutions shall be supported.43 (4) Creation of a favourable social atmosphere. Vigorous efforts shall be made to popularize knowledge on commercial health insurance to enhance the awareness of the people about health insurance. With priority given to satisfaction of the demand of the people for non-basic medical care and 41 Ibid., s.6(1). 42 Ibid., s.6(2). 43 Ibid., s.6(3).

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public health services with commercial health insurance, efforts for publicity thereof shall be strengthened, and successful experience therein shall be actively generalized. Channels and mechanisms for disclosure of information on commercial health insurance shall be improved, and systems of supervision with participation by multiple parties in society shall be established to voluntarily accept social supervision. Self-regulation by the commercial health insurance industry shall be strengthened, and fair competition and cooperation shall be advocated to jointly create a favourable atmosphere for the development of commercial health insurance.44 16.5 The Measures for the Administration of Health Insurance The main regulation for health insurance is the Measures for Administration of Health Insurance. The Measures was first enacted by the CIRC on 7 August 2006 and became effective on 1 September 2006. With the development of health insurance in China for the last 14 years, many changes in the health insurance industry have taken place, so the 2006 version of the Measures was not suitable for the rapid development. In order to further strengthen supervision and effectively meet the people’s needs for health protection, the CBIRC amended the 2006 version of the Measures. The new version of the Measures for the Administration of Health Insurance was issued on 31 October 2019 and became effective on 1 December 2019 (hereinafter, the Measures 2019).45 The Measures 2019 consists of 72 articles in nine chapters. The first chapter (arts. 1–7) sets out the general rules, the purposes, and application scope of the Measures and stipulates the classification and related concepts of health insurance. Chapter 2 (arts. 8–11) clarifies the operating conditions of health insurance and sets out requirements for the professional capabilities of insurance companies. Chapter 3 (arts. 12–34) and Chapter 4 (arts. 35 to 46) provide rules on the development and design of health insurance products, record approval, sales, and claims management. Chapter 5 (arts. 47–54) clarifies and unifies the assessment rules for the reserves of the health insurance business of property insurance and life insurance companies. Chapter 6 (arts. 55–62) regulates the provision of health management services by insurance companies and encourages the integration of health insurance and health management services. Chapters 7 to Chapter 9 (arts. 63–72) provide for reinsurance management, legal liability, and supplemental rules. 16.5.1 General provisions For purposes of promoting the development of health insurance, regulating the business activities of health insurance, protecting the lawful rights and interests of the parties in health insurance activities, and enhancing the health guarantee level of the public, the Measures 2019 were developed according to the Insurance Law and other laws and administrative regulations.46 44 Ibid., s.6(4). 45 The CBIRC No. 3 [2019]. 46 The Measures for the Administration of Health Insurance 2019, art.1.

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As an important component of the multilevel healthcare guarantee system of the state, health insurance shall stick to the orientation of health insurance as guarantee, encourage insurance companies to follow the principles of prudence and stability, continuously enrich health insurance products, improve health insurance services, expand the coverage of health insurance, reduce prices and operating costs of health insurance through effective management and market competition, and improve the guarantee level.47 Health insurance is classified into long-term health insurance and short-term health insurance according to the insurance period. “Long-term health insurance” means the health insurance with its insurance period exceeding one year or that which contains a guaranteed renewal insurance clause though the insurance period does not exceed one year. The insurance period of long-term nursing insurance shall not be less than five years. “Short-term health insurance” means the health insurance with the insurance period of not more than one year and without the guaranteed renewal insurance clause. “Guaranteed renewal insurance clause” means the contractual stipulation that an insurance company must continue insurance underwriting according to the original clause and agreed premium rate if the proposer applies for renewal prior to the expiration of the preceding insurance period.48 Medical insurance is classified into compensatory medical insurance and rationed payment medical insurance according to the nature of the payment of insurance premiums. Compensatory medical insurance means the medical insurance under which the amount of insurance premium is determined according to the agreed standards on the basis of the insured’s actual medical and rehabilitation expenses. Rationed payment medical insurance means the medical insurance whereby an insurance premium is paid on the basis of the agreed amount.The payment amount of compensatory medical insurance shall not exceed the insured’s actual medical rehabilitation expenses.49 The CBIRC shall, according to the laws and administrative regulations, and as authorized by the State Council, supervise and administer insurance companies’ activities of operating health insurance.50 47 Ibid., art.3 48 Article 4 of the Measures 2019 provides definitions: “Health insurance” means insurance whereby an insurance company makes indemnity payment to an insured due to his or her health cause or occurrence of the medical treatment, mainly including medical insurance, disease insurance, disability income loss insurance, care insurance and medical accident insurance, among others. “Medical insurance” means the insurance providing guarantee for an insured’s medical treatment, and recovery, among others, as stipulated in the insurance contract. “Disease insurance” means the insurance providing protection for an insured in the occurrence of diseases as stipulated in the insurance contract. “Disability income loss insurance” means the insurance providing guarantee for income reduction or interruption of an insured within a certain period of time and taking loss of working ability caused by the diseases or accidental injuries stipulated in the insurance contract as the condition for the payment of insurance premium. “Nursing insurance” means the insurance providing guarantee for the nursing needs caused by impediments in daily living ability of an insured as stipulated in the insurance contract. “Medical accident insurance” means the insurance providing guarantee for an insured in the occurrence of medical damages not attributable to medical institutions or medical personnel as stipulated in the insurance contract.

49 The Measures for the Administration of Health Insurance 2019, art.5. 50 Ibid., art.6.

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Except as otherwise prescribed by the policies of the state, the policy-related insurance business concerning health insurance carried out by insurance companies shall be implemented, mutatis mutandis, to the Measures 2019. The Measures 2019 is not applicable to the entrustment management services for which insurance companies do not undertake insurance risks.51 16.5.2 Business operation and management Health insurance companies, life insurance companies, and pension insurance companies established according to the law may, with the approval of the CBIRC, engage in the health insurance business. Insurance companies other than those prescribed in the preceding paragraph may, with the approval of the CBIRC, engage in the short-term health insurance business.52 To engage in the health insurance business, insurance companies, except for specialized health insurance companies, shall establish specialized health insurance business departments. A health insurance business department shall continuously meet the following conditions:53 It has established a separate accounting system for health insurance business, an actuarial system and risk management system for health insurance, an underwriting system and claim settlement system for health insurance, a data management and information disclosure system for health insurance, and a relatively independent health insurance information management system with complete functions. It has employed actuarial, underwriting, and claims assessment personnel with professional knowledge in health insurance and management personnel with medical education backgrounds. It shall meet other conditions prescribed by the CBIRC. An insurance company shall provide professional training on health insurance for its practitioners engaging in underwriting, claim settlement, and sale of health insurance.54 An insurance company shall strengthen the protection of the privacy of insurance proposers, the insureds, and beneficiaries and establish an information management and confidentiality system for health insurance customers.55 16.5.3 Management of insurance products An insurance company shall, in accordance with the relevant provisions of the CBIRC, submit the insurance clauses and premium rates of health insurance drafted for examination and approval or recordation. Health insurance products enjoying preferential tax shall comply with the relevant policies and supervision requirements in terms of product design, the rate of payment for losses, and other aspects.56 Where a health insurance product developed by an insurance company includes two or more health guarantee liabilities, the chief actuary shall judge the primary 51 52 53 54 55 56

Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12.

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liability under the general actuarial principles and determine the product type according to the primary liability.57 Medical accident insurance and long-term disease insurance products may include death insurance liability.The amount of death benefit in long-term disease insurance shall not exceed the maximum benefit amount for diseases. Other health insurance products shall not include death insurance liability, except the death insurance liability resulting from diseases. Medical insurance, disease insurance, and medical accident insurance products shall not include any survival insurance liability.58 A cooling-off period shall be set in long-term health insurance products, and the rights of insurance applicants within the cooling-off period shall be specified in the insurance clauses. The cooling-off period of a long-term health insurance product shall not be less than 15 days.59 An insurance company shall sell short-term individual health insurance products in strict accordance with the product rates approved or recorded.60 Except family genetic history, an insurance company shall not set different pricing on the basis of an insured’s other genetic information or genetic testing materials.61 The product parameters of short-term group health insurance products may be adjusted. “Product parameters” means insurance amount, minimum amount, proportion of compensation, excluded liabilities, liability waiting period, and other matters in insurance product clauses that are rationally adjusted in light of the true circumstances of the insured group.62 When submitting short-term group health insurance products with adjustable parameters for examination and approval or recordation, an insurance company shall submit the application materials, including the methods of adjusting the product parameters, and the chief actuary shall affix a signature thereto for confirmation under the principle of prudence.63 An insurance company selling short-term group health insurance products with adjustable parameters shall, according to the methods of adjusting the product parameters, its risk management level, and risk situation of the groups purchasing the insurance policies, calculate the corresponding insurance premium rates. The adjustment to the product parameters shall not change the methods of calculating the premium rates or the basic data required for the calculation of the premium rates.64 An insurance company that sells a short-term group health insurance product with adjustable parameters and that needs to change the methods of calculating the premium rates or the basic data required for the calculation of the premium rates shall resubmit the product for examination and approval or recordation.65

57 58 59 60 61 62 63 64 65

Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid. Ibid.

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An insurance company may stipulate the adjustment of the premium rates of long-term medical insurance products in its insurance products and specify the triggering conditions for adjustment to the premium rates.66 The premium rates of long-term medical insurance products shall be adjusted under the principles of fairness and rationality, and the triggering conditions shall be objective and universally applicable and comply with the relevant regulatory provisions.67 A health insurance product containing a guaranteed renewal clause shall specify the effective date of the guaranteed renewal clause. A health insurance product with a guaranteed renewal clause shall not stipulate that the insurance company has the right to reduce insurance liability and increase the scope of liability exemption at the time of renewal. An insurance company submitting a health insurance product containing a guaranteed renewal clause for examination and approval or recordation shall, in the product actuarial report, specify the pricing method and the method of calculating the liability reserves.68 When drafting the clauses of a medical insurance product, an insurance company shall respect the insured’s right to accept rational medical services and shall not set any requirements that are unreasonable or violate the general medical standards as the conditions for indemnity payment.69 The disease diagnosis standards stipulated by an insurance company in the clauses of a health insurance product shall comply with the generally recognized medical diagnosis standards and take the development trend of medical technologies and conditions into account. Where, after a contract of health insurance comes into force, an insured is diagnosed with illness according to the generally recognized medical diagnosis standards, the insurance company shall not refuse to make indemnity payment under the pretext that the diagnosis standards are inconsistent with that stipulated in the insurance contract.70 When designing a compensatory medical insurance product, an insurance company must distinguish between different situations such as whether an insured is under the coverage of free medical service, basic medical insurance, or other compensatory medical insurance so as to make a difference in terms of insurance clauses, premium rates, compensation amount, and other aspects.71 An insured covered by more than one effective compensatory medical insurance policy concurrently may decide the order of applying for claim settlement independently.72 An insurance company may reach an agreement with an insurance applicant that indemnity payment shall be made under the premise that medical treatment is received in a designated medical institution. An insurance company shall designate medical institutions under the principles of providing facilitation to insureds and rational administration of medical costs, direct insureds to rationally use medical 66 67 68 69 70 71 72

Ibid., art.20. Ibid. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25.

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resources to save medical expenses and expenditures, and effectively make explanation and interpretation for insurance applicants and insureds.73 The waiting period for disease insurance, medical insurance, and nursing insurance products shall not exceed 180 days.74 Appropriate preferences shall be provided for poverty-stricken populations in pricing, payment conditions, scope of guarantee, and other aspects of a medical insurance product and shall be specified in writing.75 The survival insurance benefits paid before the expiry of the insurance period of a nursing insurance product shall be paid under the conditions of care needs caused by daily life disability of the insured as stipulated in the insurance contract.76 An insurance company shall be encouraged to develop medical insurance products and ensure expenditures for the application of new drugs, new medical devices, and new diagnosis and treatment methods in medical services.77 An insurance company shall be encouraged to adopt new technologies such as big data to improve the risk management level. An insurance company may also, using the internet and other information technology means, review the insured’s digital materials for settlement of claims, simplify the procedures for settlement of claims, and improve service efficiency.78 An insurance company shall, on the basis of the actual compensation experience of health insurance products, trace and analyze the pricing of products, revise the premium rates of the newly sold health insurance products in a timely manner, and conduct examination and approval or recordation in accordance with the relevant provisions of the CBIRC.79 An insurance company shall be encouraged to provide innovative health insurance products to meet the multilevel diversified health guarantee needs of the public.80 Innovative health insurance products developed by an insurance company shall comply with the Insurance Law and the basic theories of insurance and be submitted to the CBIRC for examination and approval or recordation according to the relevant provisions.81 16.5.4 Sales management When selling health insurance products, an insurance company shall strictly implement the insurance clauses and premium rates for which the formalities of examination and approval or recordation have been undergone.82 No insurance company may refuse to provide health insurance products for which the formalities of examination and approval or recordation have been undergone, 73 74 75 76 77 78 79 80 81 82

Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35.

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except as otherwise specified by legal reasons or separately stipulated by certain clauses. An insurance company shall not force an insurance applicant to buy any other product in the sale of health insurance products.83 An insurance company shall not entrust any medical institution or medical care personnel with the selling of any health insurance product.84 An insurance company selling health insurance products shall neither illegally collect nor obtain any genetic information or genetic testing materials of any insured except the family’s genetic history, nor require the insurance applicant, the insured, or the beneficiary to provide the aforesaid information. An insurance company shall not take any insured’s genetic information or genetic testing materials except the family’s genetic history as the underwriting conditions.85 When selling a health insurance product, an insurance company shall explain the contents of the insurance contract to an insurance applicant in written or verbal form and give a specific notification on the following matters, and the insurance applicant shall provide confirmation:86 (1) (2) (3) (4) (5) (6) (7) (8)

the insurance liabilities; the mitigation or exemption of the insurance liability; the waiting period of the insurance liabilities; the cooling-off period of an insurance contract and the relevant rights and obligations of the insurance applicant; whether guaranteed renewal is provided and the effective time of renewal; the procedures for settlement of claims and the requirements for the claim settlement documents; the insurance period of each product in the portfolio of health insurance products; and other matters to be notified as prescribed by the CBIRC.

When selling health insurance products, an insurance company shall not magnify the insurance coverage scope, conceal the liability exemption, or mislead insurance applicants or insureds.87 Where an applicant or an insured raises an inquiry on such professional terms as insurance, medical care, and disease in the insurance clauses, the insurance company shall make an explanation in clear and easy-to-understand language.88 An insurance company selling compensatory medical insurance shall inquire of an insurance applicant about whether the insured is under the coverage of free medical service, basic medical insurance, or other compensatory medical insurance, and the insurance applicant shall honestly inform the insurance company.89 An insurance company shall explain to the insurance applicant the legal consequences of failure to honestly inform the insurer and shall effectively keep relevant 83 84 85 86 87 88 89

Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid. Ibid., art.41.

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records. An insurance company shall not induce any insurance applicant to repeatedly purchase any compensatory medical insurance product with the identical or similar guarantee functions for the same insured.90 An insurance company selling medical insurance shall notify insurance applicants of the list of agreed medical institutions or the qualification requirements and provide inquiry services. An insurance company that has changed agreed medical institutions shall notify insurance applicants or insureds in a timely manner.91 Where an insurance company sells health insurance products without any guaranteed renewal clause in the form of additional insurance, the insurance duration of the additional insurance shall not be less than that of the main insurance.92 An insurance company selling long-term individual medical insurance products shall pay return visits to insurance applicants during the cooling-off period. Where an insurance company finds that an insurance applicant has been misled, it shall effectively make explanations and expressly notify insurance applicants of the right to terminate the insurance contracts according to the law.93 An insurance company underwriting group health insurance shall notify each insured of the participation in insurance and relevant rights and interests in written or verbal form.94 Where an insurance applicant terminates a group health insurance contract, the insurance company shall require the insurance applicant to provide effective proof that the insureds have been notified of surrender and refund the surrender value via bank transfer or the original payment route to the payment account or other accounts of the insurance applicant according to the provisions of the CBIRC on surrender of group insurance.95 16.5.5 Evaluation of reserves An insurance company offering health insurance shall, according to the relevant provisions of these Measures, submit the actuarial report or the report on assessment of reserves of the previous year.96 For a claim that an insurance accident has already occurred and an application for settlement of claims has been filed, but that has not been settled by the insurance company, the insurance company shall set aside the reserves for the outstanding losses that have already occurred and have been reported to the insurance company.97 The reserves for the outstanding loss that has already occurred and has been reported to the insurance company shall be prudently set aside by the case-by-case estimation method, average compensation method, and other reasonable methods.98

90 91 92 93 94 95 96 97 98

Ibid. Ibid., art.42. Ibid., art.43. Ibid., art.44. Ibid., art.45. Ibid., art.46. Ibid., art.47. Ibid., art.48. Ibid.

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An insurance company setting aside reserves for an outstanding loss that has already occurred and has been reported to the insurance company by an actuarial method other than the case-by-case estimation method shall report the basic data, parameters setting, and estimation method of the method in a detailed manner and explain the sources of the basic data, data quality, and reliability of the calculation results of the reserves.99 If the chief actuary of an insurance company cannot determine the reliability of the estimation method or the experience data of the relevant business is less than three years, the insurance company shall, on the basis of the amount of claims applied for, set aside reserve for the outstanding loss that has already occurred and has been reported to the insurance company.100 For the indemnity or payments for which an insurance accident has occurred but no claim has been applied for, the insurance company shall withdraw reserve for the outstanding loss that has already occurred and has not been reported to the insurance company.101 An insurance company shall, on the basis of the factors such as the nature of risks and experience data of the insurance type, adopt two of such methods as the chain ladder method, the average compensation method, the method of progression of reserve, the B-F method, and the compensation rate method at a minimum to evaluate the reserve for the outstanding loss that has already occurred and has not been reported to the insurance company and determine the optimal evaluation value on the basis of the maximum value of the evaluation results.102 An insurance company shall report the basic data, calculation methods, and parameter setting of the reserves for the outstanding loss that has already occurred and has not been reported to the insurance company in a detailed manner and explain the sources of the basic data, data quality, and reliability of the calculation results of the reserves.103 Where the chief actuary of an insurance company believes that the data basis cannot ensure the reliability of the calculation results, or the past experience data of relevant business contains data of less than three years, reserve for the outstanding loss that has already occurred and has not been reported to the insurance company shall be set aside on the basis of not lower than 10% of the actual indemnity in that fiscal year.104 For short-term health insurance, an insurance company shall withdraw unearned premium reserve. Unearned premium reserve for short-term health insurance may be withdrawn by one of the following methods:105 (1) 1/24 gross premium method (withdrawal on a monthly basis). (2) 1/365 gross premium method (withdrawal on a daily basis).

99 100 101 102 103 104 105

Ibid. Ibid. Ibid., art.49. Ibid. Ibid. Ibid. Ibid., art.50.

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(3) Another more prudent and reasonable method may be adopted on the basis of the risk distribution. The unearned premium reserve withdrawn shall not be lower than the results obtained from the methods specified in (1) and (2), whichever is smaller. The withdrawal amount of the unearned premium reserve for a short-term health insurance shall not be lower than the following two results, whichever is larger:106 (1) the balance after deducting the relevant return on investment from the anticipated future indemnities and expenses; or (2) the value of assumed surrender of all insurance policies on the evaluation date of liability reserve. Where the unearned premium reserve is inadequate, insurance premium inadequacy reserve shall be withdrawn to make up for the margin between the unearned premium reserve and the larger amount in the preceding two items.107 For the purpose of these Measures, liability reserve means the liability reserve for business-related reports.The withdrawal of liability reserves for financial reports and liability reserves for solvency reports shall be governed by the relevant provisions of the Ministry of Finance and the CBIRC.108 The methods of withdrawing unearned premium reserve of long-term health insurance shall be governed by the relevant provisions of the CBIRC.109 An insurance company shall respectively report the results of the reserves withdrawal prior to and subsequent to reinsurance to the CBIRC.110 16.5.6 Health management services and cooperation An insurance company may combine health insurance products with health management services and provide health risk assessment and intervention, disease prevention, physical examination, health consultation, health maintenance, management of chronic diseases, healthcare, and other services to reduce health risks and disease losses.111 An insurance company providing health management services may specify the contents of the relevant health management services in the insurance contract clauses or separately enter into a health management service contract.112 The costs shared by the health management services provided by health insurance products shall not exceed 20% of the net premium. Services that exceed the aforesaid limits shall be priced separately and not included in the premium. The price of the health management service shall be specified in the contract.113

106 107 108 109 110 111 112 113

Ibid., art.51. Ibid. Ibid., art.52. Ibid., art.53. Ibid., art.54. Ibid., art.55. Ibid., art.56. Ibid., art.57.

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To offer medical insurance, an insurance company shall strengthen cooperation with medical institutions, health management institutions, rehabilitation service agencies, and other institutions and provide insureds with quality and convenient medical services. An insurance company, for offering medical insurance, shall, according to the provisions of the relevant policy documents, supervise the authenticity and legitimacy of the medical treatments received by insureds and strengthen the administration of the rationality and necessity of medical expenses.114 An insurance company shall actively maximize the role of the health insurance rate adjustment mechanism on medical expenses and risk management and control, and reduce unreasonable medical expenses and expenditures.115 An insurance company shall actively maximize its role as a third party in the doctor-patient relationship, assist in easing the doctor-patient information asymmetry, and promote the resolution of disputes between doctors and patients.116 The cooperation between an insurance company and a medical institution or a health management institution shall not damage the lawful rights and interests of any insured.117 An insurance company shall, according to the laws and administrative regulations, sufficiently protect customers’ privacy and data security and conduct necessary information interconnection and data sharing with medical institutions and basic medical insurance departments, among others, on the basis of the scope of services and service objects.118 16.5.7 Management of reinsurance An insurance company shall take reinsurance of health insurance in compliance with the Insurance Law and the provisions of the CBIRC on the administration of reinsurance.119 Except branch offices of reinsurance companies, a branch office of an insurance company shall not conduct ceded-in reinsurance of health insurance.120 16.5.8 Legal liability An insurance company and its branch office that violate these Measures shall be subject to punishment imposed by the CBIRC and its dispatched agency according to the laws and administrative regulations. The company and its branch office shall be ordered by the CBIRC and its dispatched agency to take corrective action and be given a warning where there are no provisions in the laws and administrative regulations, be subject to a fine of not less than the amount of illegal gains, if any, no more than three times the illegal gains, to the extent of 114 115 116 117 118 119 120

Ibid., art.58. Ibid., art.59. Ibid., art.60. Ibid., art.61. Ibid., art.62. Ibid., art.63. Ibid., art.64.

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¥30,000 yuan at maximum, or be subject to a fine of no more than ¥10,000 yuan where there are no illegal gains. The company and its branch office shall also be transferred to the judicial organ for criminal investigation, where it is suspected of any crime.121 An employee of an insurance company and an employee of a branch office of an insurance company that violate these Measures shall be subject to punishment imposed upon by the CBIRC and its dispatched agency according to the laws and administrative regulations; shall be ordered by the CBIRC and its dispatched agency to take corrective action and be given a warning where there are no provisions in the laws and administrative regulations; be subject to a fine of no less than the amount of illegal gains, if any, nor more than three times the illegal gains, to the extent of ¥30,000 yuan at maximum, or be subject to a fine of no more than ¥10,000 yuan where there are no illegal gains; and be transferred to the judicial organ for criminal investigation, where they are suspected of any crime.122 The health insurance business run by mutual insurance organizations shall be governed by these Measures.123 The sale of health insurance products by insurance intermediary institutions and their practicing personnel shall be governed by these Measures.124 The sale of health insurance products through channels such as banks and postal offices shall be governed by the provisions of the relevant regulatory authorities.125 16.5.9 Significant changes of the Measures 2019 As compared with the 2006 version of the Measures, the Measures 2019 has made ten significant changes. First, medical accident insurance becomes a member of health insurance. Article 2 of the Measures 2019 includes medical accident insurance in the definition of health insurance. Medical accident insurance refers to the insurance that provides protection for the insured in the event of medical damage not attributable to medical institutions or medical personnel as stipulated in the insurance contract. Second, under certain conditions, the rate of long-term health insurance products can be adjusted. Article 20 of the Measures 2019 provides that an insurance company may stipulate a rate adjustment clause for long-term health insurance products and clearly indicate the trigger conditions for the rate adjustment. Longterm health insurance product rate adjustments should follow the principles of fairness and reasonableness, and the triggering conditions should be objective and universally applicable and resubmitted for approval or filing. Third, the cooling off period has increased from ten days to 15 days. Article 15 of the Measured 2019 stipulates that long-term health insurance products shall have a contract cooling off period, and the insurance clause shall specify the rights

121 122 123 124 125

Ibid., art.65. Ibid., art.66. Ibid., art.67. Ibid., art.68. Ibid., art.69.

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of the policyholder during that period. The cooling off period shall not be fewer than 15 days. Fourth, short-term health insurance cannot guarantee renewal, and property insurance companies can only operate short-term health insurance. Short-term health insurance means the health insurance with the insurance period of not more than one year and without the guaranteed renewal insurance clause.126 Fifth, health insurance products may not be compulsorily sold with other products. An insurance company selling health insurance products shall strictly implement the insurance clauses and insurance rates approved or filed by the CBIRC.127 Health insurance products that have been approved or filed shall not be refused by insurance companies unless otherwise stipulated by statutory reasons and terms. Insurance companies that sell health insurance products may not force the proposer to buy other products.128 Six, the Measures 2019 encourages insurance companies to help poor consumers in purchasing health insurance. Appropriate preferences shall be provided for poverty-stricken populations in pricing, payment conditions, scope of guarantee, and other aspects of a medical insurance product and shall be specified in writing.129 Seven, it is forbidden to use genetic testing materials to differentiate pricing for consumers. Article 38 of the Measures 2019 provides that insurance companies selling health insurance products shall not illegally collect and obtain genetic information and genetic testing materials of the insured in addition to the family genetic history, nor shall they require the insured or the beneficiary to provide such information. It shall not take any insured’s genetic information or genetic testing materials except for the family’s genetic history as the underwriting conditions.130 Eight, insurance companies are encouraged to develop medical insurance products to guarantee expenditures for use of new drugs, new medical devices, and new diagnosis and treatment methods in medical services.131 Insurance companies are encouraged to provide innovative health insurance products to meet the multilevel and diverse health protection needs of the people.132 Nine, insurance companies are encouraged to adopt new technologies such as big data to improve risk management.133 Ten, the cost of health management services has increased from 12 to 20%. This is the major change. Article 57 of the Measures 2019 provides that the cost of health insurance products providing health management services shall not exceed 20% of the net insurance premium. Services exceeding the upper limit shall be priced separately, not included in the insurance premium, and the price of health management services shall be clearly stated in the contract.

126 127 128 129 130 131 132 133

The Measures for the Administration of Health Insurance 2019, art.4. Ibid., art.35. Ibid., art.36. Ibid., art.28. Ibid., art.38. Ibid., art.30. Ibid., art.33. Ibid., arts.31, 32, 33, and 59.

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In addition, it is for the first time that the Measures 2019 includes a special chapter on health management services and cooperation, which clarifies the main contents of health management, and its relationship with health insurance. Insurance companies can combine health insurance products with health management services to provide health risk assessment and intervention, disease prevention, health check-ups, health consultation, health maintenance, chronic disease management, health care, and other services to reduce health risks and reduce disease losses. 16.6 Health insurance business with individual tax preferences In order to support and promote the business of commercial health insurance, an individual income tax preference programme is put into operation in China. 16.6.1 An overview of the relevant regulatory rules for the health insurance business with individual tax preferences On 8 May 2015, the Ministry of Finance, the State Administration of Taxation, and the CIRC jointly issued the Notice of Carrying out Commercial Health Insurance Pilot Programme with Individual Income Tax Preference 2015.134 On 27 November 2015, the Ministry of Finance, the State Administration of Taxation, and the CIRC jointly issued the Notice on the Implementation of the Pilot Programme of the Individual Income Tax Policy for Commercial Health Insurance 2015.135 Following the aforesaid two Notices, the Pilot Programme was then carried out in Beijing, Shanghai, Tianjin, Chongqing, and one chosen city in each province or autonomous region. The core of the Pilot Programme is the tax preference for purchasing health insurance products. For the expenditure of individuals who purchase commercial health insurance products in accordance with the Notice (the Ministry of Finance No.56 [2015]) in the pilot area, it is allowed to deduct a certain amount before tax when calculating the taxable income in the current year (month). The deduction limit is ¥2400 yuan per year (or ¥200 yuan per month). The expenditures of enterprises and institutions in the pilot areas to organize and purchase commercial health insurance products for employees in a unified manner are separately included in the employees’ personal salaries and wages and deducted according to the limits just stated as if they were purchased by individuals. The deduction limit of ¥2400 yuan per year (or ¥200 yuan per month) is the deduction in addition to the standard deduction of expenses stipulated by the personal income tax law.136 To provide detailed rules for the commercial health insurance Pilot Programme, the CIRC issued three sets of regulations. 134 The Ministry of Finance No. 56 [2015], which is now ineffective 135 The Ministry of Finance No. 126 [2015], which is now ineffective. 136 The Notice of Carrying out Commercial Health Insurance Pilot Programme with Individual Income Tax Preference 2015, s.1.

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On 10 August 2015, the CIRC issued the Notice on Issuing the Interim Measures for the Administration of the Health Insurance Business with Individual Tax Preferences 2015 (hereinafter, the Measures 2015).137 This is the major regulation for the practice of the individual tax preferences for purchasing health insurance products in China and is considered in detail in the subsection 16.6.2. On 14 December 2015, the CIRC issued the Notice of Issuing the Guidance Framework and Model Clauses of Individual Tax Preferential Health Insurance Products 2015.138 In this Notice, the individual tax-preference health insurance product guidance framework and the individual tax-preference health insurance (universal) model A, B, and C model clauses were issued to insurance companies which were requested to design the individual tax-preference health insurance products in accordance with the relevant regulations and report to the CIRC for approval. On 4 January 2016, the CIRC General Office issued the Notice on Matters concerning the Health Insurance Business with Individual Tax Preferences 2016.139 This Notice is considered in detail in the subsection 16.6.3. After the completion of the Pilot Programme, on 28 April 2017, the Ministry of Finance, the State Administration of Taxation, and the CIRC jointly issued the Notice on the Promotion of the Pilot Policy for Commercial Health Insurance with Individual Tax Preference to Nationwide Implementation 2017.140 After the issuance of the Notice 2017, the programme of commercial health insurance with individual tax-preference has been carried out nationwide in China. 16.6.2 Administration of the health insurance business with individual tax preferences In this subsection, we consider the Interim Measures for the Administration of the Health Insurance Business with Individual Tax Preferences 2015 (the Measures 2015).141 “Individual tax-preference health insurance” refers to the commercial health insurance in compliance with the provisions of the Measures 2015 which is purchased by an individual in a pilot area.142 (a) Requirements for business operations An insurance company that engages in the individual tax-preference health insurance business shall:143 137 Bao Jian Fa No. 82 [2015]. 138 Bao Jian Fa No. 118 [2015], issued on 14 December 2015 (see accessed on 14 October 2020). 139 The CIRC General Office No. 1 [2016]. 140 The Ministry of Finance No. 39 [2017]; the Notice 2017 abolished the two previous Notices.They were the Notice of Carrying out Commercial Health Insurance Pilot Programme with Individual Income Tax Preference (the Ministry of Finance No. 56 [2015] and the Notice on the Implementation of the Pilot Programme of the Individual Income Tax Policy for Commercial Health Insurance (the Ministry of Finance No. 126 [2015]). 141 Bao Jian Fa No. 82 [2015]. 142 The Notice of the CIRC on Issuing the Interim Measures for the Administration of the Health Insurance Business with Individual Tax Preferences 2015, art.2. 143 Ibid., art.5.

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(1) comply with the administrative provisions on the solvency of insurance companies, and its solvency adequacy ratios at the end of last year and at the end of the latest quarter are not less than 150%; (2) have no record of any major administrative penalty in the last three years; (3) have established a health insurance business division if it is a personal insurance company other than a professional health insurance company; (4) have a relatively independent health insurance information management system, which is integrated with the commercial health insurance information platform; (5) have been staffed with a team of professionals, with no less than 50% of the staff members in its health insurance business division having working experience in the health insurance business, and not less than 30% of the same shall have medical background; and (6) meet other conditions as required by the CBIRC. The CBIRC shall, according to these Measures 2015, publish and update in a timely manner the name-list of the head offices of the insurance companies that comply with the requirements of art.5 mentioned earlier.144 (b) Product management The design of individual tax-preference health insurance products shall observe the principles of providing protection, reasonable pricing, and business operations with a limited profit.145 An insurance company shall engage in the individual tax-preference health insurance according to the long-term health insurance requirements, shall not refuse to insure the insured for his or her past medical history, and shall guarantee the renewal of insurance policies.146 Individual tax-preference health insurance products shall adopt the universal insurance mode, which includes two insurance liabilities, namely, medical insurance and personal account accumulation.147 Medical insurance shall integrate with basic medical insurance and supplementary medical insurance and shall be used to compensate the insured for the medical expenses after the insured’s obtaining the compensation from the basic medical insurance and supplementary medical insurance. The medical expenses of the insured shall not be reimbursed repeatedly.148 Accumulative amounts in individual accounts may only be used for the purchase of commercial health insurance by an individual and the individual’s payment for medical expenses after his or her retirement.149 The insured amount of medical insurance shall not be less than ¥200,000 yuan. Where any person with illness purchases medical insurance for the first time, the

144 145 146 147 148 149

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid. Ibid.

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insured amount may be reduced appropriately. No deductible amount may be set for medical insurance. The proportion of the medical expenses to be borne by the insured as agreed on in the insurance contract shall be no more than 10% of the total medical expenses.150 A simple loss ratio of medical insurance shall be no less than 80%. Where a simple loss ratio of medical insurance is lower than 80%, the balance thereof shall be returned to the individual accounts of the insured.151 An insurance company shall not charge any initial fees or other administrative fees from an individual account.152 The individual tax-preference health insurance products developed by an insurance company shall be indicated with the words “Individual Tax-Preference Health Insurance,” and be reported to the CBIRC for approval.153 (c) Business administration An insurance company shall verify the identity and tax payment information of the proposer and shall not underwrite an insurance policy unless the proposer meets the relevant conditions.154 An insurance company shall, after acknowledging receipt of the premiums paid by the proposer, issue a special document for individual tax-preference health insurance to the proposer, which is used for the pre-tax deduction of individual income tax.155 An insurance company shall not provide insurance policy loan services concerning individual tax-preference health insurance.156 An insurance company shall not force, or require in disguised form, proposers or the insureds to change their insurance companies, nor maliciously compete for customers from any other insurance company.157 An insurance company shall not disperse the risks of the individual tax-preference health insurance business by means of financial reinsurance.158 An insurance company shall not mislead the public, narrow down insurance coverage, or conduct compulsory or tied-in sale of other commercial insurance products.159 An insurance company shall strengthen the training and administration of the salespeople engaged in the individual tax-preference health insurance business so as to improve their professional ethics and business quality but shall not lead or indulge salespeople to participate in any activities in breach of the principle of good faith.160 150 151 152 153 154 155 156 157 158 159 160

Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20.

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An insurance company shall provide a policyholder with such information and materials as purchase of insurance, policy status, account information, payment frequency, payment amount, and universal account value and earnings in appropriate manners at least once each quarter and provide corresponding inquiry services so as to effectively safeguard the legitimate rights and interests of the insured.161 An insurance company shall strengthen cooperation with medical institutions, and, based on the norms for diagnosis and treatment, clinical pathway, and other standards or provisions, effectively conduct supervision and administration of the medical practices through medical inspection, arrangement of station and hospitalbased personnel, and random inspection of the medical cases of illness, and so on.162 An insurance company shall review and pay for the medical expenses of the insured in strict accordance with the relevant local policies and provisions and the insurance contract and timely report violations of regulations such as seeking medical treatment under a false name, false hospitalization, or overtreatment, and so on to the proposer and the relevant government departments.163 (d) Financial management An insurance company shall conduct separate accounting for the individual taxpreference health insurance business.164 An insurance company shall strengthen funds management for the individual tax-preference health insurance and strictly appropriate and use funds in accordance with the requirements for separating revenues from expenditures.165 An insurance company shall separately gather the premium income, compensation expenses, business operation and management expenses, and profits and losses incurred by the individual tax-preference health insurance and separately issue profit statements, cost breakdowns, and reports on the individual tax-preference health insurance business.166 An insurance company, in accordance with the relevant regulatory provisions on expense apportionment, shall determine in a reasonable manner the person to whom such expenses are attributed, shall gather and apportion expenses in real terms, and shall not misappropriate the costs of other business or apportion the costs of other business to the individual tax-preference health insurance business.167 An insurance company shall truthfully disburse sales and management expenses and other operation expenses incurred by the operation of the individual taxpreference health insurance business, constantly strengthen the control of expenses, effectively improve expense management capabilities, and reduce business operation costs.168

161 162 163 164 165 166 167 168

Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28.

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(e) Information system management The CBIRC shall organize the development of a uniform commercial health insurance information platform throughout the industry which shall feature the following functions:169 (1) It supports the underwriting, claim settlement, and transfer of the individual tax-preference health insurance business, among others. (2) It can submit the relevant statistical data to insurance regulatory authorities. (3) It supports a tax authority’s inspection on the authenticity of any insurance policy and the available amount of tax preference. (4) It can provide policyholders with the self-service policy information and account information inquiry services. (5) Other functions as required by the CBIRC. An insurance company shall strengthen the management and maintenance of the health insurance information system, establish and implement a strict confidentiality system, and strictly manage user authority so as to effectively protect the information security of the insured.170 An insurance company shall strengthen the accumulation and analysis of the data on the individual tax-preference health insurance business.171 An insurance company shall, in accordance with the requirements of the relevant insurance regulatory authority, submit the information on the operation of the individual tax-preference health insurance business and other relevant information and data.172 (f) Information disclosure An insurance company shall, in accordance with the relevant provisions of the CBIRC, disclose the information on the operation of the individual tax-preference health insurance business.173 An insurance company shall disclose on a regular basis to the public the insurance liabilities, service contents, service commitments, the way to make inquiries and complaints, claims settlement processes and contact information of the individual tax-preference health insurance business. The insurance company shall also effectively safeguard the legitimate rights and interests of the insured and accept social supervision.174 An insurance company shall publish the interest rates of universal accounts of the individual tax-preference health insurance in accordance with the requirements of the CBIRC.175 The information disclosure materials provided by an insurance company shall be subject to the unified administration of the head office of the insurance company. 169 170 171 172 173 174 175

Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35.

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All insurance companies shall be responsible for the authenticity and integrity of the materials disclosed.176 (g) Supervision and administration The insurance regulatory authority shall supervise the business of insurance companies. An insurance company shall, in accordance with the relevant requirements, transmit the relevant information to the commercial health insurance information platform at an appropriate time.177 The operation of the individual tax-preference health insurance business shall be subject to the supervision from the local public finance, taxation, audit, other government departments, and the general public. Such supervision shall be conducted in an open and transparent manner.178 Where an insurance company violates any law or regulation in the individual tax-preference health insurance business, the insurance regulatory authority shall impose administrative penalties upon it in accordance with the Insurance Law and the relevant provisions of the CBIRC.179 Where an insurance company is lawfully dissolved, cancelled, or declared bankrupt, it shall conduct liquidation of the individual tax-preference health insurance business in accordance with the Insurance Law and other relevant laws.180 (h) Supplementary provisions For the purpose of the Measures 2015, “major administrative penalty” refers to one of the following administrative penalties imposed upon an insurance company:181 (1) (2) (3) (4) (5)

a single fine of ¥1.5 million yuan or more; restriction over the scope of business; order to stop accepting new business for one year or more; order to stop business for rectifications; revocation of the business license of a branch company at the level of a city under separate state planning or province; (6) removal of the chairman or general manager from his or her position or being banned from practicing in the industry; or (7) any other major administrative penalty as set forth by the CBIRC. “Commercial health insurance information platform” refers to a uniform information platform throughout the industry developed by China Insurance Information Technology Management Co., Ltd.182 The purchase of tax-preference health insurance products by a “non-taxpayer” group shall be determined by the insurance company at its own discretion.183 176 177 178 179 180 181 182 183

Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid., art.41. Ibid., art.42. Ibid., art.43.

993

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16.6.3 Matters concerning the health insurance business with individual tax preferences The Notice of the CIRC General Office on Matters concerning the Health Insurance Business with Individual Tax Preferences 2016184 was issued for the purpose of promoting the smooth implementation of the pilot program of individual income tax policies for commercial health insurance; it is still in force for the expansion of the programme to the whole country. The phrase “pilot programme” was used then but now means the programme. All insurance companies shall attach great importance to the pilot programme of individual income tax policies for commercial health insurance and fully comprehend the great significance of the pilot programme. Insurance companies that plan to participate in the pilot programme shall increase support, improve business flow, strengthen internal management, effectively conduct the beginning work, and ensure the implementation of the pilot programme in a sound and sustainable manner.185 The health insurance information management systems of insurance companies that plan to conduct the health insurance business with individual tax preferences shall be connected to the commercial health insurance information platform developed by China Insurance Information Technology Management Co., Ltd.; (hereinafter, the CIITC), and the certification materials on passing acceptance check shall be issued after testing and acceptance check by the CIITC.186 Insurance companies that plan to conduct the health insurance business with individual tax preferences shall, according to the relevant provisions, submit to the CBIRC a report on the operation of the health insurance business with individual tax preferences, together with the certification materials on passing acceptance check issued by the CIITC, and the content of the report shall be true, accurate, and well documented. The CBIRC will, according to the relevant provisions, issue and update in a timely manner the list of head offices of insurance companies meeting the requirements for conducting the health insurance business with individual tax preferences.187 Insurance companies in the list shall effectively undertake primary responsibility and in strict accordance with the product guideline framework and model clauses develop health insurance products with individual tax preferences based on their own business operation management capability and report to the CBIRC for approval under prescribed procedures.188 Insurance companies that conduct the health insurance business with individual tax preferences shall strengthen business management, ensure accurate information of the insured, and ensure “one insurance policy and one code for one person,” which means that one insured has one insurance contract and one tax preference identification code.189

184 The CIRC General Office No. 1 [2016]. 185 The Notice of the CIRC General Office on Matters concerning the Health Insurance Business with Individual Tax Preferences 2016, s.1. 186 Ibid., s.2. 187 Ibid., s.3. 188 Ibid., s.4. 189 Ibid., s.5.

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Insurance companies that conduct the health insurance business with individual tax preferences shall provide the insured with special insurance purchase documents and insurance contracts and indicate the tax preference identification code on the upper right corner of the first page of the body of insurance contracts and ensure an obvious and identifiable code.190 Insurance companies that conduct the health insurance business with individual tax preferences must obtain the consent of the insured.191 Insurance companies shall strengthen the publicity management of the health insurance business with individual tax preferences, and the form and content of publicity and the relevant policy interpretation shall strictly comply with the requirements of relevant documents; exaggeration and hype are prohibited.192 The CIITC shall guarantee the stable operation of the commercial health insurance information platform and ensure that the tax preference identification code of a contract on health insurance with individual tax preferences is unique.193 All local CBIRC offices shall, according to the requirements of relevant documents, actively coordinate with local public finance and tax authorities in resolving new problems that may occur in the implementation of the pilot programme so as to ensure the smooth implementation of the pilot programme.194 16.7 Critical illness insurance Critical illness insurance is regulated mainly by the following regulations: (1) Guiding Opinions on Carrying Out the Work of Critical Illness Insurance for Urban and Rural Residents 2012.195 (2) Opinions of the General Office of the State Council on the Comprehensive Implementation of Critical Illness Insurance for Urban and Rural Residents 2015 (hereinafter, the Opinions 2015).196 (3) The Notice of the CIRC on Issuing the Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013 (hereinafter, the Interim Measures 2013).197 (4) The Notice of the CIRC on Issuing the Interim Measures for the Bidding of Insurance Companies for the Critical Illness Insurance for Urban and Rural Residents and Other Rules 2016 (hereinafter, the Interim Measures and Other Rules 2016).198 The first two pieces are more principle-based and the last two are more detailed regulatory rules. In this section, we consider the Opinions 2015, the Interim Measures 2013, and the Interim Measures and other Rules 2016 in detail. 190 191 192 193 194 195 196 197 198

Ibid., s.6. Ibid., s.7. Ibid., s.8. Ibid., s.9. Ibid., s.10. National Development and Reform Commission No.2605 [2012]. The General Office of the State Council No. 57 [2015]. Bao Jian Fa No. 19 [2013]. Bao Jian Fa No. 86 [2016].

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16.7.1 Opinions of the General Office of the State Council on the Comprehensive Implementation of Critical Illness Insurance for Urban and Rural Residents 2015 The General Office of the State Council issued the Opinions on Comprehensively Implementing Critical Illness Insurance for Urban and Rural Residents on 28 July 2015. The Opinions set out the overall framework for the development of the critical illness insurance for urban and rural residents. In the Opinions 2015, the State Council states that critical illness insurance for urban and rural residents (hereinafter, critical illness insurance) is an expansion and extension of the basic medical security system and a new systematic arrangement that gives a further protection to residents if a large amount of medical expenses is incurred from their critical illness. Since its beginning, the pilot programme of critical illness insurance has advanced the coordinated reform of medical insurance, medical treatment, and medicine; promoted the combination of government leadership and allowing market mechanism to play its role; improved the management and operation efficiency of the basic medical security; and effectively eased the problem of poverty caused by illness. For the purposes of accelerating the advancement of the development of the critical illness insurance system, consolidating the bottom line of the national basic medical security and allowing more people to benefit, with the approval of the State Council, the following opinions are hereby issued. (a) Basic principles199 (1) Adhering to people-oriented security for critical illness. A critical illness insurance system shall be established and improved, the level and accessibility of services of critical illness security shall be improved, the health rights and interests of the people shall be protected in particular, and the fact that the people become impoverished or return to poverty resulting from illness shall be effectively avoided. (2) Adhering to overall coordination and coordinated policies. The connection between basic medical insurance, critical illness insurance, medical aid, illness emergency aid, commercial health insurance, charitable aid, and other systems shall be enhanced to play a role in coordination and mutual complementation, output sufficient security momentum, and form joint security force. (3) Adhering to government leadership and professional undertaking. While the functions of the government in policymaking, organization, coordination, supervision, management, and other aspects are strengthened, the mode of commercial insurance institutions undertaking critical illness insurance shall be adopted, and the role of market mechanism and the professional advantage of commercial insurance institutions shall be made use of to improve the efficiency, services, and quality of the critical illness insurance.

199 The 2015 Opinions, s.1.

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(4) Adhering to steady and gradual advancement and constant implementation. The level of critical illness insurance security shall adapt to social and economic development, medical consumption level, and burden tolerance of society, among others. Social mutual aid shall be strengthened, and a mechanism where government, individuals, and insurance institutions share critical illness risks shall be created. The adoption of measures suitable to local conditions and regulated operation shall be adhered to in order to achieve the steady and sound operation and sustainable development of critical illness insurance. (b) Improving the fundraising mechanism for critical illness insurance200 (1) Scientifically calculating the fundraising standards. All regions shall scientifically, meticulously, and effectively calculate funds based on the social and economic development, high medical costs incurred by critical illness, and fundraising ability and payment level of the basic medical insurance as well as the guarantee level of critical illness insurance and other factors and reasonably determine the fundraising standards of critical illness insurance. (2) Stabilizing fund sources. A certain proportion or amount from the basic medical insurance funds for urban and rural residents shall be withdrawn as the funds of critical illness insurance. Regions with a surplus of basic medical insurance funds for urban and rural residents shall make use of the surplus to raise funds of critical illness insurance; regions with an insufficient surplus or without a surplus shall make arrangements with the funds raised annually. The mechanism of multiple-channel fundraising for basic medical insurance for urban and rural residents shall be improved to ensure the sustainable development of the system. (3) Raising overall arrangements and plans. Critical illness insurance shall be subject to city-level (prefecture-level) overall arrangements and plans; provincial-level overall arrangements and plans or uniform policy and uniform organization and implementation in the whole province (autonomous region or municipality directly under the Central Government) shall be encouraged to improve the ability to resist risks. (c) Raising the level of critical illness insurance protection201 (1) Full coverage of urban and rural residents. The coverage of critical illness insurance is for the urban and rural residents who have participated in the basic medical insurance, and the scope of coverage is linked to the basic medical insurance of urban and rural residents. If the insured suffers from a critical illness and suffers from high medical expenses, the critical illness insurance will provide indemnity for the medical expenses borne by the insured after the basic medical insurance is paid in accordance with the relevant regulations. 200 Ibid., s.2. 201 Ibid., s.3.

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High medical expenses can be calculated on the basis that the cumulative medical expenses borne by the individual in the past year exceed the average of annual per capita disposable income of urban and rural residents announced by the local statistics department. According to the changes in the income of urban and rural residents, a dynamic adjustment mechanism shall be established to study and refine the scientifically defined criteria for critical illness, which are determined by the local government according to the actual situation. The specific scope of compliant medical expenses is determined by each province (region, city) and Xinjiang Production and Construction Corps based on actual conditions. (2) Gradual increase of the payment ratio. In 2015, the proportion of critical illness insurance payment should reach more than 50% of the medical expenses. With the continuous improvement of financing capacity and management level of critical illness insurance, the proportion of payment will be further increased, and the burden of personal medical expenses will be more effectively reduced.The proportion of critical illness insurance payment is formulated according to the level of medical expenses. The higher the medical expenses, the higher the payment proportion. Local governments to explore specific methods that are appropriate to the disadvantaged groups should be encouraged. The accuracy of the bottom-line protection of the critical illness insurance system should be improved. (d) Strengthening the connection of medical security systems202 The complementary linkage should be strengthened between basic medical insurance, critical illness insurance, medical assistance, disease emergency assistance, commercial health insurance and charity assistance. The division of labour should be clarified. Good connections in policy formulation, treatment payment, management services, and so on should be established. Local places where conditions permit should be encouraged to explore the establishment of critical illness insurance systems with unified policies covering employees, urban residents, and rural residents. A smooth transition should be promoted from new rural cooperative medical protection of critical illness to critical illness insurance system. A critical illness information notification system should be established to support the necessary information sharing between the commercial health insurance information system and the basic medical insurance and medical institution information systems. The insurance institutions underwriting critical illness insurance should get hold of the information in a timely manner of the medical expenses and payment of basic medical insurance for critical illness patients, strengthen the connection with the basic medical insurance handling services of urban and rural residents, and provide “one-stop” real-time settlement services to ensure that people can enjoy critical illness insurance treatment conveniently and in time. For patients who still have difficulty in paying their own expenses after payment of critical illness insurance, the civil affairs and other departments should implement relevant relief policies in a timely manner. 202 Ibid., s.4.

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(e) Standardizing critical illness insurance undertaking services203 (1) Supporting commercial insurance institutions to undertake major illness insurance. The local government’s human resources, social security, health and family planning, finance, and insurance regulatory departments jointly formulate basic policies for financing, payment scope, minimum payment ratio, medical treatment, and settlement management of critical illness insurance and seek public opinions through appropriate methods. In principle, commercial insurance institutions are selected through government bidding to undertake the critical illness insurance business. In the case where the insurance institutions cannot be determined through normal bidding, the local government shall determine the method for selecting the insurance institutions. According to the current regulations, the premium income of commercial insurance institutions undertaking critical illness insurance will be exempted from business tax and insurance business supervision fees. From 2015 to 2018, a trial exemption from insurance guarantee funds was implemented. (2) Standardizing critical illness insurance bidding and contracts management. Adhering to the principles of openness, fairness, justice, and good faith, the bidding mechanism should be established and improved, and the bidding procedures should be standardized. The bidding mainly includes the specific payment ratio, profit and loss ratio, equipped undertaking, management force and so on. Commercial insurance institutions that meet the basic access requirements of the insurance regulatory authorities voluntarily participate in bidding.The bid-inviting party shall sign an insurance contract with the winning commercial insurance institution stipulating the responsibilities, rights, and obligations of both parties, and the contract period shall not be less than three years in principle. Due to breach of the contract or other serious damage to the rights and interests of the insured, the contract can be terminated or cancelled in advance according to the agreement, and the liability can be investigated according to law. All localities should constantly improve the content of the contract and explore the formulation of a unified model contract for the whole province (region, city). (3) Establishing a dynamic adjustment mechanism for the balance of critical illness insurance income and expenditure and policy losses. Following the principles of balance between the incomes and expenditure, and narrow margin of profit, the profitability of commercial insurance institutions should be reasonably controlled. Commercial insurance institutions are required to return funds to the basic medical insurance fund for urban and rural residents where they have exceeded the contracted balance due to undertaking critical illness insurance business. When policy reasons such as the adjustment of basic medical insurance policies for urban and rural residents bring about losses to commercial insurance institutions, such losses shall be apportioned by the basic medical insurance fund and the commercial insurance institutions; the specific proportion should be stated in the insurance contract. 203 Ibid., s.5.

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(4) Continuously improving the ability and level of critical illness insurance management services. Fund management shall be standardized, and the premiums obtained by commercial insurance institutions undertaking critical illness insurance shall be accounted separately to ensure the safety and solvency of funds. Commercial insurance institutions should establish professional teams, strengthen professional capacity building, improve management service efficiency, optimize service processes, and provide more efficient and convenient services for the insureds. By taking advantage of the nationwide network of commercial insurance institutions, reimbursement procedures should be simplified to promote immediate settlement of medical insurance in different places. Commercial insurance institutions are encouraged to provide diversified health insurance products on the basis of undertaking the critical illness insurance business. (f) Strict supervision and management204 (1) Strengthening the supervision of the operation of critical illness insurance. Relevant departments should bear their respective responsibilities, coordinate and cooperate, strengthen service awareness, and effectively protect the rights and interests of the insureds. Human resources, social security, health and family planning, and other departments should establish an assessment and evaluation index system with the core of protection level and the satisfaction of the insureds; strengthen supervision, inspection, and evaluation; and urge commercial insurance institutions to improve service quality and level according to contract requirements. The insurance supervision department shall strengthen the examination of the business qualification of commercial insurance institutions and the supervision of solvency, service quality, and market behaviour and investigate and deal with violations in accordance with the law. The financial department shall, in conjunction with the relevant departments, implement the financial expenditure and accounting methods for using the basic medical insurance fund for urban and rural residents to purchase critical illness insurance from commercial insurance institutions and strengthen fund management. The audit department shall conduct strict audits in accordance with regulations. Relevant government departments and commercial insurance institutions should effectively strengthen the security of personal information of insured persons to prevent information leakage and misuse. (2) Regulating the conduct of medical services. The health and family planning department should strengthen the supervision of medical institutions, medical service conduct, and quality. Commercial insurance institutions should work closely with the human resources and social security and health and family planning departments to coordinate the reform of payment methods such as disease-based payment. Close attention must be paid to formulate relevant clinical pathways, strengthen diagnosis and treatment standards, standardize medical conducts, and control medical expenses. 204 Ibid., s.6.

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(3) Actively accepting social supervision. Commercial insurance institutions must disclose to the public the status of contract signing, financing standards, treatment levels, payment procedures, settlement efficiency, and annual income and expenditure of critical illness insurance. If the insurance institution runs the business of basic medical insurance and also the business of critical illness insurance, the current regulations on basic medical insurance of urban and rural residents shall be implemented in terms of fund management, business services, information disclosure, and social supervision. (g) Strengthening the organization and implementation205 Provincial (regional, municipal) governments, Xinjiang Production and Construction Corps, and municipal (prefecture) governments should supervise the comprehensive implementation of critical illness insurance by further improving the working mechanism of government leadership, overseeing department coordination, and monitoring social participation,. They should make efforts to formulate and implement a plan, to refine work tasks and responsible departments, to clarify work requirements within a time frame, and to ensure that these things were fully rolled out before the end of 2015. Human resources, social security, and health and family planning departments should strengthen the guidance for the implementation of critical illness insurance in various regions, closely follow the progress of work, study in a timely manner and solve new situations and new problems, summarize and promote experience and practices, and constantly improve the critical illness insurance system. Publicity and interpretation of critical illness insurance should be strengthened to make the people widely understand the critical illness insurance policy, treat diseases scientifically and rationally, enhance the awareness of insurance responsibility of the whole society, and create a good social atmosphere for the implementation of critical illness insurance. 16.7.2 The Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013 In order to implement the Guiding Opinions on Carrying out the Work of Critical Illness Insurance for Urban and Rural Residents 2012,206 promote the sound development of the critical illness insurance business for urban and rural residents, and protect the lawful rights and interests of the urban and rural residents who are covered by critical illness insurance, the CIRC issued the Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013.207 Consisting of 53 articles in ten chapters, these Interim Measures 2013 are important regulatory rules and are considered here in detail.

205 Ibid., s.7. 206 The National Development and Reform Commission No. 2605 [2012]. 207 Bao Jian Fa No. 19 [2013].

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(a) General provisions “Critical illness insurance for urban and rural residents” (hereinafter, “critical illness insurance”) as mentioned in these Measures refers to a systematic arrangement that gives a further guarantee to urban and rural residents if large amount of medical expenses are incurred from their critical illness on the basis of the basic medical insurance for the purpose of improving the medical security level of urban and rural residents. The concrete practice shall be the following: (1) appropriating a certain percentage or a certain amount of capital from the funds of the basic medical insurance for urban residents (hereinafter, the “medical insurance for urban residents”) and the funds of the new rural cooperative medical system (hereinafter, the NCMS), or from the funds of the basic medical insurance for urban and rural residents (hereinafter, the “medical insurance for urban and rural residents”) to serve as the funds of the critical illness insurance; and (2) purchasing critical illness insurance from a commercial insurance company that meets business qualification by means of bid.208 Critical illness insurance is an expansion and extension of the basic medical security system. These Interim Measures 2013 shall apply to critical insurance business that is linked up with the medical insurance for urban residents, the NCMS, or the medical insurance for urban and rural residents. These Interim Measures 2013 may also apply to the unified system of critical illness insurance covering urban employees, urban residents, and rural residents that is established in some regions.209 The “policyholder” as mentioned in these Interim Measures 2013 refers to a department that is authorized by local government; “the insured” refers to all persons covered by the medical insurance for urban residents and the NCMS, and also refers to the medical insurance for urban and rural residents in a region where critical illness insurance is to be carried out. The “beneficiary” refers to the insured himself or herself. Unless otherwise specified, the “insurance companies” as mentioned in these Interim Measures 2013 include insurance companies and their branches.210 To engage in the critical illness insurance business, an insurance company shall give priority to the protection of the lawful rights and interests of the insured and the implementation of the sustainable development of the critical illness insurance business by improving operational efficiency, service quality, risk management level, capacity of monitoring medical services and expenses, and establishing market integrity.211 (b) Operation qualification To engage in the critical illness insurance business, the headquarters of an insurance company shall meet the following basic conditions:212

208 The Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013, art.1. 209 Ibid., art.2. 210 Ibid., art.3. 211 Ibid., art.4. 212 Ibid., art.5.

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(1) Its registered capital is no less than ¥2 billion yuan or its net assets within the latest three years are valued no less than 5 billion yuan; excluding professional health insurance companies. (2) It complies with the provisions on the solvency of an insurance company. The solvency of a professional health insurance at the end of the previous year and at the end of the latest season is no less than 100% and the solvency of an insurance company of any other type is no less than 150% at the end of the previous year and at the end of the latest season. (3) It has engaged in the special business of health insurance within the territory of China for more than five consecutive years and has obtained mature experience in business operations and management of health insurance. (4) Its business operations comply with regulations, and it has no violation of laws and regulations within the last three years. (5) It is capable of implementing special management and independent accounting of the critical illness insurance business. (6) It has good actuarial techniques for health insurance and is capable of setting a scientific and reasonable price for critical illness insurance. (7) It has a good service network with broad coverage. (8) It has a team of personnel with professional backgrounds such as medical science and good capacities of underwriting, claim assessment, and risk management. (9) It has a relatively independent management system of health insurance information with complete functions and is capable of reporting data related to critical illness insurance to the insurance regulatory authority as required. (10) Any other conditions as prescribed by the CBIRC. The number of branch companies of an insurance group company that engages in critical illness insurance business by means of bid in the region subject to overall planning of critical illness insurance shall not exceed one. The insurance group company shall integrate resources, strengthen guidance, and make overall planning and coordinate its branch companies to properly conduct the critical illness insurance business.213 To engage in the critical illness insurance business, provincial branch companies of an insurance company (including branch companies in cities under separate state planning and branch companies under direct management of the headquarters) shall meet the following basic conditions:214 (1) The headquarters is qualified to engage in the critical illness insurance business. (2) The headquarters has approved the subsidiary’s engaging in the critical illness insurance business. (3) A provincial subsidiary has no material violation of laws and regulations within the last three years.

213 Ibid., art.6. 214 Ibid., art.7.

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(4) A provincial subsidiary has a professional service team that knows local policies of basic medical insurance well and has professional backgrounds such as medical science and is capable of providing special critical illness insurance services such as stationed personnel and inspections. (5) Any other conditions as prescribed by local offices of the CBIRC. The CBIRC shall, in accordance with these Interim Measures 2013, announce and update in a timely manner the list of qualified headquarters of insurance companies. The local offices of the CBIRC shall, in accordance with these Interim Measures 2013 and the list of headquarters of insurance companies announced by the CBIRC, announce and in a timely manner update the list of provincial branch companies of qualified insurance companies (including branch companies in cities under separate state planning and branch companies under direct management of the headquarters). The insurance companies that are included in the list may, in accordance with these Interim Measures 2013, engage in the critical illness insurance business.215 Where the headquarters of a direct insurance company serves as the reinsurer or reinsurance accepter of critical illness insurance, it shall meet the basic conditions as prescribed in art.5 of these Interim Measures 2013 and be qualified to engage in the critical illness insurance business. Where a branch of the direct insurance company serves as the reinsurer or reinsurance acceptor of critical illness insurance, the branch shall meet the basic requirements as prescribed in art.7 of these Interim Measures 2013 and be qualified to engage in critical illness insurance business.216 (c) Bid management217 An insurance company that is qualified to engage in the critical illness insurance business may, on the basis of meeting the qualification conditions as prescribed in the bidding document, bid for critical illness insurance as a bidder.218 A bidder shall, as required in the bidding document, prepare the bid and provide substantial response to the requirements and conditions as prescribed in the bidding document. The bid shall, according to the empirical data of basic medical insurance provided by the tenderee and the requirements for management services raised by the bidder, scientifically pre-estimate underwriting risks and management service costs, reasonably determine insurance premiums, insured amount, minimum amount, and payment ratio, and at the same time, include such contents as beneficiaries of critical illness insurance, insurance term, scope of cover, excluded liability, settlement methods, medical management, and service measures. The bid shall be approved by the headquarters of an insurance company, and the headquarters of the insurance company shall provide the written actuarial opinion, the written legal opinion, and the relevant power of attorney.219 215 Ibid., art.8. 216 Ibid., art.9. 217 The detailed rules can be seen in section 16.7.3. 218 The Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013, art.10. 219 Ibid., art.11.

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A bidder may not make falsification, submit a bid in collusion, maliciously force prices down in competition, impede other bidders’ fair competition, impair the lawful rights and interests of the tenderee and any other bidder, win the bid by bribing the tenderee or the bid evaluation committee or adopting any other improper competition means, or disclose information of the insured provided by the tenderee.220 A bidder shall, seven work days before submitting a bid, report such basic information as the name of the critical illness insurance project for which it intends to bid, the tenderee, and date of bid opening to the local office of the CBIRC. The local office of the CBIRC shall follow up the whole process of bid and supervise an insurance company’s bid for critical illness insurance in accordance with laws and regulations. Where it is clear that the bid price is relatively low, the local office of the CBIRC shall conduct a comprehensive evaluation and prohibit vicious competition.221 After winning a bid, the bidder shall, in accordance with the bid, enter into a cooperation agreement of critical illness insurance. In principle, the term of the cooperation agreement of critical illness insurance shall not be less than three years, and the content of the critical illness insurance contract may be negotiated once every year. After the conclusion of the cooperation agreement of critical illness insurance, the provincial branch companies of an insurance company (including branch companies in cities under separate state planning and branch companies under direct management of the headquarters) shall, within one month, submit the cooperation agreement of critical illness insurance to the local office of the CBIRC.222 (d) Business management223 An insurance company shall conduct special management of critical illness insurance. The headquarters of an insurance company shall conduct a unified review of the critical illness insurance project.224 An insurance company may formulate the clauses of special products of critical illness insurance in accordance with the model clauses of critical illness insurance as issued by the Insurance Association of China. The naming of a special product of critical illness insurance shall comply with the following format:225 “Name of insurance company” + “Descriptive words” + “Group medical insurance against critical illness for urban and rural residents” The special products of critical illness insurance shall be reported to the Department of Personal Insurance Supervision of the CBIRC for filing. The insurance company may not underwrite critical illness insurance with its other products.

220 Ibid., art.12. 221 Ibid., art.13. 222 Ibid., art.14. 223 The detailed rules can be seen in section 16.7.4. 224 The Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013, art.15. 225 Ibid., art.16.

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The term of critical illness insurance is one year. An insurance company shall collect insurance premiums from policyholders at the time agreed in the cooperation agreement of critical illness insurance on a yearly basis. After undertaking the critical illness insurance, the insurance company shall make public the security liabilities and service contents.226 An insurance company shall completely and accurately record and timely update information of the insured. The information shall include the name, gender, birth date, ID type, valid ID card number, social security number, and contact means of an insured person, and the information shall be consistent with the requirements for information of the persons covered by local basic medical insurance. The insurance company shall be obligated to keep the information of the insured confidential.227 An insurance company shall, on the basis of the empirical data of basic medical insurance provided by a policyholder, establish an actuarial model for critical illness insurance, set product parameters and premium rates in a scientific manner, and prudently fix prices. In the business operating cycle, the insurance company shall strengthen the accumulation of and analysis on empirical data, analyze and evaluate business operations of critical illness insurance in an accurate and truthful manner, and provide a basis for improving the operation management and service of critical illness insurance.228 An insurance company shall establish an information system of critical illness insurance, and the information system shall have such functions as information collection, settlement payment, information inquiry, and statistical analysis. The insurance company shall strengthen the management and maintenance of the information system of critical illness insurance and strictly manage user authorities so as to ensure information security. The insurance company shall strengthen communication and cooperation with the relevant government departments and implement the link-up of the information system of critical illness insurance with that of the basic medical insurance, that of medical aid, and that of medical institutions.229 An insurance company shall, in accordance with the industrial regulatory requirements and the relevant provisions, submit in a timely manner and provide reports, statements, documents, information, and materials related to critical illness insurance.230 Where an insurance company that engages in the critical illness insurance business is merged, split, dissolved, legally taken over, revoked, bankrupted, or falls under any other circumstances as prescribed by the CBIRC, the insurance company shall properly handle matters related to the critical illness insurance business and guarantee that the rights and interests of the insured persons are not damaged.231 At the expiry of the cooperation agreement of critical illness insurance, where an insurance company no longer continues to undertake the critical illness insurance

226 227 228 229 230 231

Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

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project, the insurance company shall cooperate with the policyholder to properly handle the link-up and transitional work.232 To undertake critical illness insurance, an insurance company may not pay any handling charge or commission to any entity or individual in any form and may not offer or promise to offer rebates or any other interest not agreed to in the insurance contract.233 (e) Service management An insurance company shall cooperate with local governments to promote the publicity of policies for critical illness insurance. In the publicity, the insurance company may not mislead the public, reduce or exaggerate the scope of insurance coverage, or implement compulsory conditional sale of other commercial insurance products.234 An insurance company shall strengthen the building of service capacity, establish a professional team of critical illness insurance, conduct professional training and service quality evaluation on a regular basis, and improve the general quality of the service personnel of critical illness insurance.235 An insurance company may, jointly with the relevant government departments, provide consultation and inquiry services for the insured by means of telephone or network, accept complaints, and effectively safeguard the lawful rights and interests of the insured.236 An insurance company shall, according to the residence and hospitalization of the insured, set up service stations and provide convenient services for policyholders and the insured. The insurance company shall strengthen its link-up with the basic medical insurance and medical aid and provide “one-stop” instant settlement services of critical illness insurance. The advantages of networking of institutions shall be made proactive use of so as to provide settlement services of medical expenses incurred at different places for the insured.237 An insurance company shall strengthen communication and coordination with local government departments, jointly formulate evaluation and assessment standards for medical services of critical illness, establish a review mechanism of designated medical institutions for critical illness insurance, and effectively strengthen administration of medical activities. The insurance company shall, upon authorization of the competent department of basic medical insurance and in accordance with such standards and regulations as diagnosis and treatment norms and clinical routes, properly conduct supervision and administration of medical activities by means of medical inspection, arrangement of station and hospital-based personnel, and random inspection of medical cases of illness and shall explore and develop the medical expert review system of difficult cases.238 232 233 234 235 236 237 238

Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29.

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An insurance company shall follow the principle of seeking truth from facts and being objective and fair; it shall regulate review standards, review and pay medical expenses to the insured in strict accordance with the relevant local policies and the stipulations of the insurance contract, timely report such violations of regulations discovered as seeking medical treatment under an assumed name, false hospitalization, or over-treatment to the policyholder and the relevant government departments, and put forward corresponding proposals for handling.239 An insurance company shall proactively cooperate with the relevant government departments to promote reform in the payment methods of medical insurance and explore such payment methods as total expenses prepaid and settlement of medical expenses according to diseases.240 An insurance company shall actively develop commercial health insurance products that link up with critical illness insurance, carry out health management services, and satisfy the insured person’s demands for multilevel and diversified health security and services. Where conditions permit, insurance companies shall actively engage in various handling services of basic medical insurance.241 (f) Financial management242 An insurance company shall, in accordance with the finance and accounting regulations of the state and the relevant regulatory provisions, independently account for and report critical illness insurance business and implement complete separation of critical illness insurance business from any other insurance business and conduct closed operation of critical illness insurance business so as to reflect the business operations of critical illness insurance in a true and accurate manner.243 An insurance company shall strengthen the management of critical illness insurance funds, establish a mechanism of transfer of critical illness insurance premiums, follow the principle of “separating revenue from expenditure”, and appropriate and use funds in strict accordance with account types and use purposes.244 To engage in the critical illness insurance business, an insurance company shall establish an independent account of critical illness insurance premiums and an account of indemnities, actively promote non-cash payment for critical illness insurance business according to the requirements of the relevant regulatory provisions on collection and payment of expenses, and effectively guarantee the safety of critical illness insurance funds.245 An insurance company shall, in accordance with the relevant regulatory provisions on expense apportionment, account for management costs of the critical illness insurance business, strictly differentiate exclusive expenses only incurred in the business operations of critical illness insurance from common expenses that 239 Ibid., art.30. 240 Ibid., art.31. 241 Ibid., art.32. 242 The detailed rules can be seen in section 16.7.5. 243 The Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013, art.33. 244 Ibid., art.34. 245 Ibid., art.35.

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are apportioned from the company’s operating costs, properly determine the owner of such expenses, and gather and apportion expenses in real terms. It may not misappropriate the costs of other business or apportion the costs of other business to those of the critical illness insurance business.246 An insurance company shall truthfully disburse expenses incurred from business operations of critical illness insurance, including human costs and expenses incurred from hardware equipment, software development, medical management, case investigation, office operations, and publicity and training. It must constantly strengthen management and control of expenses, reduce management costs of critical illness insurance, and improve efficiency of business operations.247 An insurance company shall check data of critical illness insurance in the financial system and business system on a regular basis to guarantee consistency between financial data and business data.248 An insurance company shall establish an internal mechanism of supervision and inspection on critical illness insurance business to guarantee authenticity of financial and business data.249 The business operations and expense disbursements in the account of critical illness insurance premiums and the account of indemnities of an insurance company shall be subject to the supervision of the relevant government departments so as to ensure that such accounts operate in an open and transparent manner.250 (g) Risk adjustment251 To engage in the critical illness insurance business, an insurance company shall follow the principle of balancing income and expenditure and keeping a narrow margin of profit. The insurance company shall fix reasonable prices and determine a proper critical illness insurance loss ratio and expense and interest ratio through consultation with policyholders.252 An insurance company shall establish a mechanism of dynamic risk adjustment upon consultation with policyholders and conduct risk adjustment of profits and losses such as excess surplus and policy-related losses in the insurance term by adopting reasonable methods so as to ensure the sustainable development of the critical illness insurance business.253 An insurance company shall, on the basis of the actual business operation results, adjustment of medical insurance policies, and changes in medical expenses and pursuant to the cooperation agreement of critical illness insurance, adjust the insurance liabilities and insurance premium rates for the next term of insurance upon consultation with policyholders.254 246 Ibid., art.36. 247 Ibid., art.37. 248 Ibid., art.38. 249 Ibid., art.39. 250 Ibid., art.40. 251 The detailed rules can be seen in section 16.7.6. 252 The Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013, art.41. 253 Ibid., art.42. 254 Ibid., art.43.

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An insurance company shall consult with policyholders, and policyholders shall make corresponding indemnities for losses to the critical illness insurance business caused by adjustment of local basic medical insurance policies or any other policy-related factor in the insurance term.255 (h) Supervision and administration The personal insurance regulatory department under an insurance regulatory authority shall conduct unified supervision and administration of the critical illness insurance business in which an insurance company engages. It shall conduct a whole-process supervision and administration of the critical illness insurance business in which the insurance company engages. It shall strengthen supervision and administration of market access and withdrawal and strengthen the supervision and administration of market activities so as to ensure orderly competition and improve the level of service quality. It shall conduct inspections on a regular or irregular basis, make corrections, and solve problems occurring in business operations.256 The CBIRC shall strengthen supervision and administration of the critical illness insurance business and maintain market order. Where serious problems or major risks of the critical illness insurance business arise due to poor supervision and administration, the relevant persons in charge shall be subject to liability in accordance with law.257 The CBIRC shall explore to establish an evaluation and assessment system of the critical illness insurance business, focusing on security level and satisfaction of the insured.258 An insurance company shall diligently perform the insurance cooperation agreement and accept supervision of such local government departments as the financial department and the auditing department and the masses.259 Where an insurance company commits any of the following behaviours when it engages in the critical illness insurance business, the insurance regulatory authority shall give it an administrative penalty in accordance with the Insurance Law and the relevant provisions of the CBIRC:260 (1) Refuses to perform obligations of paying indemnity or insurance money as agreed in the insurance contract. (2) Discloses information of the insured persons in violation of the relevant provisions. (3) Has such behaviours as commercial bribery and unfair competition in the process of bidding or undertaking the critical illness insurance business. (4) Fails to submit or keep reports, statements, documents, or materials as required or fails to provide the relevant information and materials as required. (5) Prepares or provides false business data and financial statements. (6) Any other behaviour that is prohibited by the insurance regulatory authority. 255 256 257 258 259 260

Ibid., art.44. Ibid., art.45. Ibid., art.46. Ibid., art.47. Ibid., art.48. Ibid., art.49.

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(i) Market withdrawal261 In the course of engaging in the critical illness insurance business, an insurance company shall satisfy the conditions as specified in art.5 and art.7 of these Interim Measures 2013 and conduct business operations in accordance with laws and regulations.262 Where the headquarters of an insurance company and its provincial branch companies (including branch companies in cities under separate state planning and branch companies under direct management of the headquarters) fall under any of the following circumstances, the insurance regulatory authority shall not include the headquarters of the insurance company or its provincial branch companies in the qualification list within three years, and during the period of such three years, the insurance company may not engage in the critical illness insurance business:263 (1) The headquarters of the insurance company is given an administrative penalty due to its critical illness insurance business, or three or more provincial branch companies of the insurance company (including branch companies in cities under separate state planning and branch companies under direct management of the headquarters) are given administrative penalties due to their critical illness insurance business within one year. (2) The provincial branch companies of the insurance company (including branch companies in cities under separate state planning and branch companies under direct management of the headquarters) are given administrative penalties due to their critical illness insurance business, or three or more branches of the provincial branch companies are given administrative penalties due to their critical illness insurance business within one year. (3) The bid of critical illness insurance violates the relevant laws, regulations, and regulatory provisions. (4) The provisions of article 12 of these Interim Measures 2013 are violated. (5) The provisions of article 24 of these Interim Measures 2013 are violated. (6) Unilateral withdrawal occurred in the term of critical illness insurance. (7) Any other situation that is serious enough to affect normal business operations of the critical illness insurance business occurs. Where a branch of an insurance company at the prefectural or municipal level falls under any of the following circumstances, the insurance company may not engage in the critical illness insurance business within three years:264 (1) It is given an administrative penalty due to its critical illness insurance business. (2) The bid of critical illness insurance violates the relevant laws, regulations, and regulatory provisions. 261 The detailed rules can be seen in section 16.7.7. 262 The Interim Measures for the Administration of Insurance Companies’ Critical Illness Insurance Business for Urban and Rural Residents 2013, art.50. 263 Ibid., art.51. 264 Ibid., art.52.

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(3) (4) (5) (6)

It violates the provisions of article 12 of these Interim Measures 2013. It violates the provisions of article 24 of these Interim Measures 2013. It unilaterally withdraws in the term of critical illness insurance. Any other situation that is serious enough to affect normal business operations of the critical illness insurance business occurs.

Where an insurance company that has engaged in the critical illness insurance business falls under any of the circumstances as provided in articles 51 and 52 of these Interim Measures 2013, the insurance regulatory authority shall propose the local government that is responsible for invitation for bid to terminate the cooperation agreement of critical illness insurance at the end of the insurance year and assist the government in selecting any other insurance company to undertake the cooperation agreement of critical illness insurance.265 An insurance company that has engaged in supplementary medical insurance business for urban and rural residents shall cooperate with the relevant local government departments to properly conduct the transitional work of link-up with critical illness insurance.266 16.7.3 The Interim Measures for the Bidding of Insurance Companies for the Critical Illness Insurance for Urban and Rural Residents 2016 After the issuance of Interim Measures 2013 by the CIRC which have just been considered, the General Office of the State Council issued the Opinions on Comprehensively Implementing Critical Illness Insurance for Urban and Rural Residents on 28 July 2015,267 which are also considered in section 16.7.1. In accordance with the Opinions 2015, the CIRC further issued another five sets of rules for regulating the critical illness insurance system on the same day (9 October 2016) with the same document number (Bao Jian Fa No.86 [2016]): (1) The Interim Measures for the Bidding of Insurance Companies for the Critical Illness Insurance for Urban and Rural Residents 2016; (2) The Basic Rules for Insurance Companies’ Critical Illness Insurance Services for Urban and Rural Residents (for Trial Implementation) 2016; (3) The Interim Measures for the Financial Management of Insurance Companies’ Critical Illness Insurance for Urban and Rural Residents 2016; (4) The Interim Measures for the Risk Adjustment of Insurance Companies’ Critical Illness Insurance for Urban and Rural Residents 2016; and (5) The Interim Measures for the Administration of Insurance Companies’ Exit from the Market of Critical Illness Insurance for Urban and Rural Residents, and other regulatory rules 2016.

265 Ibid., art.53. 266 Ibid., art.54. 267 The State Council general Office No. 57 [2015].

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These five set of rules are considered here in turn, with the first one on the Interim Measures for the Bidding of Insurance Companies for Critical Illness Insurance for Urban and Rural Residents 2016 in this section. (a) General provisions For the purposes of regulating the bidding of insurance companies for the critical illness insurance for urban and rural residents, effectively preventing risks, and realizing the sound and orderly development of the critical illness insurance business, these Measures are developed in accordance with the Insurance Law, the Bidding Law of China, the Government Procurement Law of China, the Opinions of the General Office of the State Council on Comprehensively Implementing Critical Illness Insurance for Urban and Rural Residents, and so on.268 These Measures applies to insurance companies bidding for the critical illness insurance business within the territory of China or participation in government procurement for critical illness insurance in other forms.269 (b) Bidding qualifications The CBIRC and all local CBIRC offices shall announce and update in a timely manner the list of the head offices and provincial branch offices of the insurance companies qualified for conducting the critical illness insurance business (including branch offices of cities under separate state planning and branch offices under the direct management of head offices, hereafter the same). Insurance companies qualified for conducting the critical illness insurance business may participate in bidding for the critical illness insurance as bidders.270 With the consent of local government departments responsible for bidding, two or more insurance companies may form a consortium to bid as one bidder. All parties to the consortium shall have the qualifications for critical illness insurance business and the corresponding ability to undertake bidding projects. All parties to the consortium shall clarify the service areas, insured groups, and relevant responsibilities and obligations of each company undertaking the service.271 In a region under the overall planning on critical illness insurance, there shall be no more than one subsidiary company of the same insurance group company that bids for the critical illness insurance business, except that the different subsidiary companies of the same group form a single bidding consortium.272 In principle, the head office of an insurance company or the branch office at or above the prefecture level authorized by the head office shall participate in bidding for the critical illness insurance as a bidder.273 268 The Interim Measures for the Bidding of Insurance Companies for the Critical Illness Insurance for Urban and Rural Residents 2016, art.1. 269 Ibid., art.2. 270 Ibid., art.3. 271 Ibid., art.4. 272 Ibid., art.5. 273 Ibid., art.6.

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An insurance company that participates in bidding for the critical illness insurance shall be able to provide convenient and efficient services in the regions under overall planning on critical illness insurance.274 (c) Management of bidding flow An insurance company shall report its bidding activities to the local CBIRC office in a timely, accurate, and authentic manner, including pre-bidding, bidding, bid winning, and entry into contracts. If a bid is made by a consortium, the leading underwriter shall report it to the local CBIRC office. The report shall be uniformly submitted by the provincial branch office of the insurance company.275 An insurance company that participates in bidding for the critical illness insurance business shall report it to the local CBIRC office at least seven working days before bidding, and the content shall cover the name of the bidding project, bid caller, bidding documents, time for submitting bids, and basic information on the bid tender institution, among others. The insurance company shall, after bid opening, submit the duplicates of bid, the actuary opinions, the legal opinions, and the power of attorney issued by the head office to the local CBIRC office. If it has any reply to the bidding, it shall submit the reply documents within two working days after the reply is given. The insurance company shall report the bid-winning result to the local CBIRC office within two working days after winning the bid.276 An insurance company shall, after winning the bid, enter into a critical illness insurance cooperation agreement with the insurance applicant according to the provisions of the bidding documents. The term of the critical illness insurance cooperation agreement shall not be less than three years in principle, and the content of the critical illness insurance contract may be determined through consultation once each year. After the critical illness insurance cooperation agreement and contract are signed, the photocopies of the agreement and the contract shall be submitted to the local CBIRC office within one month.277 An item in which the bid caller invites for bids or selects the bidder once again after a bid fails or is cancelled shall be deemed as a new bid invitation, and the insurance company shall undergo reporting formalities in accordance with relevant provisions of these Measures.278 (d) Management of bidding risks An insurance company shall, as required by bidding documents, prepare its bid and give substantial response to the requirements and conditions as prescribed in bidding documents. According to the historical and empirical data on basic medical insurance provided by the bid caller and the requirements for management services raised by the bid caller, the underwriting risks and management service costs shall be scientifically assessed and insurance premiums, insured amount, minimum 274 275 276 277 278

Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11.

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amount, and proportion of compensation, as well as such content as the beneficiaries of critical illness insurance, guarantee period, scope of coverage, excluded liabilities, settlement methods, profit and loss adjustment mechanism, methods for dynamic adjustments to the contract, medical management, and service standards and measures, and so on shall be reasonably determined in the bidding documents. The insurance company shall not bid for any bidding item if for the said item no empirical data is provided or the data provided is incomplete and cannot be calculated, evident loss will be caused at the determined price, there is no risk adjustment mechanism, or the payment of handling charges or commissions, bidding service fees, consulting fees, and so on, is required after bid winning.279 An insurance company shall, when participating in bidding for the critical illness insurance business, use the special clauses on critical illness insurance that have been reported to the CBIRC for recordation and shall not have any content which is inconsistent with special clauses in the bid.280 The head office of an insurance company shall be responsible for the management and control of the tenders for bids made by the branch offices for participating in critical illness insurance. A branch office of an insurance company shall submit its bid to the head office for examination and approval and obtain a power of attorney of the head office. The product pricing department of the head office shall issue a prudential actuary opinion on bid documents, and the actuary opinion shall at least cover the calculation basis, data analysis, calculation result, and quotation opinion, among others. The legal affairs department of the head office shall issue a legal opinion on the bid documents based on strict examination.281 An insurance company shall not submit a bid in collusion, bid at a price lower than the minimum price set forth in the actuary opinion of the head office, bid in any other person’s name or practice fraud in any other form, impede any other bidder’s fair competition, or impair the lawful rights and interests of the bid caller or any other bidder. The insurance company shall not submit bids in collusion with any bidder, damage national interest, public interest, or the lawful rights and interests of any other person and shall not divulge any information on the insured provided by the bid caller. The insurance company shall not seek to win a bid by bribing the bid caller or the bid evaluation committee or any other means of unfair competition. The insurance company shall not undertake to pay any handling charge or commission, bidding service fee, or consulting fee, and so on to any entity or individual in any form and shall not undertake to offer kickbacks or any other interest not agreed upon in the insurance contract.282 (e) Supervision and administration An insurance regulatory authority shall conduct supervision over bidding made by insurance companies for the critical illness insurance and investigate and punish the violations of laws committed by insurance companies in the course of bidding.283 279 280 281 282 283

Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16.

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The local CBIRC office shall track and oversee the whole process of bidding for the critical illness insurance made by insurance companies within its jurisdiction. If the bidding price is evidently lower than the average industry level, the underwriting conditions are irrational, or any serious loss risk exists, the local CBIRC office shall conduct a comprehensive assessment, take regulatory measures in a timely manner so as to prevent vicious competition, maintain a fair and competitive market order, and protect the lawful rights and interests of the insured.284 16.7.4 The Basic Standards for Insurance Companies’ Critical Illness Insurance Services for Urban and Rural Residents (for Trial Implementation) 2016 (a) General provisions For the purposes of regulating insurance companies’ critical illness insurance services for urban and rural residents, protecting the lawful rights and interests of the insured, and enhancing the capacity to provide professional critical illness insurance services, these Basic Standards are developed in accordance with the Insurance Law, the Opinions of the General Office of the State Council on Comprehensively Implementing Critical Illness Insurance for Urban and Rural Residents, and so on.285 Insurance companies that undertake the critical illness insurance business shall comply with the requirements of these Basic Standards in such aspects as service competence building, design of the critical illness insurance plan, indemnity verification, payment and settlement, client services, supervision of medical conducts, and archives management.286 (b) Building of service competence An insurance company that undertakes the critical illness insurance business shall improve its organizational structure, improve its by-laws, strengthen its staffing, and enhance its professional operation and service level.287 An insurance company shall, under the principle of facilitating people and high efficiency, assist basic medical insurance institutions in setting up outlets for the provision of critical illness insurance services in the regions under the overall planning according to the requirements of relevant government departments, and according to such information as the residence and hospitalization of the insured, and provide good critical illness insurance services.288 Critical illness insurance service outlets shall have clearly indicated independent counters or full-time service personnel, be able to provide such services as policy publicity, business consulting, “one-stop” settlement, inquiry service and acceptance of complaints, and provide convenient services for insurance applicants and the insured.289

284 Ibid., art.17. 285 The Basic Standards for Insurance Companies’ Critical Illness Insurance Services for Urban and Rural Residents (for Trial Implementation) 2016, art.1. 286 Ibid., art.2. 287 Ibid., art.3. 288 Ibid., art.4. 289 Ibid., art.5.

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An insurance company may set up service outlets by such forms as the following:290 (1) Branch offices of the insurance company formed with the approval of the insurance regulatory authority. (2) Joint office outlets formed through cooperation between the insurance company and the institution that undertakes the basic medical insurance business. (3) Branch offices of the insurance company that provide agency services through resource integration within the same insurance group. (4) Other forms approved by local governments. In regions under overall planning, the setup of critical illness insurance service outlets shall match with the basic medical insurance service outlets, as is the general principle, and at least one service outlet shall be set up within each county (city or district). It shall be governed by the agreement signed with the relevant department of the local government.291 An insurance company shall establish the designated team for critical illness insurance services according to the services of critical illness insurance items and management requirements. Each prefectural city service team shall have at least two full-time employees with relevant professional medical backgrounds.292 An insurance company shall establish rules for the study, training, and assessment of the designated team for critical illness insurance services, ensure that service personnel receive the training on theoretical policy and business skills for not less than 40 accumulated hours each year, and record it in their training files. It shall establish a critical illness insurance service assessment system and internal accountability rules centring on the degree of satisfaction of the insurance applicant and the insured, and continuously enhance the comprehensive competence and professional competence of the service personnel.293 An insurance company shall develop a designated critical illness insurance information system. The information system shall have such functions as information collection and modification, payment and settlement, information inquiry, statistics and analysis, realize the automatic circulation with the data of the financial system, and ensure the consistency of business data and financial data. The insurance company shall strengthen the management and maintenance of the information system, establish and implement strict confidentiality rules, conduct strict management of users’ authority, and effectively protect the information security of the insured. The insurance company shall actively develop its medical expense examination system and continuously enhance the capacity of monitoring medical expenditures by using information technology means.294 An insurance company shall strengthen communication with relevant government departments; and as supported by the government, realize the interconnection

290 291 292 293 294

Ibid., art.6. Ibid. Ibid., art.7. Ibid., art.8. Ibid., art.9.

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between the critical illness insurance information system and the basic medical insurance information system, the medical institution information system, and the medical aid information system; realize the interconnection of the personal information and medical conduct as well as the information on medical expenses of the insured, including the insured’s name, gender, date of birth, medical insurance card or social security number, type of the certificate, number of the valid identity certificate, contact information, name of the hospital, disease code, treatment information, details of medical expenses (including total medical expenses, drugs and treatment expenses within the policy scope, and deductible amount of individuals), and so on. In the region where the system interconnection of basic medical insurance and designated medical insurance institutions is realized, the institution that undertakes critical illness insurance shall, in principle, realize the interconnection of the critical illness insurance information system and basic medical insurance system within six months as of the date of undertaking the insurance and provide “one-stop” settlement services.295 (c) Management of critical illness insurance data An insurance company shall, according to the historical and empirical data in the last three years as provided by the local basic medical insurance department or those that are able to satisfy actuarial requirements, make a scientific guarantee plan for critical illness insurance for urban and rural residents.296 An insurance company shall make rational provision of reserve for the critical illness insurance business, track the indemnity of critical illness insurance on a monthly basis, judge the trend of loss ratio of critical illness insurance, and according to the actual operation of the critical illness insurance, continuously improve the methods and tools for the calculation of fee rates and the reserve for critical illness insurance so as to make calculation more scientific and effective and ensure the long-term, stable, and sound development of critical illness insurance.297 An insurance company shall establish a database of the critical illness insurance business, accumulate the underwriting and claim settlement data, and lay a solid foundation for the calculation of and adjustments to fee rates, reserve assessment, and business management. Risk warnings shall be given in a timely manner in the regions where the loss ratio is excessively high or low.298 An insurance company shall, according to the requirements of the insurance regulatory authority, report the information on the operation of the critical illness insurance business and relevant information and data on schedule.299 (d) Settlement services An insurance company shall, according to different settlement methods, provide “one-stop” settlement services to the insured.300 295 296 297 298 299 300

Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15.

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(1) Real-time settlement upon leaving the hospital. In a region where the interconnection of the systems of basic medical insurance institutions and designated medical insurance institutions is realized, after the authorization of the institution that undertakes the basic medical insurance business, the insurance company shall develop a corresponding settlement system, and through interconnection with the basic medical insurance system, complete information exchange and data sharing with the basic medical insurance institutions and the designated medical insurance institutions and realize real-time settlement of guarantee items such as critical illness medical expenses and basic medical expenses when patients leave the hospital. (2) Simultaneous settlement with outlets. Where real-time settlement upon leaving the hospital cannot be realized in an objective manner due to such reasons as transfer to another hospital for treatment, complicated case circumstances, or failure to realize system interconnection between the basic medical insurance and the designated medical insurance institutions, the simultaneous real-time settlement of basic medical insurance and critical illness insurance shall be realized through cooperating with the institutions that undertake the critical illness insurance business in establishing joint office outlets and mechanisms according to the management mode of basic medical insurance. An insurance company shall, by relying on itself and the information network, provide hospitalization and settlement services at different places for the insured that seek medical services across regions under overall planning so that real-time settlement can be realized when they leave hospitals.301 Where “one-stop” settlement has not been realized due to system debugging in the process of interconnection or any other particular circumstance, when an insurance applicant applies to the insurance company for claim settlement, the insurance company shall, all at once, inform the applicant of the required materials for claim settlement in writing, and conduct an assessment in a timely manner after claim settlement materials are complete; if the circumstances are complicated, it shall conduct an assessment within 30 days, and after making an assessment conclusion, notify the applicant to confirm the conclusion in a timely manner and complete payment within ten days if the applicant has no objection and provides his or her bank account number. Where the insurance company makes direct compensation to the insured at a service outlet, it shall comply with relevant provisions of the Insurance Law, and verify and confirm the identity of the recipient. If the insured has any objection to the indemnity, the insurance company shall conduct publicity and give an effective explanation.302 An insurance company may explore the establishment of return visit rules for claim settlement of critical illness insurance. The insurance company may, within 15 days after the fulfilment of indemnity obligations, pay a return visit to the insured in multiple forms, such as telephone and text messages, and record the return visits. The 301 Ibid., art.16. 302 Ibid., art.17.

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insurance company shall, when the insured or his or her close relative obtains the indemnity, inform the insurance company that it may make a return call.303 The return call shall cover the following content:304 (1) Confirmation of the insured’s identity (confirming the insured’s name and effective basic medical insurance certificate or identity certificate number). (2) Confirming the hospital where the insured receives medical treatment and actual expenses during hospitalization and deductible amount, and whether it has received the indemnity for critical illness insurance. (3) Inquiring about the insured’s degree of satisfaction with the insurance company’s critical illness insurance services and the insured’s opinions and suggestions on insurance services. (e) Client services An insurance company may, through such channels as service outlets, networks, and designated medical institutions, cooperate with relevant government departments in effectively publicizing critical illness insurance policies, release to the public the guarantee responsibility of critical illness insurance, service contents, service commitments, methods of raising inquiries and filing complaints, claim settlement flow and contact information, effectively protect the lawful rights and interests the insured, and accept social supervision. The insurance company shall not mislead the public when publicizing critical illness insurance, shall not reduce or exaggerate insurance liability, and shall not conduct the compulsory tie-in sale of any other commercial insurance product.305 An insurance company shall establish a sound mechanism for handling complaints on the critical illness insurance business. For a complaint with clear facts and simple circumstances, the insurance company shall make a handling decision within seven working days after accepting the complaint, and if the circumstances are complicated, shall make a handling decision within 30 days after accepting the complaint. The insurance company shall give a written reply to the complainant after conducting an objective and detailed investigation. With the approval of the complainant, it may also give a reply by phone or e-mail, and shall confirm that the complainant has received its reply. If it gives a reply by phone, it shall make audio recordings, and if it gives a reply in writing or by an e-mail, it shall keep a printed copy for archives.306 An insurance company shall, after verifying the identity of the insured of critical illness insurance, provide the services of researching the critical illness insurance contracts, investigation information, critical illness insurance indemnity status, and the amount of indemnity. As authorized by the local competent basic medical insurance department, the insurance company may also provide the services of researching the basic medical insurance indemnity and hospital settlement status.307 303 304 305 306 307

Ibid., art.18. Ibid. Ibid., art.19. Ibid., art.20. Ibid., art.21.

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An insurance company shall continuously improve its professional services, explore the provision of such services as health files management, risk assessment, and health intervention to the insured, and endeavour to improve the health of the insured of critical illness insurance and reduce the incidence of diseases.308 (f) Management and control of medical risks An insurance company shall strengthen communication and coordination with the relevant department of the local government, and as supported by the health administrative department or competent basic medical insurance department, establish critical illness insurance medical inspection rules, assist in the formulation of standards for the assessment of critical illness insurance medical services, establish a mechanism for the review of designated critical illness insurance medical institutions, and cooperate in the effective supervision over medical conduct.309 An insurance company shall, as authorized by or through the joint work of the health administrative department or competent basic medical insurance department, and in light of the peculiarities of the critical illness insurance business, conduct rational management and control of medical expenses in an active and effective manner by taking such measures as conducting medical routine inspections, onsite supervision at hospitals, appraisal of medical records, and optimization of payment methods.310 An insurance company shall, in the course of making critical illness insurance indemnities, according to local relevant policy provisions and as agreed upon in the insurance contracts, and as authorized by the health administrative department and other departments, examine the authenticity and regulatory compliance of the medical conducts and exclude such expenses as false hospitalization and medical services in violation of regulations and may offer suggestions on the rationality and appropriateness of medical conduct to medical institutions or health administrative departments.311 An insurance company shall actively participate in the reform of payment forms in all localities, analyze medical expenses, offer opinions and suggestions on improving the critical illness insurance plans to relevant government departments, and by such methods as medical evaluation, direct medical institutions and doctors to improve medical services, reduce medical expenses, and prevent the waste of medical resources and excessive medical services.312 An insurance company may, through its institution and network, inspect medical services in different places across regions under overall planning, and different provinces (autonomous regions and municipalities) and strengthen risk management and control.313

308 309 310 311 312 313

Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27.

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(g) Files management An insurance company shall effectively manage critical illness insurance files in accordance with the laws and regulations on files management. The indemnity files shall be prepared in a paper and electronic form and be preserved in the form of “one archive for one case,” and claim number, information of the insured, and other index methods shall be established so as to facilitate inquiry.314 An insurance company shall strengthen the confidentiality of critical illness insurance archives and routine management, and irrelevant personnel shall not enter the archives database so as to prevent business archives from being stolen, lost, torn, cut, or altered.315 (h) Service evaluation An insurance company shall formulate specific measures for implementation according to the requirements of these Basic Standards, and form a service quality supervision mechanism. The insurance company shall examine the services provided by branch offices by integrating annual examination, routine inspection, and spot check.316 The insurance industry association shall establish a critical illness insurance service assessment system focusing on the satisfaction of insurance applicants and the insured, and the assessment system shall meet both qualitative and quantitative standards and cover such contents as basic management, claim settlement quality and efficiency, and information inquiry.317 16.7.5 The Interim Measures for the Administration of Financial Management of Insurance Companies’ Critical Illness Insurance for Urban and Rural Residents 2016 (a) General provisions For the purposes of regulating the financial management of the critical illness insurance for urban and rural residents undertaken by insurance companies, and guaranteeing the security of critical illness insurance funds, the CIRC issued the Interim Measures for the Administration of Financial Management of Insurance Companies’ Critical Illness Insurance for Urban and Rural Residents 2016 in accordance with the Insurance Law, the Accounting Law, the Opinions of the General Office of the State Council on Comprehensively Implementing Critical Illness Insurance for Urban and Rural Residents, the Accounting Standards for Business Enterprises, and so on.318 An insurance company shall observe the principle of “accrual basis accounting system,” conduct accounting according to the Accounting Standards for Business

314 Ibid., art.28. 315 Ibid., art.29. 316 Ibid., art.30. 317 Ibid., art.31. 318 The Interim Measures for the Administration of Financial Management of Insurance Companies’ Critical Illness Insurance for Urban and Rural Residents 2016, art.1.

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Enterprises, and record and report the operation of the critical illness insurance business in a complete, faithful, and accurate manner.319 An insurance company shall conduct separate accounting of critical illness insurance and separately identify and summarize relevant premium income, indemnity expenditure, expenses, and other profit and loss items so as to reflect the business result of each critical illness insurance item.320 (b) Fund management The overall principle for the management of funds for the critical illness insurance business of insurance companies shall be separating income from expenditures, safety, and efficiency.321 An insurance company that conducts critical illness insurance business shall observe the principle of “separating income from expenditures,” set up separate accounts for the income of the critical illness insurance business and indemnity expenditure, and transfer and use funds in strict accordance with the uses and types of accounts. The account of the critical illness insurance business shall not be used for any purpose other than the critical illness insurance business.322 An insurance company’s opening of the critical illness insurance business account shall be subject to the examination and approval of the head office. In principle, the insurance company shall open separate accounts for the income of the critical illness insurance business and indemnity expenditure in companies at the provincial or prefectural city level, unless it is otherwise required by local government.323 An insurance company shall, according to the requirements for receipt and payment management, adopt non-cash payment for the critical illness insurance business and ensure the security of critical illness insurance funds.324 An insurance company shall establish a mechanism for turning critical illness insurance premium income over to upper levels and allocating indemnity expenditure, ensure the security of critical illness insurance funds, and raise the efficiency of utilization of critical illness insurance funds.325 The investment return of a critical illness insurance item shall be allocated based on the balance of actual cash flow, and sufficient reserves shall be set aside to ensure the provision of claim settlement services in a timely manner.326 (c) Accounting An insurance company shall, on the date of initial confirmation of a critical illness insurance contract, conduct risk testing to see if it has to assume any serious insurance risk and determine whether it falls under an entrusted management contract or an insurance contract in accounting treatment.327 319 320 321 322 323 324 325 326 327

Ibid., art.2. Ibid., art.3. Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10.

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(I) ACCOUNTING TREATMENT OF ENTRUSTED MANAGEMENT CONTRACTS An insurance company shall, according to the nature of a critical illness insurance business contract, judge the contract nature, no matter whether the contract has set up a risk-adjustment mechanism. If the insurance company does not assume major insurance risks, it shall conduct accounting according to the entrusted management contract.328 When an insurance company conducts accounting of an entrusted management contract, it shall confirm the receivable and payable funds according to the source of funds.329 An insurance company shall not prepay funds for an entrusted management contract in principle. If it prepays funds under any peculiar circumstance, it shall enter the prepaid amount in “other receivables.” When it receives funds for the critical illness insurance business, it shall offset “other receivables” accordingly.330 The funds for the entrusted management of the critical illness insurance business obtained by an insurance company shall be included in the liability of agency services and be used to offset the liability of agency services.331 Where it is agreed upon in the entrusted management contract that all interest income generated from entrusted management funds shall be attributed to entrusted management funds, the interest income shall be directly included in the liability of agency services. If the interest rate of settlement of entrusted management funds is separately agreed upon in the entrusted management contract, the settlement interest expenditure shall be included in other business expenditures.332 An insurance company shall confirm other business income according to the amount of management expenses as agreed upon in the contract and increase the insurance company’s other receivables accordingly.When it receives the management expenses, it shall offset the other receivables accordingly. Where the management expenses are not expressly agreed upon, the insurance company shall confirm the expenses according to reasonable methods, and the expenses shall not exceed the upper limit of agreed fee rates and rate of profit agreed upon.333 Where an insurance company sets up a risk-adjustment mechanism through consultation with insurance applicants, the company receives the risk adjustment funds for critical illness insurance transferred by insurance applicants, or the company transfers the risk adjustment funds for critical illness insurance to insurance applicants, these funds shall be included in the agency business liabilities for the current period.334 (II) ACCOUNTING TREATMENT OF INSURANCE CONTRACTS An insurance company shall consult with the insurance applicants to determine the insurance premium rates each year and rationally confirm the rates according 328 329 330 331 332 333 334

Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17.

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to the principle for the confirmation of insurance premium. It shall confirm the insurance funds that have not been received as receivable insurance premiums.335 Where the examination of insurance premiums is agreed upon in a critical illness insurance contract, the insurance company shall determine whether it should be entered into current insurance premiums according to the principle for the confirmation of insurance premiums. The difference between the finally determined amount and the estimated amount shall be included in the insurance premiums during the determination period.336 An insurance company shall, as agreed upon in the contract, conduct accounting treatment of the risk adjustment mechanism, and if it needs to return any insurance premium, it shall offset the current insurance premium income; if it may collect the additional insurance premiums, it shall confirm it as current insurance premium. The insurance company shall at least estimate the risk adjustment funds that shall be collected or returned at the end of the year, and confirm the receivable and payable funds in a timely manner. The insurance company shall set up the classification items such as “return of excessive surplus of critical illness insurance” and “subsidy for the loss of critical illness insurance” under the item of insurance premium to calculate the expenditures and income of risk adjustment of critical illness insurance.337 The long-term insurance liability reserve shall not be withdrawn for a critical illness insurance contract.338 An insurance company shall not make provision for the unearned premium reserve at the end of a year for a critical illness insurance contract of which the insurance period is a natural year.339 An insurance company shall, at the end of the reporting period, make provision of the reserve for outstanding losses that have occurred and have been reported, the reserve for outstanding losses that have occurred but have not been reported, and the claim expense reserve on the liability for outstanding losses. The reserves shall be assessed by fully considering the personalized features of critical illness insurance items and be adjusted in light of the claim settlement rules agreed upon with the government.340 An insurance company shall conduct retrospective inspection of the reserve for outstanding losses according to the CBIRC’s requirements. It shall, through comparing the reassessment result and the original assessment result, analyze the rationality of the assumptions, methods, and flow of assessment of reserves at the early period so as to find out problems and make corrections, if any, in the assessment of reserves during the subsequent accounting period. In case of any major deviation in the withdrawal of reserves of the insurance company, the relevant person shall be seriously held liable.341 335 336 337 338 339 340 341

Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24.

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(d) Management of expenses The expenses for the business management of critical illness insurance shall be categorized into special expenses and common expenses according to the attributes of expenses.342 “Special expenses” mean the expenses that specially occur for critical illness insurance and can be directly attributed to critical illness insurance, mainly including expenses relating to full-time staff members of critical illness insurance, depreciation of special assets for critical illness insurance, rentals, and so on; meetings, travel, training, and other routine operation expenses that specially occur for the critical illness insurance business; expenses for the construction and maintenance of special information systems for critical illness insurance; and so on.343 “Common expenses” mean the expenses which directly relate to the critical illness insurance business but cannot be all attributed to the critical illness insurance business. Common expenses are mainly categorized into the remuneration and fringe benefits of part-time critical illness insurance staff members; asset occupation expenses, including office rentals; relevant expenses; expenses relating to vehicles, electronic equipment, and consumable items; and expenses for the construction and maintenance of information systems relating to critical illness insurance; and so on.344 The fixed assets and intangible assets relating to the critical illness insurance business shall be depreciated or amortized according to the expected number of years and shall not be included in current profits and losses at one time.345 The remuneration and fringe benefits of the senior executives of the head offices and provincial offices of insurance companies shall not be included in special expenses and common expenses.346 An insurance company which undertakes the critical illness insurance business shall not pay handling charges or commissions, and so on, to any entity or individual in any form and shall not offer or promise to offer kickback or any benefit other than those agreed upon in the contract.347 No business entertainment fee and gift expense shall occur in the critical illness insurance business.348 (e) Submission of statements and the supervision and inspection thereof An insurance company shall, within four months after the end of each accounting year, report to the CBIRC the financial business result of critical illness insurance, including the income statements on critical illness insurance and a detailed list on expenses. The provincial branch office of an insurance company shall, within three months after the end of the insurance policy year for each critical illness insurance item, report the financial information on the item to the local CBIRC office.349 342 343 344 345 346 347 348 349

Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid., art.32.

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An insurance company shall establish a mechanism for the internal supervision and inspection of critical illness insurance and conduct at least one special financial inspection of each critical illness insurance item within the agreement-based period.350 An insurance company shall actively assist relevant government departments in conducting the supervision and inspection of the critical illness insurance business.351 An insurance company shall, according to the requirements of relevant government departments, release to the public the actual operation of critical illness insurance for supervision by the general public.352 An insurance company shall, according to the regulations on accounting and archives, establish and improve the rules for archiving all critical illness insurance materials and retain all accounting certificates, accounting books, and statements on the management of the critical illness insurance business in their entirety.353 16.7.6 Interim Measures for the Administration of Risk Adjustment of Insurance Companies’ Critical Illness Insurance for Urban and Rural Residents 2016 (a) General provisions Risk adjustment is an important aspect in critical illness insurance; the CIRC issued the Interim Measures for the Administration of Risk Adjustment of Insurance Companies’ Critical Illness Insurance for Urban and Rural Residents 2016 to regulate the matter on risk adjustment.354 “Risk adjustment of critical illness insurance” means insurance companies’ consultation with relevant departments of the local governments to establish a dynamic risk adjustment mechanism and adopt reasonable methods to conduct the risk adjustment of excessive surplus, policy-related losses, and other circumstances during the operation of the critical illness insurance business so as to ensure the continuous development of the critical illness insurance business.355 The risk adjustment of critical illness insurance shall observe the principles of balancing income and expenditures and keeping a narrow margin of profit.356 (b) Risk adjustment circumstances An insurance company shall, on the basis of consulting with the relevant department of the local government, determine reasonable loss ratio of critical illness insurance, expenses, and rate of profit. It shall conduct the risk adjustment of excessive surplus, policy-related loss, and other circumstances during the insurance period so as to realize the balance of income and expenditures and narrow margin of profit in the operation of the critical illness insurance business.

350 Ibid., art.33. 351 Ibid., art.34. 352 Ibid., art.35. 353 Ibid., art.36. 354 Interim Measures for the Administration of Risk Adjustment of Insurance Companies’ Critical Illness Insurance for Urban and Rural Residents 2016, art.1. 355 Ibid., art.2. 356 Ibid., art.3.

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Loss ratio = critical illness insurance indemnity ÷ critical illness insurance premium × 100%. Expenses plus profit rate of = (operation cost of critical illness insurance + reasonable profit) ÷ critical illness insurance premium × 100%.357 “Excessive surplus” means the balance of an insurance company after it pays off the indemnity for critical illness insurance (including the reserve for outstanding losses) and after necessary operation costs and reasonable profits are deducted, that is, Excessive surplus = critical illness insurance premiums – indemnity expenditures of critical illness insurance – operation costs of critical illness insurance – reasonable profits. The method for determining excessive surplus shall be determined according to the cooperation agreement on the critical illness insurance, if it is particularly agreed upon in the agreement.358 “Policy-related loss” means the loss of critical illness insurance incurred by inaccurate pricing, adjustments to basic medical insurance policies, or other policy factors, including:359 (1) The price of critical illness insurance which is determined by the bid caller unilaterally, and the loss which is incurred by the relatively low bid price resulting from the loss of historical medical data, inaccurate pricing assumption and measurement parameters, or any other reason. (2) Loss incurred by the increase of indemnity expenditures and operation costs of critical illness insurance resulting from the adjustments to relevant policies such as basic medical insurance policies, the catalogue of basic medical insurance drugs, the catalogue of basic medical insurance treatment items, the scope of basic medical insurance service facilities, the catalogue of critical illness insurance regulatory compliance medicine treatment, and the scope of service facilities in the implementation of a critical illness insurance cooperation agreement. (3) The loss caused by the increase of indemnity expenditures of critical illness insurance resulting from earthquakes, floods, or any other natural disaster or any major public health incident in the implementation of the critical illness insurance cooperation agreement. (4) Any other circumstance which is determined as policy-related loss through consultation with the relevant department of the local government. (c) Design of the risk adjustment mechanism An insurance company shall obtain the local basic medical insurance historical data and relevant parameters from the relevant department of the local government, including the treatment data, basic medical insurance purchase rates, hospitalization rates, and the growth of per capita medical expenses in the last three years and rationally design risk adjustment methods based on historical data and relevant parameters.360 357 358 359 360

Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.7.

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The critical illness insurance cooperation agreement signed by an insurance company with the relevant department of the local government shall specify the conditions for initiating risk adjustment and the methods for realizing adjustment. The historical data and relevant parameters as mentioned in article 7 of these Measures shall be specified as the text of or annex to the cooperation agreement.361 An insurance company shall pay close attention to and appraise the impact of changes of policies relating to critical illness insurance and changes of pricing assumptions and parameters, among others, on the business result and report relevant information to the insurance applicant and the local CBIRC office.362 (d) Realization of risk adjustment After the end of each insurance period of critical illness insurance, an insurance company shall, according to the actual operation of critical illness insurance, adjustments to the medical insurance policies, and changes of medical expenses, and according to the critical illness insurance cooperation agreement, consult with the relevant department of the local government to adjust the insurance liability and insurance premium rates in the next insurance period and conduct the risk adjustment of excessive surplus, policy-related loss, and other circumstances during the insurance period.363 After the end of each insurance period of critical illness insurance, if the insurance company and the relevant department of the local government confirm the existence of an excessive surplus, the insurance company shall return the basic medical insurance fund or handle it according to any other method as determined through negotiations with the relevant government department and the insurance company.364 After the end of each insurance period of critical illness insurance, if both the insurance company and the relevant department of the local government confirm the existence of a policy-related loss, the relevant department of the local government shall offer policy subsidies to the insurance company or handle it according to any other method as determined by the relevant government department and the insurance company through negotiations.365 Where an insurance company and the relevant department of the local government jointly establish a risk adjustment fund, after the expiration of the critical illness insurance cooperation period, if the balance of the risk adjustment fund is positive, the balance shall be returned to the basic medical insurance fund, and if the balance is negative, the relevant department of the local government shall offer a policy subsidy to the insurance company.366 When an insurance company that undertakes the critical illness insurance returns excessive surplus to the basic medical insurance fund, it must conduct accounting treatment according to relevant provisions and shall not return the excessive 361 362 363 364 365 366

Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13.

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surplus in such forms as falsely issuing invoices to obtain expenses and reducing the number of personnel and refunding expenses or transfer the refunded balance funds to any account other than the basic medical insurance fund.367 16.7.7 Interim Measures for the Administration of Insurance Companies’ Exit from the Market of Critical Illness Insurance for Urban and Rural Residents 2016 For the purposes of strengthening the administration of exit from the critical illness insurance business for urban and rural residents, regulating insurance companies’ exit from the critical illness insurance business, protecting the lawful rights and interests of the insured, and improving the critical illness insurance system, the CIRC formulated the Interim Measures for the Administration of Insurance Companies’ Exit from the Market of Critical Illness Insurance for Urban and Rural Residents 2016 in accordance with the Insurance Law, the Opinions of the General Office of the State Council on Comprehensively Implementing Critical Illness Insurance for Urban and Rural Residents, and other relevant provisions.368 These Measures shall apply to the market exit of insurance companies which undertake the critical illness insurance business according to insurance regulatory requirements.369 Insurance companies shall exit from the critical illness insurance business under the principles of protecting the lawful rights and interests of the insured, respecting contracts, and steady transition.370 The CBIRC shall be responsible for the supervision and administration of the exit of the head offices of insurance companies from the critical illness insurance business. Local CBIRC offices shall be responsible for the supervision and administration of the exit of branch offices of insurance companies within their respective jurisdictions from the critical illness insurance business.371 Excluding professional health insurance companies, if an insurance company falls under any of the following circumstances, the insurance regulatory authority shall not include, for the time being, the head office and its branch offices in the list of institutions qualified for conducting the critical illness insurance business. (1) Its registered capital is less than two billion yuan, and its net assets are less than five billion yuan. (2) Its core solvency adequacy ratio is lower than 50%, or its comprehensive solvency adequacy ratio is lower than 100%.372 Where the head office of an insurance company falls under any of the following circumstances, the insurance regulatory authority shall no longer include the head office and its branch offices in the qualification list within three years.373 367 Ibid., art.10. 368 Interim Measures for the Administration of Insurance Companies’ Exit from the Market of Critical Illness Insurance for Urban and Rural Residents 2016, art.1. 369 Ibid., art.2. 370 Ibid., art.3. 371 Ibid., art.4. 372 Ibid., art.5. 373 Ibid., art.6.

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(1) It has been given an administrative penalty due to its critical illness insurance business, or three or more provincial branch offices of the insurance company (including branch offices in cities under separate state planning and branch offices under the direct management of the head office, hereafter the same) have been given administrative penalties due to their critical illness insurance business within one year. (2) Three or more provincial branch offices are no longer included in the qualification list within one year. (3) The bid documents for critical illness insurance violate the provisions of any relevant law, regulation, or regulatory provision. (4) It is guilty of fraud in the bidding for the critical illness insurance, submits a bid in collusion, maliciously underprices to gain an advantage in competition, impedes any other bidder’s fair competition, impairs the lawful rights and interests of the bid caller or any other bidder, wins the bid by bribing the bid caller or the member of the bid evaluation committee or by any other means of unfair competition, divulges the information on the insured provided by the bid caller, or instigates or approves the aforesaid conduct of its branch office. (5) It pays any handling charge or commission, bidding service fee or consulting fee, and so on, in any form to any entity or individual in the course of undertaking the critical illness insurance; offers or undertakes to offer kickbacks or any other interest not agreed upon in the insurance contract; or approves or instigates its branch office’s aforesaid conduct. (6) The full-time service team is seriously insufficient, the claim settlement service quality is low, or it divulges the information of the insured or any other significant information that seriously affects the normal operation of the critical illness insurance business. (7) It unilaterally exits during the course of the critical illness insurance contract. Where a provincial branch office of an insurance company falls under any of the following circumstances, the local CBIRC office shall no longer include it in the list of institutions qualified for conducting the critical illness insurance business within three years. (1) It has been given an administrative penalty due to its critical illness insurance business, or three or more branch offices thereof have been given administrative penalties for the critical illness insurance business within one year. (2) The head office falls under any circumstance as set forth in items (3) through (7), art.6 of these Measures.374 An insurance company shall not undertake new type of critical illness insurance business during the period when it is temporarily not included in the list of institutions qualified for conducting the critical illness insurance business.375

374 Ibid., art.7. 375 Ibid., art.8.

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Where an insurance company which is operating a specific critical illness insurance item falls under any circumstance as set forth in items (3) through (6) of art.6, or is given an administrative penalty due to the item, the insurance regulatory authority may order it to exit from the item after the end of the insurance year and shall not undertake the item within three years.376 For an insurance company that has won the bid for a critical illness insurance item and has not entered into an insurance agreement, if its head office or provincial branch office falls under any of the circumstances as set forth in item (3) or (4) of art.6 of these Measures, the local CBIRC office may order the insurance company not to conclude the insurance agreement with the bid caller and not to undertake critical illness insurance within three years, and the local CBIRC office may assist the relevant department of the local government to invite bids once again or choose the alternative organization according to the original bidding result.377 Where, in the course of operation of a critical illness insurance item, an insurance company is unable to continue the business operation due to reasons attributable to the insurance company, or its continued operation will cause serious consequences to the critical illness insurance business, the local CBIRC office shall, after discussing with the relevant government department, designate another insurance company to replace it in a timely manner and require the original insurance company to exit from the item after the end of the current insurance year and not undertake the item within three years.378 All insurance companies may consult the change of the qualification list for critical illness insurance on the website of the CBIRC and local CBIRC offices. The decision made by the insurance regulatory authority to require an insurance company to exit from a critical illness insurance item at the end of the insurance policy year shall be made in writing, and a letter shall be sent to the relevant department of the local government which has concluded a critical illness insurance agreement with the insurance company at the same time.379 Where the CBIRC or the local CBIRC office requires the insurance company’s exit from the critical illness insurance item, it shall assist the relevant department of the local government to select another qualified insurance company to undertake the original critical illness insurance cooperation agreement.380 An insurance company shall, according to the critical illness insurance cooperation agreement, perform corresponding responsibilities and obligations, shall not maliciously delay the payment of and underpay the indemnity or lower the service quality. At the end of the cooperation agreement period, the insurance company shall cooperate with its successor insurance company to complete the handover work, effectively conduct such work as the transfer of materials and information, premium settlement, service docking, and so on. They shall form relevant records or reports, which shall be signed and confirmed by all parties.381 376 377 378 379 380 381

Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14.

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An insurance company that undertakes the critical illness insurance business shall not unilaterally exit, unless it is otherwise prescribed by these Measures.These Measures shall not apply to the agreement-based termination of the insurance contract by both parties to the critical illness insurance contract. However, the insurance company shall effectively conduct the transitional exit work as agreed upon in the contract and shall not damage the lawful rights and interests of the insured.382 When an insurance company enters into a critical illness insurance contract with the relevant department of the local government, it may take the exit circumstances prescribed in these Measures as the clauses applicable to the rescission of the agreement, agree upon the specific exit flow, and observe it at the time of exit.383 16.8 Conclusion Commercial health insurance has been developing rapidly in China. The regulatory system for health insurance has been strengthened and played a vital role for the rapid development of the health insurance industry. In 2018, China’s total national medical and health expenses reached ¥5.8 trillion yuan, of which personal expenditure accounted for 28.7%. Commercial health insurance payments accounted for only 3% of the total national medical and health expenses,384 being much lower than the developed countries. For example, in the United States, commercial health insurance accounts for about 37% of the total national medical and health expenditure.385 There is great potential for health insurance to further develop in China. At present, the health insurance business is facing four major challenges: First, the health insurance product is still mainly based on long-term critical illness insurance, and the product differentiation is insufficient. Second, sales of the products are still highly dependent on the traditional offline channels of life insurance and property insurance. The development cost is high, and professionalism needs to be improved.Third, the complexity of health products and the high frequency of claims have led to long and complicated operational procedures. At present, traditional human operations are mostly used, the cost is high, and the overall digitalization is not high. Fourth, the integration of insurance companies with medical and health industry service providers is still in its preliminary stage. Lack of data sharing with medical institutions and the difficulty of precise pricing and rate control reduce, to a certain extent, product supply and services and also business model innovation. These challenges need to be addressed in the years to come. To further regulate the development of health insurance, with the approval of the State Council, the CBIRC recently, together with other 12 governmental

382 Ibid., art.15. 383 Ibid., art.16. 384 Insurance Association of China, “Industry outlook under the newly revised ‘Measures for the Administration of Health Insurance’”, Chinese News Agency, 25 November 2019. 385 Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Science Press, Beijing 2018) p. 204.

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departments,386 jointly issued the Opinions on Promoting the Development of Commercial Insurance in Social Services 2020.387 The Opinions 2020 sets out 13 aspects to be emphasized in order to promote the development of commercial insurance in social services, improve the risk protection in related areas, and increase long-term capital supply. Among the 13 aspects, the Opinions 2020 put the development of commercial health insurance on the top of the agenda with the following four aspects. (1) Expanding the supply of commercial health insurance. Adhering to the health insurance protection attributes, commercial insurance institutions shall be guided to innovate and improve the content of insurance protection and improve the protection level and service capabilities. They are encouraged to adapt to consumer’s needs and provide comprehensive health insurance products and services in various fields, including medical treatment, disease, rehabilitation, care, and childbirth. They are encouraged to make full use of the personal income tax preferential policies of commercial health insurance and expand the scope of related insurance products in a timely manner. New medical technologies, new drugs, and new device applications shall be gradually incorporated into the scope of health insurance protection. Commercial insurance institutions shall be guided to develop products related to cancer screening, diagnosis, and treatment; to support medical innovation; and to serve the country’s “cancer prevention implementation plan”. They are encouraged to participate in the construction of the Boao Lecheng International Medical Tourism Pioneer Zone and provide health insurance services that are connected to medical tourism.The development of medical liability insurance and medical accident insurance shall be accelerated. Insurance for compensation for adverse reactions to vaccination shall be studied and developed. The goal is to expand the commercial health insurance market to over ¥2 trillion by 2025 and to make the commercial health insurance an important part of the medical security system with Chinese characteristics. (2) Improving the quality and efficiency of commercial insurance institutions participating in medical insurance services. The operation and supervision mechanism of commercial insurance institutions undertaking critical illness insurance for urban and rural residents shall be improved and their service levels be raised. They shall actively participate in medical insurance control costs and promote the reduction of “poverty due to illness and return to poverty due to illness”. They are encouraged to run basic medical insurance, medical assistance, and so on to provide quality services. The information sharing between the commercial health insurance information 386 Including the CBIRC, the National Development and Reform Commission, the Ministry of Education, the Ministry of Civil Affairs, the Ministry of Justice, the Ministry of Finance, the Ministry of Human Resources and Social Security, the Ministry of Natural Resources, the Ministry of Housing and Urban-Rural Development, the Ministry of Commerce, the National Health Commission, the State Taxation Administration, and the National Healthcare Security Administration. 387 Yin Bao Jian Fa No. 4 [2020].

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platform and the national medical security information platform shall be explored and promoted to strengthen the use of medical and health big data, promote the reform of medical payment methods, and better serve medical insurance policy formulation and medical expense management. Commercial insurance institutions are encouraged to participate in the national long-term care insurance pilot programme. (3) Accelerating the development of commercial long-term care insurance. In meeting the needs for the development of the nursing industry and market demand, commercial insurance institutions shall be guided to accelerate research and development of products suitable for diverse nursing needs such as home nursing, community nursing, and institutional nursing and explore the combination of commercial long-term nursing insurance and nursing services. A conversion mechanism shall be studied and established between life insurance compensation liability and nursing payment liability to support the insured to obtain insurance payments in advance when they are disabled, which can be used for nursing expenses. (4) Promoting the development of health services. Commercial insurance institutions shall be supported to actively participate in the Healthy China Initiative. The proportion of health management expenses in health insurance premiums shall be increased. Health services such as health promotion, disease prevention, chronic disease management, and maternal and child health care shall be innovated and improved. The integrated development of health insurance and health management shall be promoted. Insurance funds to invest in the health service industry according to regulations shall be supported. Commercial insurance institutions shall be allowed to orderly invest in the establishment of medical institutions such as Chinese and Western medicine and health service institutions such as rehabilitation, care, and medical care. Commercial insurance institutions shall be guided to actively participate in the construction of care personnel training systems, promote the expansion of rehabilitation aids, and improve the quality of care services.

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CHAPTER 17

Pension insurance

17.1 Introduction A pension is a type of retirement plan that provides monthly income in retirement. Pension insurance is an important security for the basic needs of elderly people and a stable and reliable financial source for living after retirement. The establishment of a good pension insurance system can contribute to the development of society and also to its stability and harmony. In recent years, China’s aging population has been increasing. China is the only country in the world with an elderly population of over 100 million, and it is also the country with the most severe population aging among developing countries. By the end of 2012, China’s elderly population over 60 years of age reached 194 million; it reached 243 million by the end of 2020 and will exceed 300 million in 2025.1 With the gradual increasing of the population aging, the demand for elderly care services has been increasing. The issue of pension insurance has attracted much attention from the government. The pension system in China is underpinned by three pillars. The first one is the basic pension insurance, which is composed of public pension plans and is mandatory. The second pillar is an annuity plan (enterprise annuity and occupational annuity) initiated by employers and contributed to by the employees,2 which aims to improve the living standards of employees after retirement and is an important supplementary form of basic pensions. The third pillar is composed of individual or household savings annuity plans, such as commercial pension insurance. The first pillar is within the scope of the social insurance which is regulated by the Social Insurance Law of China.3 It is beyond the scope of this chapter. The second and third pillars involve commercial pension insurance. This chapter considers the question of how the commercial pension insurance is regulated in China.

1 The Several Opinions of the State Council on Accelerating the Development of Pension Services (the State Council No. 35 [2013]), 6 September 2013. 2 According to the Measures on Enterprise Annuities (which was issued by the Ministry of Human Resources and Social Security and the Ministry of Finance and came into effect on 1 February 2018), the employer and its employees need to make contributions to the enterprise annuity respectively. The employer’s annual contribution cannot be more than 8% of total payroll.The total contribution from both the employer and its employees should not exceed 12% of total payroll.The employer will be responsible for withholding the employees’ contributions from their individual salaries. 3 The Social Insurance Law of China was enacted on 28 October 2010 and came into force on 1 July 2010. Chapter 2 of the Law deals with basic pension insurance.

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DOI: 10.4324/9781351122863-17

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17.2 The legal framework for the regulation of commercial pension insurance In 2006, the State Council pointed out in the Several Opinions of the State Council on the Reform and Development of the Insurance Industry the following: We shall develop individual and group pension insurance, encourage and support competent enterprises to set up multilevel pension plans through commercial insurance and to enhance the security level for employees. We shall take full advantage of insurance institutions in actuarial analysis, investment, account management, pension payment and etc, and encourage them to involve in enterprise annuity business, expand pension insurance service area.4

Further, in 2014, the State Council put forth a number of requirements for speeding up modern insurance service in the Several Opinions of the State Council on Accelerating the Development of Modern Insurance Service Industry.5 Building commercial insurance into an important pillar of the multilayered social security system is one of the government’s objectives.6 Commercial insurance shall gradually become the major insurance undertaking individual and household commercial security plans and providing pension and health security plans initiated by enterprises or individuals. Insurance institutions are supported to vigorously expand the enterprise annuity business. The supplementary role of commercial insurance in basic pension insurance shall be brought into full play.7 The State Council set out the following policies and requirements: [I]nsurance institutions shall be encouraged to develop new pension insurance products and services in order to provide personalized and differential pension security for different groups of customers. The individual pension insurance by personal savings shall be promoted. The pilot programme on the housing reverse mortgage pension insurance shall be conducted.8 The single child family security plan shall be developed. The new model to provide security for the elderly who have lost their only child shall be explored. The comprehensive liability insurance of the elderly care institutions shall be developed. Qualified insurance institutions are supported to invest in the elderly service industry

4 The Opinions of the State Council on the Reform and Development of the Insurance Industry was issued on 15 June 2006 (The State Council No.23 [2006]) (see accessed on 15 October 2020). 5 The Several Opinions of the State Council on Accelerating the Development of Modern Insurance Service Industry (the State Council No. 29 [2014]), 10 August 2014. 6 Ibid., Part 2(4). 7 Ibid. 8 The elderly reverse mortgage pension insurance is an innovative commercial pension insurance business that combines housing mortgage with lifetime pension annuity insurance. That is, after a senior citizen (over 60 years old) who owns the complete property right of a housing mortgages the housing to an insurance company, the senior citizen shall continue to have the ownership, the right to use, the right to earnings, and the right of disposal upon consent of the mortgagee (the insurer) and shall continue to receive pensions until his or her death according to the conditions as agreed on in the pension insurance contract. After the death of the senior citizen, the insurance company shall obtain the disposal right of the mortgaged housing and the incomes arising from the disposal shall be preferentially used for paying costs related to the pension insurance

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so as to promote the integrated development of the insurance service industry and the elderly service industry.9

In order to promote the development of commercial pension insurance, the State Council, the CIRC/CBIRC, and other relevant government departments have formulated a number of “Opinions”, “Measures”, or “Guidelines” which are to be followed by insurance companies and other relevant players of the pension insurance market. The following are the major pieces of these rules: (1) Several Opinions of the State Council on Accelerating the Development of Pension Services Industry 2013.10 (2) Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry 2014.11 (3) Several Opinions of the General Office of the State Council on Accelerating the Development of Commercial Pension Insurance 2017.12 (4) The Guidelines of the CIRC on Carrying out the Pilot Programmes on Elderly Reverse Mortgage Pension Insurance 2014.13 (5) Notice of the CIRC on Issuing the Measures for the Administration of Old-Age Security Management Business 2015.14 (6) Notice of the Ministry of Finance, the State Administration of Taxation, the Ministry of Human Resources and Social Securities, the CBIRC, the China Securities Regulatory Commission on Carrying out the Pilot Project of Individual Tax-Deferred Commercial Pension Insurance 2018.15 (7) Notice of the CBIRC, the Ministry of Finance, the Ministry of Human Resources and Social Security, and the State Administration of Taxation on Issuing the Guidelines on Developing Individual Tax-Deferred Commercial Pension Products 2018.16 (8) Notice of the CBIRC on Issuing the Interim Measures for the Administration of the Individual Tax-Deferred Commercial Pension Insurance Business 2018.17 9 The Several Opinions of the State Council on Accelerating the Development of Modern Insurance Service Industry (the State Council No. 29 [2014]), Part 2(5). 10 The State Council No. 35 [2013] issued on 6 September 2013 came into force on the same day (see accessed on 15 October 2020). 11 The State Council No. 29 [2014] issued on 10 August 2014 came into force on the same day (see accessed on 15 October 2020). 12 The General Office of the State Council No. 59 [2017] issued on 29 June 2017 came into force on the same day (see accessed on 15 October 2020). 13 Bao Jian Fa No. 53 [2014] issued on 17 June 2014 came into force on the same day (see accessed on 15 October 2020). 14 Bao Jian Fa No. 73 [2015] issued on 30 July 2015 came into force on the same day (see accessed on 15 October 2020). 15 Ministry of Finance No.22 [2018] issued on 2 April 2018 came into force on the same day (see accessed on 15 October 2020). 16 Yin Bao Jian Fa No.20 [2018] issued on 25 April 2018 came into force on the same day (see accessed on 15 October 2020). 17 Yin Bao Jian Fa No.23 [2018] issued on 16 May 2018 came into force on the same day (see accessed on 15 October 2020).

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(9) Notice of the CBIRC on Issuing the Interim Measures for the Administration of the Utilization of Individual Tax-Deferred Commercial Pension Insurance Funds 2018.18 (10) Notice of the CBIRC on Expanding the Scope of Elderly Housing Reverse Mortgage Pension Insurance 2018.19 (11) The Opinions on Promoting the Development of Commercial Insurance in Social Service 2020.20 The aforementioned regulatory rules are considered here, with some of them in detail and some in brief. 17.3 The State Council’s opinions on the development of commercial pension insurance In recent years, the State Council has published two pieces of regulation relating to the pension service industry. The first one is the Several Opinions of the State Council on Accelerating the Development of Pension Service Industry 2013,21 which for the first time requests insurance companies to carry out pilot programmes of reverse mortgage pension insurance for the elderly.The second one is the Several Opinions of the General Office of the State Council on Accelerating the Development of Commercial Pension Insurance 2017.22 The “Opinions” means in essence “requirements” or “directives”. The relevant Ministries, the CIRC/CBIRC, and the insurance industry must implement the “Opinions”. To implement the Several Opinions of the State Council on Accelerating the Development of Pension Service Industry, the CIRC published the Guidelines on Carrying out the Pilot Programme of the Elderly Housing Reverse Mortgage Pension Insurance 2014,23 and then the CBIRC published the Notice on Expanding the Scope of Elderly Housing Reverse Mortgage Pension Insurance 2018.24 In accordance with these regulations, the Pilot Programme of the Elderly Housing Reverse Mortgage Pension Insurance have been carried out and expanded to the whole country. This programme represents an innovation of commercial pension insurance in China and will be discussed in detail in section 17.5. The State Council in the Several Opinions on Accelerating the Development of Commercial Pension Insurance 2017 pointed out that “before the end of 2017,

18 Yin Bao Jian Fa No. 32 [2018] issued on 22 June 2018 came into force on the same day. (see accessed on 15 October 2020). 19 Yin Bao Jian Fa No. 43 [2018] issued on 31 July 2018 came into force on the same day (see

accessed on 15 October 2020). 20 The CBIRC and other 12 Government departments jointly issued the Opinions on Promoting the Development of Commercial Insurance in Social Service (Yin Bao Jian Fa No. 4 [2020]) on 23 January 2020 (see accessed on 15 October 2020). 21 The State Council No. 35 [2013]. 22 The General Office of the State Council No. 59 [2017]. 23 Bao Jian Fa No. 53 [2014]. 24 Yin Bao Jian Fa No. 43 [2018].

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a pilot program for individual tax-deferred commercial pension insurance will be launched.” To implement this requirement, the Ministry of Finance, the State Administration of Taxation, the Ministry of Human Resources and Social Securities, the CBIRC, and the China Securities Regulatory Commission have jointly formulated two pieces of “Notice”, that is, the Notice on Carrying out the Pilot Project of Individual Tax-Deferred Commercial Pension Insurance 201825 and the Notice on Issuing the Guidelines on Developing Individual Tax-Deferred Commercial Pension Products 2018.26 In addition, the CBIRC has published another two pieces of “Notice”, that is, the Notice on Issuing the Interim Measures for the Administration of the Individual Tax-Deferred Commercial Pension Insurance Business 201827 and the Notice on Issuing the Interim Measures for the Administration of the Utilization of Individual Tax-Deferred Commercial Pension Insurance Funds 2018.28 In compliance with the aforesaid requirements, since 2018, the new programme of individual tax-deferred commercial pension insurance has been carrying out in China. This new programme will be discussed in detail in section 17.6. 17.4 The measures for the administration of old-age security management business To facilitate the insurance sector in actively participating in the construction of a multilayer old-age security system, promote the sustainable and sound development of old-age security management business, and protect the lawful rights and interests of parties involved in old-age security management business activities, the CIRC issued the Measures for the Administration of Old-Age Security Management Business 201529 and requested all endowment (pension) insurance companies to comply and implement the Measures. These Measures are considered in this section.30 The Measures for the Administration of Old-Age Security Management Business 2015 consist of 60 articles in six chapters: the general provisions (articles 1–6), business rules (articles 7–34), investment management (article 35–42), risk control (articles 43–53), supervision and administration (articles 54–57) and supplementary provisions (article 58–60). The “endowment (or pension) insurance companies” means the lawfully registered commercial endowment insurance companies formed with the approval of the CBIRC.31 The “old-age security management business” means the old-age security services and related fund management services provided by endowment insurance companies in the capacity of management institutions on the commis-

25 Ministry of Finance No.22 [2018]. 26 Yin Bao Jian Fa No.20 [2018]. 27 Yin Bao Jian Fa No.23 [2018]. 28 Yin Bao Jian Fa No. 32 [2018]. 29 Bao Jian Fa No. 73 [2015]. The Measures came into force on the date of issuance. The Interim Measures for the Administration of Old-Age Security Management Business (the CIRC No. 43 [2013]) was repealed. 30 The Measures for the Administration of Old-Age Security Management Business 2015, art.1. 31 Ibid., art.2.

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sion of group clients such as government bodies, enterprises, public institutions, and other social organizations and individual clients, including scheme design, entrusted management, account management, investment management, payment of benefits, deferred compensation, welfare plans, talent retention incentives, and other service items.32 An endowment insurance company engaging in the old-age security management business shall comply with laws, administrative regulations, and the provisions of the CBIRC and other regulatory authorities; adhere to the principles of free will, fairness, and good faith; and not damage the lawful rights and interests of clients or the public interest.33 It shall fully know the clients’ demands, follow the risk matching principle, maximize the comprehensive advantages of endowment insurance companies in terms of entrusted management, account management, investment management, risk management and annuity payment, and provide clients with suitable products and services.34 17.4.1 Business rules To engage in the old-age security management business, an endowment insurance company shall have a complete corporate governance structure, sound internal control rules, a scientific investment decision-making system, and standard business operation procedures.35 It shall have two or more years of experience in the enterprise annuity business or the insurance business.36 An endowment insurance company may engage in the old-age security management business throughout the entire nation but shall possess customer service capabilities required for its business development.37 An endowment insurance company engaging in the old-age security management business shall require clients to participate in the business in their real identities and commit that the sources and uses of funds entrusted to them comply with laws and regulations. Such a commitment may be made in writing or through internet real-name authentication. When a client fails to make such a commitment or when the endowment insurance company knows that a client’s identity is unreal or the source or use of the funds entrusted by a client is illegal, the company shall not provide old-age security management service for the client.38 An endowment insurance company may engage in the old-age security management business in the following ways: (1) Providing a single old-age endowment security management service for a single group client; (2) Providing collective old-age endowment security management services for multiple group clients; (3) Providing collective old-age endowment security management services for multiple individual clients. Where an endowment insurance company engages in 32 33 34 35 36 37 38

Ibid., art.3. Ibid., art.4. Ibid., art.5. Ibid., art.7. Ibid., art.9. Ibid., art.8. Ibid., art.10.

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the old-age security management business in the way mentioned in item (1), the initial amount of funds entrusted by the client for management shall be not less than ¥50 million yuan; if it engages in the old-age security management business in the way mentioned in item (3), the initial amount of funds entrusted by an individual client for management under a closed-end portfolio shall not be less than ¥10,000 yuan.39 When engaging in the group old-age security management business, an endowment insurance company shall require a group client to provide the following materials: (1) An old-age security management plan adopted by the resolution of the board of directors, the assembly of employee representatives, or any other decision-making process, or the reply or approval documents issued by relevant governmental departments regarding the old-age security plan; (2) The names and identity information of all beneficiaries. Where only individual contributions are made under the group old-age security management business and there are no group contributions, the group client may be exempted from providing the materials listed in item (1). When engaging in the individual old-age security management business, an endowment insurance company shall require an individual client to provide the following materials: (1) Identity information; (2) Capital account information.40 An endowment insurance company engaging in the old-age security management business shall enter into an entrusted management contract with a client in accordance with laws, administrative regulations, and these Measures, expressly stipulating the rights and obligations of both parties and other relevant matters. The entrusted management contract shall include the following basic matters: (1) The fund contribution plan of the client; (2) The scope, limitation, and proportion of investment; (3) The investment strategy and the management term; (4) The management mode and authority for the client’s funds; (5) Disclosure of various risks; (6) The methods for providing and inquiring about the account information of the client; (7) The rights and obligations of the parties; (8) The method of calculation and mode of payment of management fees; (9) Other services and the methods for setting aside and paying fees for them; (10) Conditions and procedures for the rescission and termination of the contract, and matters in respect of the settlement and return of client assets; (11) Liabilities for breach of contract and methods for settling disputes; (12) Other matters as prescribed by the CBIRC.41 An endowment insurance company engaging in old-age security management business shall perform the following duties: (1) Establishing and maintaining information on the accounts of clients and beneficiaries and providing clients and beneficiaries with account status inquiry service; (2) Developing fund investment strategies and conducting investment management; (3) Valuating and checking with the asset custodian on a regular basis; (4) Overseeing fund management; (5) Calculating and paying benefits; (6) Preparing and providing clients with old-age security management reports on a regular basis; (7) Properly keeping records related to the 39 Ibid., art.11. 40 Ibid., art.12. 41 Ibid., art.13.

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old-age security management business; (8) Other duties as prescribed by the state or stipulated in the contract.42 An endowment insurance company may carry out various works in respect of the old-age security management business by itself or authorize any other qualified financial institution to undertake part of the duties of a management institution but shall assume ultimate responsibility for the old-age security management business it undertakes. Where an endowment insurance company authorizes any other qualified financial institution to assume part of the duties of a management institution, it shall enter into an entrusted management contract with the hired financial institution, expressly stipulating the rights and obligations of both parties and other relevant matters.43 An endowment insurance company is not required to set aside insurance liability reserves for its old-age security management business.44 An endowment insurance company shall report the old-age security management products it has developed to the CBIRC for recordation before selling them. The materials to be submitted for recordation of an old-age security management product shall include (1) a list of materials for the recordation of old-age security management products, to which the official seal of the company has been affixed; (2) the contract text of the old-age security management product; (3) the portfolio descriptions; (4) a written declaration of the chief actuary; (5) a written declaration of the person in charge of legal affairs; (6) a feasibility study report; (7) the financial management measures; (8) the business management measures; (9) an investment risk prompt; and (10) other materials as specified by the CBIRC.45 In case of any change in the main contents of an old-age security management product, an endowment insurance company shall report the change to the CBIRC for recordation before selling such product. Any of the following circumstances shall be deemed a change in the main contents of a product: (1) Change in the name of the product; (2) Change in the management institution; (3) Increase of the management rates; (4) Change in the principal investment policy; (5) Any other circumstance as prescribed by the CBIRC. The materials to be submitted for the recordation of a change in the product shall include (1) a checklist of materials for the recordation of change, to which the official seal of the company has been affixed; (2) the reason for change, and a comparative illustration of the main changed contents; (3) the texts involved in the change (including the contract text and the portfolio descriptions); (4) a written declaration of the chief actuary; (5) a written declaration of the person in charge of the legal affairs; and (6) other materials as required by the CBIRC.46 The name of a group old-age security management product shall conform to the following format: the endowment insurance company’s name + descriptive words + single or collective + group old-age security management product, and the

42 43 44 45 46

Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18.

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name of an individual old-age security management product shall conform to the following format: the endowment insurance company’s name + descriptive words + individual old-age security management product, among which, the endowment insurance company’s name may be its full name or the abbreviation thereof, and the descriptive words shall be determined by the endowment insurance company itself, which shall not exceed ten Chinese words.47 An endowment insurance company engaging in the old-age security management business shall, in the name of an old-age security management product, open a bank capital account for the product as well as a bank capital account and an asset account for the portfolio. In particular, when old-age security management service is provided for a single client, the name of the bank capital account opened for the product shall contain the name of the old-age security management product, and the name of the bank capital account or asset account for the portfolio shall contain the name of the old-age security management product and the name of the investment portfolio; when collective old-age security management service is provided for multiple clients, the name of the bank capital account opened for the product shall contain the name of the old-age security management product, and the name of the bank capital account or asset account for the portfolio shall contain the name of the old-age security management product and the name of the investment portfolio.48 An endowment insurance company engaging in the old-age security management business shall set up a separate old-age security management fund for each old-age security management product. Such an old-age security management fund shall be managed under the principles of separate account management, account segregation, and independent accounting so as to ensure that the old-age security management fund is independent of the inherent property of any natural person, any legal person, or any other organization providing services for fund management and other property under the management thereof. “Separate account management” means that a special bank capital account and an asset account are opened for each old-age security management fund for the management thereof. “Account segregation” means that the bank capital account and asset account of an old-age security management fund shall be completely independent of and segregated from any bank capital account and asset account owned and managed by the endowment insurance company; there shall be no claims, debts, or joint and several liability between them, and there shall be no purchase or sale, transaction, property transfer or transfer of benefits between them, except for the transfer of cash made for the creation of an investment account during the initial stage after the creation of the account. “Independent accounting” means that each old-age security management fund is subject to independent accounting treatment, for which the balance sheet, income statement, and other financial statements shall be provided.49

47 Ibid., art.19. 48 Ibid., art.20. 49 Ibid., art.21.

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The third-party custody system shall be adopted for old-age security management funds. An endowment insurance company shall authorize an independent asset custodian and enter into an asset custody contract with it expressly stipulating the rights and obligations of both parties and other relevant matters.50 The qualifications, duties, selection, and other matters in respect of asset custodians shall be governed by relevant asset custody provisions of the CBIRC, mutatis mutandis. An old-age security management fund custodian shall apply to a relevant institution for opening an asset account in accordance with these Measures and the asset custody contract, open a capital account on the basis of the power of attorney of the fund management institution and the asset custody contract, and inform the fund management institution.51 The fully funded system shall apply to the management of old-age security management funds. The income from the investment operations of an old-age security management fund shall be included in various accounts of the old-age security management fund in the full amount.52 An endowment insurance company may set up public accounts for group clients to record the fees paid by them, their investment income, and other account information. If there are individual beneficiaries, the endowment insurance company may set up personal accounts for each individual beneficiary, and accounts of group contributions and accounts of individual contributions may be set up under personal accounts to respectively record details of contributions made by groups and individuals, their investment income, and other account information.53 Where an endowment insurance company sets up personal accounts for individual beneficiaries, it shall expressly agree with the client upon the principle for determining the ownership of rights and interests and upon the conditions for the receipt and payment thereof, and the individual contributions made by individual beneficiaries shall be included in the account of individual contributions in full amount. For a group client, after an individual beneficiary is dismissed, his or her personal account may continue to be managed under the preserved account set up by the original old-age security management fund management institution.54 When engaging in the old-age security management business, an endowment insurance company shall charge management fees as agreed upon in the management contract. The management fees may include the following items: (1) Initial cost. Initial cost is the management cost deducted once and for all when the funds under the entrusted management of the endowment insurance company enter into the special fund management account. Initial cost shall be collected at a certain percentage of the total payment for the current period; (2) Management fee. Management fee is the operating cost of the endowment insurance company in providing entrusted management, account management, investment management, payment of benefits and other services for the old-age security management

50 51 52 53 54

Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26.

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fund, and shall be charged each year at a certain percentage of the net value of the old-age security management fund of the year or be charged in the form of ration charging according to the mode of management and the type of service; (3) Custody fee. Custody fee is the operating cost of the asset custodian in providing fund custody services for the old-age security management fund. The custody fee shall be charged each year at a certain percentage of the net value of the old-age security management fund of the year or be charged in the form of ration charging according to the mode of management and the type of service; (4) Contract termination fee. Where a client terminates an old-age security trust management contract in advance, the endowment insurance company may charge the one-time early termination fee at a certain percentage of the net value of the old-age security management fund at the time when the contract is terminated. The endowment insurance company shall set degressive early termination fees proportionally according to the term of the contract. Where an endowment insurance company sets up a personal account for an individual beneficiary, if the individual beneficiary withdraws ahead of schedule, he or she shall file an application for withdrawal through the client. The endowment insurance company may charge a one-time contract termination fee at a percentage of the net value of the personal account of the beneficiary. An endowment insurance company shall set degressive early termination fees proportionally according to the duration of personal accounts; (5) Investment switching fee. Investment switching fee is the operating cost of the endowment insurance company in providing investment switching services for the old-age security management fund and shall be charged at a certain percentage of the net value of the switched fund or in the form of ration charging.55 Where a group client in the old-age security management business terminates a contract in advance, an endowment insurance company shall require it to provide a valid certificate on the fact that it has informed the beneficiaries of matters related to the termination of the contract and shall dispose of the old-age security management fund as requested by the client under the principle for determining the ownership of rights and interests. Where an individual client in the old-age security management business terminates a contract in advance, an endowment insurance company shall, after deducting the early termination fee, transfer the balance of the individual client’s funds to the bank capital account of the individual client by bank transfer.56 Endowment insurance companies and asset custodians shall, in accordance with relevant provisions of laws and administrative regulations, keep the accounting books of asset management businesses and properly keep relevant documents and materials, including contracts, agreements, and transaction records.57 An endowment insurance company shall disclose information about individual old-age security management products to individual clients through its website or a designated website and shall ensure the veracity, accuracy, and integrity of such information. The information to be disclosed shall include (1) the fundraising 55 Ibid., art.27. 56 Ibid., art.28. 57 Ibid., art.29.

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announcement and the old-age security management contract; (2) funds raised from the portfolio; (3) the net value or net asset value of assets in the portfolio; (4) investment orientation; and (5) other information required to be disclosed. For a closed-end portfolio, an endowment insurance company may be exempted from disclosing information mentioned in item (3).58 An endowment insurance company shall, within 60 days after the end of each year, provide group clients with the old-age security management report for the last year and provide beneficiaries with services such as inquiry regarding the annual account statements and the rights and interests of individuals.59 An endowment insurance company shall, within 60 days after the end of each year, disclose basic information about the old-age security management business on its website, including the size of funds, number of funds, and return on funds, except for client information that needs to be kept confidential.60 An endowment insurance company shall strengthen the management of salespersons for the old-age security management business. Such salespersons shall satisfy the following requirements: (1) Having full knowledge of and consciously abiding by relevant laws and regulations governing the business; (2) Being familiar with the characteristics of old-age security management products and other financial products involved in the advisory opinions given to clients and having some knowledge and understanding of the markets of relevant products; (3) Having the qualifications required by relevant regulatory authorities for relevant industries.61 An endowment insurance company selling old-age security management products through the internet channels shall comply with regulatory provisions of the CBIRC on operating insurance businesses via the internet, provisions governing network platform construction, information disclosure, conclusion of third-party cooperation agreements, transaction information management, customer service management, business data security management, client information security management, and emergency response, among others.62 17.4.2 Investment management The scope of investment of old-age security management funds shall be governed by relevant regulatory provisions of the CBIRC on the investment scope of insurance funds, mutatis mutandis.63 Assets to be allocated to investment accounts of old-age security management funds shall include current assets, fixed-income assets, listed equity assets, infrastructure investment plans, real estate-related financial products, and other financial assets. The classification and definition of current assets, fixed-income assets, listed equity assets, infrastructure investment plans, real estate-related financial products,

58 59 60 61 62 63

Ibid., art.30. Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35.

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and other financial assets shall be governed by relevant regulatory provisions of the CBIRC on the utilization of funds.64 Endowment insurance companies may take charge of the investment management of old-age security management funds themselves or entrust them to qualified investment management institutions. “Investment management institutions” means professional investment management institutions that are lawfully formed within the territory of China and comply with the CBIRC provisions, including insurance asset management companies, securities companies, securities asset management companies, securities investment fund management companies, and the subsidiaries thereof.65 The portfolios established for old-age security management products shall include open-end portfolios and closed-end portfolios. In an open-end portfolio, the total amount of fund shares is not fixed, and fund shares may be paid for or obtained at the time and place as agreed upon in the old-age security management contract. In a closed-end portfolio, the total amount of fund shares remains unchanged during the closed period agreed upon in the old-age security management contract, and fund shares may not be obtained in advance.66 An endowment insurance company shall strengthen the liquidity management of the investment account of an old-age security management product and ensure that the investment account is able to satisfy the liquidity requirements. In particular, the following requirements shall be satisfied in the liquidity management of an open-end portfolio: (1) The investment balance of current assets shall not be less than 5% of the portfolio value; (2) The investment balance of infrastructure investment plans, real estate-related financial products, and other financial assets shall not exceed 75% of the portfolio value, and the investment balance of a single item shall not exceed 50% of the portfolio value; (3) A liquidity management plan shall be established according to the characteristics of the portfolio. During the initial stage after the formation of a portfolio, when the redemption exceeds 10% of the portfolio value in ten working days, and during the liquidation of the portfolio, the portfolio may break the aforesaid proportional limitations set for liquidity management but shall make adjustments to follow the limitations within 30 working days.67 To form a closed-end portfolio, an endowment insurance company shall expressly indicate “closed-end” in the portfolio descriptions and specify the closed period and investment orientation in the product or fundraising announcement.68 A closed-end portfolio formed by an endowment insurance company shall satisfy the asset allocation independence and maturity structure matching requirements for products and investments.69 To invest a closed-end portfolio in an alternative financial product, an endowment insurance company shall, when selling it, voluntarily disclose the variety, underlying 64 65 66 67 68 69

Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39. Ibid., art.40. Ibid., art.41.

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assets, investment proportion, valuation method, liquidity management strategy, major investment risks, and other information of the alternative financial product to potential buyers. Alternative financial products are financial products other than the traditional ones such as deposits, stocks, bonds, and securities investment funds.70 17.4.3 Risk control To engage in the old-age security management business, an endowment insurance company shall establish a corresponding risk management system and include the risk management of the business in the comprehensive risk management system of the company. The risk management system for the old-age security management business shall cover various risks, including market risk, credit risk, liquidity risk, operating risk, strategic risk, and reputation risk, for which effective management and control measures shall be developed.71 When recommending old-age security management products to clients, an endowment insurance company shall have a full knowledge of the risk appetite, risk perception, and risk tolerance of clients; reasonably evaluate their financial condition; and recommend suitable products for clients to choose independently after knowing the aforesaid information.72 When entering into an entrusted management contract with a client, an endowment insurance company shall provide the client with an investment risk prompt to fully disclose investment risks, including market risk, credit risk, liquidity risk, operating risk, and other risks and the meaning, characteristics, and possible consequences of such risks and shall require the client to confirm regarding the contents of the investment risk prompt. The confirmation may be made in writing or through internet real-name authentication.73 An endowment insurance company shall truthfully disclose to clients its investment management capability, historical performance, and other information. When making investment income forecasts for its clients, an endowment insurance company must abide by the principle of good faith, provide adequate and reasonable basis for the income forecasts, and make a special statement in writing or at a conspicuous place of the product page of the sales website of the product that the forecasted results are only for reference and do not constitute its commitments to clients.74 An endowment insurance company shall reasonably control the size of its shortterm individual old-age security management products and ensure that the size of new business in the year matches the capital strength of the company. “Short-term individual old-age security management products” means the oldage security management products with a term of three years or less that are sold to individual clients.

70 71 72 73 74

Ibid., art.42. Ibid., art.43. Ibid., art.44. Ibid., art.45. Ibid., art.46.

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For an endowment insurance company engaging in the commercial insurance business, the size of new closed-end short-term individual old-age security management business entrusted to it for management shall not exceed ten times the solvency surplus of the company at the end of the last year; for an endowment insurance company not engaging in commercial insurance business, the size of new closed-end short-term individual old-age security management business entrusted to it for management shall not exceed ten times the net assets of the company at the end of the last year.75 An endowment insurance company engaging in the individual old-age security management business shall set aside risk reserves at 10% of income of management fees for products of each batch until the total amount of risk reserves reaches 1% of the total amount of the individual old-age security management business under its management in the previous year. The risk reserves shall be specifically used to compensate for losses that occur to old-age security fund property or beneficiaries due to the investment management institution’s violation of any law or regulation, breach of the entrusted management contract, or failure to diligently perform duties. Risk reserves shall be deposited in the special-purpose deposit account opened with the asset custodian by the endowment insurance company or the investment management institution authorized by it.76 An endowment insurance company may make investments with the risk reserves set aside independently or authorize an investment management institution to do so. The risk reserves may be invested in bank deposits, treasury bonds, central bank bills, bonds of central enterprises, financial bonds issued by financial institutions at the central level, and other high-liquidity and low-risk financial products. Income from such investments shall be included in risk reserves for management.77 An endowment insurance company and its employees may not have any of the following conduct when engaging in the old-age security management business: (1) Publicizing and recommending old-age security management products in a false, one-sided, misleading or exaggerated way; (2) Making commitments to clients to guarantee them against loss of the principal of their capital or to bear losses for them; (3) Selling old-age security management products by fraudulent means, concealment, or induction; (4) Misappropriating or embezzling clients’ funds; (5) Operating an old-age security management business in a mixture with other business; (6) Conducting transactions between different portfolios for the purpose of transferring the investment income or loss of old-age security management funds, which damages the interests of clients; (7) Seeking illicit benefits by taking advantage of the old-age security management funds under its management; (8) Unfairly treating different old-age security management funds, which damages the interests of clients; (9) Engaging in insider trading or any other improper trading activities; (10) Other conduct prohibited by any law or administrative regulation, the CBIRC, or any other regulatory authority.78 75 76 77 78

Ibid., art.47. Ibid., art.48. Ibid., art.48. Ibid., art.49.

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An endowment insurance company itself shall not, in any form, undertake guarantee liability for the investment income of old-age security management funds or include any investment income warranty clauses in the management contract or product design.79 An endowment insurance company may enter into a risk buyout contract with a qualified third-party institution for the maintenance and appreciation of the oldage security management fund, and the expenses may be included in the operating costs of the fund. The endowment insurance company shall not provide any form of counter-guarantee for the guarantee institution.80 A qualified third party shall meet the following conditions: (1) Its registered capital is not less than ¥500 million yuan; (2) Its audited net assets in the previous year are not less than two billion yuan; (3) The total amount of the risk buyout contract for the old-age security management fund shall not exceed ten times its audited net assets of the previous year; (4) It has not received any major punishment in the last three years; (5) Other conditions as set out by the CBIRC.81 Where an endowment insurance company purchases risk buyout guarantee for the old-age security management fund, it shall fully disclose to the client in the entrusted management contract or investment risk prompt that there still exists risk of loss from investment in the old-age security management fund after the risk buyout contract is concluded.82 An endowment insurance company shall take preventive and monitoring measures in accordance with the law, establish and improve the client identification system and the large-sum transaction and suspicious transaction reporting system, and fully fulfil the anti-money laundering obligation.83 Under any of the following circumstances, an endowment insurance company shall select an accounting firm to perform an external audit of its old-age security management business, and the corresponding audit fees may be included in the operating cost of the fund; (1) The old-age security management fund has been operating for three full fiscal years; (2) The duties of the management institution of the old-age security management fund are terminated; (3) Any other circumstance as prescribed by the state. The endowment insurance company shall, within 30 days of receipt of the audit report issued by the external audit agency, submit it to the client. If the accounting firm has conducted three audits consecutively, it shall be replaced.84 17.4.4 Supervision and administration An endowment insurance company engaging in the old-age security management business shall, prior to 31 March of each year, submit a special-purpose report on its old-age security management business to the CBIRC which shall include (1) information on the conclusion and performance of management contracts; (2) information 79 80 81 82 83 84

Ibid., art.50. Ibid., art.51. Ibid., art.51. Ibid., art.51. Ibid., art.52. Ibid., art.53.

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on the operation and investment income of funds; (3) information on asset custody and investment supervision; (4) information on the collection of management fees; (5) information on the preparation, investment management, use, and year-end balance of risk reserves; and (6) other matters as required by the CBIRC.85 Where an endowment insurance company has an external audit in accordance with relevant provisions of these Measures and the contract, it shall, within 30 days of receipt of the audit report issued by the external audit agency, submit the audit report to the CBIRC.86 The CBIRC and its local offices shall conduct inspections of the old-age security management business of endowment insurance companies, asset custodians, and investment management institutions on a regular basis or from time to time, and endowment insurance companies, asset custodians, and investment management institutions shall be cooperative.87 Where an endowment insurance company or any of its employees violates these Measures, the CBIRC shall impose punishment in accordance with laws and administrative regulations; if there is no stipulation by any law or administrative regulation, the CBIRC shall order the violator to take corrective action; if the violator is suspected of a crime, the case shall be transferred to the judicial organ for criminal investigation according to the law.88 Pension management companies shall comply with these Measures when engaging in the old-age security management business.89 17.5 The programme of the elderly housing reverse mortgage pension insurance The pension insurance industry has developed two new programmes of pension insurance. One is the elderly reverse mortgage pension insurance, and the other is the individual tax-deferred commercial pension insurance. In this section, we consider the programme of the elderly reverse mortgage pension insurance. In the next section, we shall consider the programme of individual tax-deferred commercial pension insurance. The elderly reverse mortgage pension insurance is an innovative commercial pension insurance business that combines housing mortgage with lifetime pension annuity insurance. That is, after a senior citizen (over 60 years old) who owns the complete property right of a house mortgages the house to an insurance company, the senior citizen shall continue to have the ownership, the right to use, the right to earnings, and the right of disposal upon consent of the mortgagee (the insurer) and shall receive pensions until his or her death according to the conditions as agreed on in the pension insurance contract. After the death of the senior citizen, the insurance company shall obtain the disposal right of the mortgaged housing,

85 86 87 88 89

Ibid., art.54. Ibid., art.55. Ibid., art.56. Ibid., art.57. Ibid., art.59.

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and the incomes arising from the disposal shall be preferentially used for paying costs related to the pension insurance.90 The State Council in the Several Opinions on Accelerating the Development of Pension Service Industry 201391 clearly put forward the pilot of reverse mortgage pension insurance for the elderly.The CIRC established a research group to conduct in-depth research on the reverse mortgage pension insurance business in the United States, Canada, Japan, Singapore, and China’s Hong Kong and Taiwan regions.92 The research group collected and sorted out the relevant practices and experiences of various schemes of pension insurance and organized the insurance industry to discuss the programmes of elderly housing reverse mortgage pension insurance. In order to implement the relevant requirements of the Several Opinions of the State Council on Accelerating the Development of the Pension Service Industry, encourage the insurance industry to actively participate in the development of the pension service industry, explore and improve China’s pension security system, and enrich new approaches to pension security methods, the CIRC published the Guidelines on Carrying out the Pilot Programme of the Elderly Housing Reverse Mortgage Pension Insurance 2014.93 The Pilot Programme was carried out in four cities (Beijing, Shanghai, Guangzhou, and Wuhan) for two years, from 1 July 2014 to 30 June 2016.94 The Pilot Programme proved to be successful, and the CBIRC then decided to expand the Programme into the whole country by publishing the Notice of the CBIRC on Expanding the Scope of Elderly Housing Reverse Mortgage Pension Insurance 2018.95 The Guidelines on Carrying out the Pilot Programme of the Elderly Housing Reverse Mortgage Pension Insurance 2014 are still applicable to the expansion of the Programme, so it is necessary to see how the Programme of the Elderly Housing Reverse Mortgage Pension Insurance was/is carried out in China. 17.5.1 The Guidelines on pilot programme of elderly housing reverse mortgage pension insurance (a) The significance of carrying out the programme of the elderly housing reverse mortgage pension insurance There are a number of significant points to note relating to the carrying out of the programme of the elderly housing reverse mortgage pension insurance (the Programme).96 First, the Programme is favourable to the improvement of China’s social pension security system. The establishment of a multidimensional and sustainable pension security system is an inevitable requirement for effectively respond90 Bao Jian Fa No. 53 [2014]. 91 The State Council No. 35 [2013]. 92 The CIRC Press Conference on 23 June 2014 (see accessed on 15 October 2020). 93 Bao Jian Fa No. 53 [2014]. 94 Bao Jian Fa No. 53 [2014], part 6(2) and (3). 95 Yin Bao Jian Fa No. 43 [2018]. 96 Bao Jian Fa No. 53 [2014], part 1.

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ing to the ageing of the population and realizing sound social and economic development. The Programme is favourable to enriching pension security methods, guiding society to forming a new pension security habit, and enhancing the sustainability of the pension security system. Second, the Programme is favourable to the expansion of pension security fund channels. China lacks an effective means to transform social stock assets to pension resources. The Programme revitalizes the housing properties of the elderly, and it is an active exploration for implementing the optimal allocation of individual economic resources; it is also favourable to expanding sources of pension security funds and improving the elderly pension security level. Third, the Programme is favourable to the enrichment of pension choices for the elderly. The elderly housing reverse mortgage pension insurance is included in commercial insurance. Under the precondition that the existing pension benefits of the elderly are not affected, the Programme provides a new way to support the elderly, who may voluntarily purchase insurance on the basis of their living conditions and pension demands. Fourth, the Programme is favourable to the promotion of the further participation of the insurance industry in the development of the pension service industry. Accelerating the development of the pension service industry is an inevitable requirement for responding to the pension situation and meeting the increasing pension demands of the elderly. The Programme shall be favourable to bringing the advantages of the insurance industry in risk management and fund management into full play, exploring effective measures for the multidimensional participation of the industry in the development of the pension service industry and expanding new space for the development of the industry itself. (b) The basic principles for carrying out the Programme of the elderly housing reverse mortgage pension insurance Three principles must be followed in carrying out the Programme.97 The first principle is to be fair and in good faith and to safeguard the lawful rights and interests of consumers. The elderly housing reverse mortgage pension insurance is an important means of the insurance industry to promote the development of the pension service system in response to the national call. With the elderly as consumers, this business has wide coverage, complicated process, and long period. Insurance companies shall take the overall situation into consideration, proceed from actual situations, conduct business operations in compliance with laws and regulations, and fairly treat all consumers. Insurance companies shall adhere to the principle of fairness and impartiality in terms of real estate assessment, mortgage, and subsequent management and strictly implement legal provisions and contractual stipulations. Product terms shall be easily understood, and the business process shall be standardized and feasible. The process shall also be easy for the elderly to understand and accept. In the process of business operations, the right to know of consumers shall be fully protected. Insurance companies shall, in light of the

97 Ibid., part 2.

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consumption habits and characteristics of the elderly consumers, strengthen communication and exchange and effectively disclose information relating to the rights and interests of consumers. The second principle is to conduct business operations in a prudent manner and strengthen risk prevention. Elderly housing reverse mortgage pension insurance is an innovation in pension security methods, and it involves the vital interests of the elderly and attracts much attention from the general public. Meanwhile, this business connects traditional pension insurance with the real estate market; the legal relationship is therefore complicated. There are more risk factors than those in traditional pension insurance, and it is difficult to control risks. Insurance companies shall adhere to prudent business operations, attach great importance to potential risks and hidden troubles in the process of business operations, and strengthen risk prevention and control in terms of, among others, clause preparation, process design, legal compliance, and business management. The third principle is to make bold innovations and attaching importance to summarization and communication. The elderly housing reverse mortgage pension insurance is an innovation in the business modes of the existing commercial pension insurance and is an active exploration in the establishment of a new commercial pension insurance product framework. Insurance companies shall educate consumers, and in light of various pension policies of the central government and local areas, broaden thinking and make bold innovations in terms of, among others, improving the pension benefits and services of the elderly, promoting the construction of the pension security system, and accelerating the development of the pension service industry. Meanwhile, insurance companies shall effectively summarize the experience of the (Pilot) Programme, strengthen communication with regulatory authorities regarding relevant situations, and effectively conduct information submission so as to lay a foundation for further expansion. (c) Application for and confirmation of qualification for engaging in the Programme98 To carry out the Programme, an insurance company shall file an application with the CBIRC to obtain the qualification for engaging in the Programme. (1) Qualification conditions for (pilot) insurance companies. An insurance company applying for pilot qualifications shall meet the following requirements: (i) It has been in business for five years, with a registered capital of not less than ¥2 billion yuan; (ii) It meets the solvency management regulations of insurance companies; the solvency adequacy ratio at the end of the previous year and the end of the most recent quarter when applying for the pilot is not less than 120%; (iii) It has strong insurance actuarial technology and is able to scientifically and reasonably price reverse mortgage pension insurance; (iv) It has professional legal staff and is able to deal with the legal issues relating to reverse mortgage pension insurance; (v) It has real estate property management professionals or entrusts a qualified 98 Ibid., part 3.

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property management agency, and has the capacity to perform routine maintenance and legal disposal of mortgaged real estate; (vi) It has a perfect corporate governance structure, internal risk management, and control system and can implement special management and independent accounting for the reverse mortgage pension insurance business; (vii) Other conditions prescribed by the CBIRC. (2) Application materials for insurance companies. An insurance company that meets the pilot qualification requirements shall submit the following materials for approval: (i) an application form for reverse mortgage pension insurance; (ii) a feasibility study report of reverse mortgage pension insurance; (iii) a plan for the Programme of the reverse mortgage pension insurance, including but not limited to the planned pilot area, targeted customers, pilot business scale, product design ideas and pricing, business processes, organizational implementation, risk prevention measures, and so on; (iv) the insurance contract clauses of the reverse mortgage pension insurance product signed by the person responsible for legal matters and external lawyers; (v) the promotion materials for the Programme of the reverse mortgage pension insurance business; (vi) statement of the Chief Actuary; (vii) the declaration of the person responsible for legal matters; and (viii) other materials required by the CBIRC. In addition, if an insurance company entrusts a qualified property management company for daily management, it should submit an entrustment contract. (3) If the insurance company does not meet the pilot qualification conditions, the CBIRC shall suspend its new business of reverse mortgage pension insurance until it meets the pilot qualification conditions again. (d) Product management99 Insurance companies carrying out reverse mortgage pension insurance should deal with relevant houses in accordance with the relevant provisions of property rights mortgages, that is, the policyholders mortgage their real estate to the insurance company according to the contract, and the insurance company accepts the real estate mortgage and pays the policyholder pension according to the agreed conditions. The mortgaged real property may increase value. According to the different ways in which insurance companies deal with the value-added of mortgaged real estate by the policyholder, the insurance products are divided into participating reverse mortgage pension insurance products and non-participating reverse mortgage pension insurance products (hereinafter referred to as participating products and non-participating products). Participating products means that the insurance companies can participate in sharing the value-added gains of the real estate. Through evaluation, the increase in the value of real estate mortgaged by the policyholder can be distributed between the policyholder and the insurance company according to the contract. 99 Ibid., part 4.

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Non-participating products means that the insurance companies do not participate in the sharing the value-added gains of the real estate. The increase in the value of mortgaged real estate belongs to the policyholder. The insurance company shall clearly stipulate the starting time and length of the hesitation period in the insurance contract, the rights of the customer during the cooling-off period, and the losses that the customer may suffer from the termination of the contract during the hesitation period. The cooling-off period shall not be shorter than 30 natural days. (e) Requirements of conduct100 Reverse mortgage pension insurance is a new product; it takes time for social recognition and acceptance. Insurance companies shall conduct business promotion objectively and impartially, truthfully introduce the positive role of this business in enriching pension security options and improving pension security levels, and clearly remind consumers of the subsequent evaluation, management, and disposal of mortgaged real estate. It is prohibited to exaggerate the role of increase of the value of the real estate in raising the level of pension to be paid. The promotional materials for the reverse mortgage pension insurance business shall be uniformly produced and strictly managed by the head office of the insurance company. Branches and sales personnel shall not write or print promotional materials without authorization. The CBIRC instructs the Insurance Association of China (IAC) to establish a qualification examination system for reverse mortgage pension insurance sales personnel. Before the establishment of the system, the insurance company shall, based on its own situation, take the initiative to establish the sales personnel management system for the reverse mortgage pension insurance, clarify the sales staff qualification conditions, and establish a training and assessment system. After the IAC establishes a reverse mortgage pension insurance sales personnel qualification examination system, the insurance companies shall follow its regulations. Reverse mortgage pension insurance sales personnel shall be of good conduct, skilled in business, without complaints against them or other bad records. The training content for sales personnel shall include professional knowledge and professional ethics training related to the reverse mortgage pension insurance business, in which the training time for professional ethics shall be no less than one day. The sales personnel can obtain the qualification for selling the reverse mortgage pension insurance product after passing the assessment. Insurance companies shall report qualified sales personnel to the CBIRC and its local offices and publish them on the company’s website so that consumers can inquire at any time. When a sales person with misleading sales behaviour is verified, the insurance company must cancel that person’s sales qualification. Insurance companies shall strengthen the management of sales behaviour and the sales process to ensure that the age of the insured meets the requirement of over 60 years old, the insured information is true and accurate, the property rights of

100 Ibid., part 5.

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the insured house are clear, the property evaluation is fair and transparent, the legal investigation is done with due diligence, and the risk of compliance management is controllable. It is necessary to clarify the scope and conditions of participating customers and the insurance company must not introduce business to customers who do not meet the relevant requirements. It is necessary to hire a real estate appraisal agency with first-class qualifications to evaluate the value of the real estate, and the cost shall be shared by the insurance company and the consumer. Insurance companies shall provide pre-contract counselling to consumers; comprehensively, objectively, and accurately introduce the business model, characteristics, risks, and contract terms; and conduct a surrender and redemption value demonstration to ensure that consumers correctly understand the insurance product and their rights and obligations. Insurance companies shall enhance the fairness and impartiality of the contract signing process through audio recordings, video recordings, or third-party witnesses to ensure that the contract reflects the true intention of the parties. The insurance company shall introduce the reverse mortgage pension insurance product to the policyholder again during the period of hesitation and confirm the policyholder’s true purchase intention. For participating products, insurance companies and policyholders shall clearly stipulate in the insurance contract the method and proportion of participating in the sharing of the increased value of the real estate.The insurance company shall agree with the policyholder on the rights and obligations of both parties in the daily maintenance and management of the mortgaged house, and conduct risk prevention and loss prevention and take insurance cover for the house. Insurance companies shall regularly disclose information about reverse mortgage pension insurance to customers every year, including but not limited to annuity receipt status, surrender and redemption value, and so on. For participating product customers, the insurance companies shall also disclose to them the value of the property and the impact of changes in the property value on the amount of annuity received. The cash flow of reverse mortgage pension insurance is different from the traditional insurance business. Insurance companies shall formulate a pilot business cash flow management plan to ensure that the cash flow continues to be sufficient, and they can explore the cash flow replenishment mechanism. At the same time, insurance companies shall do well in the financial accounting and solvency management of the pilot business in accordance with relevant regulations. Insurance companies shall actively explore in the areas of service extension, diversified service content, and innovation of service methods and improve the pension service chain relating to reverse mortgage pension insurance, such as the introduction of medical insurance, health management, financial management for customers of different ages, and other services. Insurance companies should attach great importance to customer complaints and do well in communication and follow-up treatment. If it is found that there is sales misleading, the insurance company can cancel the insurance according to the wishes of the customer and cancel the sales qualification of the relevant sales personnel; if there is a business management problem involved, the company shall listen fully to the customer’s opinions and actively rectify the problem. 1058

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The insurance regulatory bureaus shall strengthen the supervision of the reverse mortgage pension insurance business, urge insurance companies to properly handle consumer complaints, and effectively protect the legitimate rights and interests of insurance consumers. If there is any problem, the insurance companies shall report to the CBIRC and its local offices in a timely manner. (f) Other matters101 The insured population shall be the elderly who are over 60 years old and have completely independent property rights to the house. The total value of the mortgaged property by an insurance company conducting a pilot business shall not exceed the amount calculated by the equation: 4% × the portion of the total assets not exceeding ¥20 billion at the end of the previous year + 0.2% × the portion of the total assets exceeding ¥20 billion at the end of the previous year. Insurance companies shall submit a report on the progress of reverse mortgage pension insurance to the CBIRC and it local offices by the 10th of each month, including but not limited to business development, existing problems, suggestions, and so on. 17.5.2 The expansion of the pilot programme to the whole country After the two-year pilot on housing reverse mortgage pension insurance in the four cities (Beijing, Shanghai, Guangzhou, and Wuhan), the CBIRC decided to expand the scope of the Programme of elderly housing reverse mortgage pension insurance to the entire country and issued the Notice on Expanding the Scope of Elderly Housing Reverse Mortgage Pension Insurance 2018102 to its all local offices and all life insurance companies. The Notice was for the purpose of implementing the relevant requirements of the Several Opinions of the State Council on Accelerating the Development of the Pension Service Industry 2013,103 the Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry 2014,104 and the Several Opinions of the General Office of the State Council on Accelerating the Development of Commercial Pension Insurance 2017,105 further deepening the supply-side reform on commercial pension insurance and actively promoting elderly housing reverse mortgage pension insurance so as to provide a useful supplement for traditional pension methods and meet the demands for differentiated and diversified pension security approaches. Since the publication of the Notice on Expanding the Scope of Elderly Housing Reverse Mortgage Pension Insurance on 31 July 2018, the scope of elderly housing reverse mortgage pension insurance has been expanded to the entire country. The provisions of the Guidelines on Carrying out the Pilot Program of the Elderly

101 102 103 104 105

Ibid., part 6. Yin Bao Jian Fa No. 43 [2018], 31 July 2018. The State Council No. 35 [2013]. The State Council No. 29 [2014]. The General Office of the State Council No. 59 [2017].

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Housing Reverse Mortgage Pension Insurance 2014106 are still applied to meet the relevant business supervision requirements.107 The insurers shall conduct comprehensive research and make sound judgments on the financial market and the real estate market and strengthen the risk prevention and control of the elderly housing reverse mortgage pension insurance business. They shall actively innovate products, enrich pension security content, increase the forms of pension security, take effective measures to meet the society’s pension demands, and provide more pension options to the elderly.108 All local offices of the CBIRC shall, in light of the local actualities, increase the frequency of reporting to local governments and strengthen the communication and coordination with relevant departments and entities. They shall also support the insurers in carrying out the elderly housing reverse mortgage pension insurance business and take proper measures to conduct the supervision work, regulate the market, and conscientiously protect the legitimate rights and interests of consumers. If an insurer is determined to carry out the elderly housing reverse mortgage pension insurance business, the local office of the CBIRC shall report it to the CBIRC in a timely manner.109 17.6 The programme of individual tax-deferred commercial pension insurance business Having just considered the first new programme of pension insurance, we now turn our attention to the second new programme of pension insurance, that is, the individual tax-deferred commercial pension insurance. The individual tax-deferred commercial pension insurance means that expenditures for individuals who purchase commercial pension insurance products that meet the requirements through personal commercial pension funds accounts are allowed to be deducted for a certain amount from their monthly or annual taxable income, and the investment income included in the personal commercial pension funds accounts is not subject to personal income tax. Personal income tax is deferred, to be paid when the individual begins receiving pension payment from the insurance company. This model is short for “E.E.T.”. The first “E” is exception of income tax for premium. The second “E” is exception of income tax for investment income. The “T” means tax to be levied from the pension payment. The first piece of regulation for the tax-deferred pension programme is the Notice of the Ministry of Finance, the State Administration of Taxation, the Ministry of Human Resources and Social Securities, the CBIRC, the China Securities Regulatory Commission on Carrying out the Pilot Project of Individual Tax-Deferred Commercial Pension Insurance which was issued on 2 April 2018.110 This Notice is considered here briefly. 106 Bao Jian Fa No. 53 [2014]. 107 The Notice on Expanding the Scope of Elderly Housing Reverse Mortgage Pension Insurance 2018, s.1. 108 Ibid., s.2. 109 Ibid., s.3. 110 Ministry of Finance No.22 [2018].

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17.6.1 The pilot programme of individual tax-deferred pension insurance Some specific regulations on the individual tax-deferred pension insurance are provided in the Notice on Carrying out the Pilot Project of Individual Tax-Deferred Commercial Pension Insurance 2018 as follows. First, individuals who receive wages, salaries, or continuous labour remuneration are allowed to pay premiums that are deductible from the monthly taxable income. The deduction limit is calculated based on the current month’s income. It is 6% or ¥1000 yuan of the monthly income. The lower one is determined to be the tax-free amount to be used for premiums. For individual small business owners, individual proprietorship investors, natural persons in a partnership, and contracting and leasing operators who have obtained income from the operation of their business, the taxable income amount shall be deducted according to the actual limit. The deduction limit from the yearly income shall not be exceeding 6% or ¥12,000 yuan of the taxable income of the year. The lower of these two can be used for tax-free premium payment for purchasing the individual tax-deferred pension insurance product.111 Second, the investment income into the personal pension account is not subject to personal income tax for the period that the policyholder is paying premiums to the insurance company. Third, when an individual reaches the retirement age as stipulated by the state, he or she can receive the pension payment from the insurer on a monthly or yearly basis, and the period of receipt is in principle lifelong or not less than 15 years. Individuals who die, suffer from total disability as stipulated in the insurance contract, or suffer from major illnesses may receive a one lump-sum pension payment. A quarter of the pension income that individuals receive when they meet the prescribed conditions is tax-free, and the remaining 75% is calculated and paid as personal income tax at a proportional tax rate of 10%.112 The pilot programme was/is carried out at Shanghai, Fujian Province, and Suzhou Industrial Park beginning on 1 May 2018.113 17.6.2 The Guidelines on developing individual tax-deferred pension products On 25 April 2018, the CBIRC, the Ministry of Finance, the Ministry of Human Resources and Social Security, and the State Administration of Taxation jointly issued the Guidelines on Developing Individual Tax-Deferred Commercial Pension Products (hereinafter, the Guidelines on Tax-Deferred Pension Products 2018).114 The Guidelines on Tax-Deferred Pension Products 2018 are the basic requirements and unified standards for the development and design of tax-deferred pension

111 The Notice on Carrying out the Pilot Project of Individual Tax-Deferred Commercial Pension Insurance 2018, part 1(2). 112 Ibid. 113 Ibid., part 1. 114 Yin Bao Jian Fa No.20 [2018] issued on 25 April 2018 came into force on the same day. (see

accessed on 15 October 2020).

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products by insurance companies during the period of the pilot programme of individual tax-deferred commercial pension insurance. The insurance companies participating in the pilot program shall develop and design tax-deferred pension products in accordance with these Guidelines and relevant provisions.115 The Guidelines are composed of five parts: the principle for design, the elements of the product, product management, and the definitions of the terms. These are considered next. (a) The principles for design116 Insurance companies shall develop and design tax-deferred pensions by the principles of “sound returns, long-term preservation, lifetime benefits, and actuarial balance” so as to meet the management requirements of the insured for the safety, profitability, and long-term nature of pension funds. Based on the Guidelines on Tax-Deferred Pension Products 2018, insurance companies can design the basic insurance cover for the tax-deferred pension products and may further raise the insurance cover level in favour of the insured when developing products. (b) The elements of the products117 The Guidelines on Tax-Deferred Pension Products 2018 provide nine elements to be included in a tax-deferred pension insurance product. I The insured. Any person who is 14 years old or more, but below the retirement age as provided by the state and in conformity with the Notice on the Pilot Program of Individual Tax-Deferred Commercial Pensions 2018,118 may be insured by tax-deferred pension insurance. II Period of insurance. Lifetime or long term, including “accumulation period” and “withdrawal period”. III Premium payment methods. Monthly or annual payment. IV Premium payment period. From the time the insurance contract becomes effective to the time when the insured attains retirement age as provided by the state. V Accumulation period and withdrawal period; (1) “Accumulation period” means the stage in which an insured makes pension contributions under the insurance contract until he or she begins to receive pension annuities. During the accumulation period of a product, the insurance company shall open accounts in relation to the tax-deferred pensions purchased by the insured and record information such as premiums paid and returns on funds; (2) “Withdrawal period” means the stage in which an insured commences withdrawing pension annuities according to the insurance contract. During the receiving period, the insurance company shall, in accordance with the pension annuity receiving method selected by the insured person, 115 The Guidelines on Developing Individual Tax-Deferred Commercial Pension Products 2018, para.1. 116 Ibid., part 1. 117 Ibid., part 2. 118 Ministry of Finance No. 22 [2018].

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convert the product account value of the insured on the date when the pension annuity starts to be received into a monthly or annual pension to be received each month or each year, pension annuity benefits are paid until the death of the insured person, or the end of the agreed receiving period. VI Type of returns. The returns on the funds of a tax-deferred pension during its accumulation period may be return-determined, return-guaranteed, or return-floating, corresponding to product A, B, or C respectively: (1) “Product A,” namely, determinate-return product, means a product with a determinate yield (annual interest rate) during the accumulation period and with returns settled once a month; (2) “Product B,” namely, returnguaranteed product, means a product with a guaranteed bottom-line yield (annual interest rate) during the accumulation period, producing additional returns based on the circumstances of investment, and with returns settled once a month or each quarter. According to settlement frequency, a product B may be either product B1 (monthly settlement) or product B2 (quarterly settlement); (3) “Product C,” namely, return-floating product, means a product with settlement made according to the actual circumstances of investment at least once a week during the accumulation period. VII Insurance coverage. A tax-deferred pension may provide pension annuity payment, total disability coverage, and death coverage. “Pension annuity payment” means the payment of lifetime or long-term pension annuities made by an insurance company under the insurance contract, with corresponding deferred tax deducted, when the insured attains the retirement age as provided by the state or the agreed benefits age (not earlier than the retirement age as provided by the state). “Total disability coverage and death coverage” means that if an insured incurs an insured event of total disability or death as stipulated in the insurance contract, the insurance company pays the product account value in a lump sum with the corresponding deferred tax deducted and additional insurance benefits according to the insurance contract; if an insured incurs an insured event of total disability or death under 60 years of age and before commencing withdrawing pension annuities, the insurance company pays the product account value in a lump sum with the corresponding deferred tax deducted and 5% of the product account value in additional insurance benefits; or if an insured incurs an insured event of total disability or death at 60 years of age or older and before commencing withdrawing pension annuities, the insurance company pays the product account value in a lump sum with the corresponding deferred tax deducted. VIII Methods of withdrawal. An insurance company shall, by the principle of actuarial balance, permit the insured lifetime withdrawal, long-term withdrawal for a period not less than 15 years, and other methods of withdrawal and determine the corresponding amounts of pension annuity withdrawals. An insured may apply for modifying the method of withdrawing pension annuities before commencing the withdrawal. 1063

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An insurance company shall at least provide a method of monthly or annual withdrawal of pension annuities that guarantee the return of the account value for life. In addition, the insurance company may permit monthly (or annual) withdrawal for a fixed period of 15 (or 20) years and other methods of withdrawal. (1) Monthly (or annual) withdrawal guaranteeing the return of the account value. On the date when the withdrawal of pension annuities commences and on the corresponding date in each subsequent month (or year), the insurance company shall pay the pension annuities at a fixed rate to an insured until he or she dies. If, when the insured dies, the aggregate payment of pension annuities already made by the insurance company is less than the product account value on the day when the withdrawal of the pension annuities commences, the insurance company shall pay as lump-sum pension annuities the difference between such product account value and aggregate payment, with the insurance contract terminated. (2) Monthly (or annual) withdrawal for a fixed period of 15 (or 20) years. On the date when the withdrawal of pension annuities commences and on the corresponding date in each subsequent month (or year), the insurance company shall pay the pension annuities at a fixed rate to a surviving insured until the fixed period expires; if the insured dies before the expiration of the fixed period, the insurance company shall pay the balance of the pension annuities payable until the end of the fixed period in a lump sum, with the insurance contract terminated. IX Collection of charges. An insurance company may collect from the insured charges including initial fee, asset management fee, and rollover fee. An insurance company shall expressly explain to the insured and specify in the insurance contract the chargeable items and charge rates. Charges shall be collected in favour of clients with ensured clarity, transparency, and reasonableness: (1) “Initial fee” means the charges which an insurance company collects in a certain proportion to each premium paid by the insured. Initial charges may be collected with respect to products A, B, and C, at a proportion of not more than 2% for products A and B or a proportion of not more than 1% for products C; (2) “Asset management fee” means the charges which an insurance company collects in a certain proportion to the net asset value in the investment account for a taxdeferred pension. Asset management fee for products C may be collected at a rate of not more than 1%; (3) “Rollover fee” means charges which an insurance company collects in a certain proportion to product account value whose rollover is effected by the insured. When a rollover from products A, B, or C takes place, a rollover fee may be collected in a proportion not more than 0.5% if the rollover happens between the products of the same company; or at a proportion not more than 3%, 2%, or 1% if the rollover happens between products of different companies in the first, second, and third policy year, and no fee shall be collected from the fourth policy year. 1064

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(c) Product management119 Product management covers five processes. I Application management. An insurance company shall issue to the insured invoices and insurance certificates specifying the name of the tax-deferred pension, amount paid, and other information. II Underwriting management. An insurance company shall verify the identities and other information of applicants in the Individual Tax-Deferred Commercial Pensions Information Platform of China Insurance Information Technology Management Co., Ltd.; (hereinafter referred to as the “CIITM Platform”) and may grant approval only if the conditions are met. III Surrender management. An insured may apply for surrender under the following circumstances, and the insurance company shall pay product account value in a lump sum and deduct the corresponding deferred tax under the insurance contract: (1) Total disability or death arising from any exclusion as agreed in the insurance contract before the commencement of withdrawing pension annuities commences; (2) Suffering from any critical illness as agreed in the insurance contract. IV Rollover: (1) Before the commencement of withdrawing pension annuities, the insured may effect a rollover between products of the same insurance company or different insurance companies; (2) “Rollover between products of the same insurance company” means that an insured moves the account value of a product to another type of product of the same insurance company. “Rollover between products of different insurance companies” means that an insured moves the account value of the tax-deferred pension of an insurance company to that of another insurance company; (3) If an insured proposes to effect a cross-insurance company rollover, he or she shall personally apply to the insurance companies; (4) When an insurance company goes through a rollover operation, it shall promptly submit the relevant information to the CIITM Platform, and the operation relating to a crossinsurance company rollover shall be gone through in the CIITM Platform; (5) An insurance company shall grant the request from an insured at the end of the pilot program for conversion to another financial product. V Actuarial assessment. An insurance company shall, by the principle of “equity, reasonableness, and prudence,” according to the actuarial principles and relevant insurance regulatory requirements, withdraw all reserves for tax-deferred pensions and conduct adequacy tests on a regular basis. (d) Definitions I Pension annuity. For the purposes of the Measures for the Administration of Insurance Clauses and Premium Rates of Personal Insurance Companies 119 The Guidelines on Developing Individual Tax-Deferred Commercial Pension Products 2018, part 3.

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II

III IV

V

(2015 Revision) (the CIRC Order No. 3 [2015]), “pension annuity insurance” means annuity insurance for the purpose of retirement coverage. Pension annuity insurance shall meet the following conditions: (1) the age as agreed in the insurance contract qualifying the insured for the payment of survival benefits shall not be younger than the retirement age as provided by the state; (2) the interval between two consecutive payments shall not exceed one year. Retirement age as provided by the state. It means the normal retirement age as provided by the law issued by the state, and if the insured retires at an age younger than the retirement age as provided by the state, the actual retirement age shall prevail. The retirement age shall be the age calculated based on the date of birth contained in a valid statutory identity document. Product account value. It means the balance after deducting related expenses from the sum of insurance premiums paid by the insured and the returns on pension funds during the accumulation period of a product. Total disability. It means any of the following circumstances: (1) Permanent total loss of binocular vision; (2) Loss of both upper extremities above the wrist joints or both lower extremities above the ankle joints; (3) Loss of an upper extremity above the wrist joint and a lower extremity above the ankle joint; (4) Permanent total loss of the vision of an eye and loss of an upper extremity above the wrist joint; (5) Permanent total loss of the vision of an eye and loss of a lower extremity above the ankle joint; (6) Permanent total loss of the joint functions of four extremities; (7) Permanent total loss of chewing and swallowing functions; (8) Extreme dysfunction of the central nervous system or the thoracic or abdominal viscera, resulting in incapacitation for any work and requirement for assistance in all daily activities necessary for survival. Loss of vision includes loss or removal of an eyeball, or incapacitation for discerning light and shade, or vision of discerning only proximate hand movement; and best-corrected visual acuity of less than 0.02 by standard visual acuity chart, or the visual field of less than five degrees, with the course of the disease lasting not less than 180 days (not applicable to loss or removal of an eyeball), for which an appraisal institution recognized by the insurance company has issued an appraisal. “Loss of joint functions” means that a joint is permanently and totally stiff or paralyzed or unable to move as intended. “Loss of chewing and swallowing functions” means the dysfunction for any reason other than the teeth to the extent that chewing or swallowing cannot be taken and anything except liquid food cannot be chewed or swallowed. “Requirement for assistance in all daily activities necessary for survival” means the requirement for assistance in eating, defecation, dressing and undressing, sleeping and rising, walking, and bathing, among others, due to incapacitation therefor. Critical illness. It means any of the 25 critical illnesses, names of illnesses, and terms of illnesses as defined in the Specifications of the Use of Illness Terms for Critical Illness Insurance (IAC No. 9 [2007]) issued by the Insurance Association of China. 1066

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17.6.3 The Interim Measures for Administration of Individual Tax-Deferred Commercial Pension Insurance Business Soon after the publication of the Guidelines for tax-deferred pension products as aforementioned, the CBIRC published the Notice on Issuing the Interim Measures for the Administration of the Individual Tax-Deferred Commercial Pension Insurance Business on 16 May 2018,120 which came into force on the same day (hereinafter, the Measures 2018), for the purposes of promoting the sound development of individual tax-deferred commercial pension insurance and protecting the lawful rights and interests of all parties. The Measures 2018 consist of 58 articles in 12 chapters: the general provisions (article 1–4), business requirements (articles 5–7), product management (articles 8–19), sales management (articles 20–24), business management (articles 25–28), investment management (articles 29–33), financial management (articles 34–37), information platform management (articles 38–40), service management (articles 41–46), information disclosure (articles 47–50), supervision and administration (articles 51–55), and supplementary provisions (articles 56–58). The Measures 2018 provide detailed rules for regulating the tax-deferred commercial pension insurance business and deserve detailed consideration. (a) Business requirements An insurance company which conducts the tax-deferred pension insurance business shall meet the following conditions (art.5): (1) Its registered capital and net assets are not less than ¥1.5 billion yuan; (2) It complies with the provisions on the solvency management of insurance companies, its composite solvency adequacy ratio at the end of the last year and at the end of the latest quarter are not lower than 150%, and its core solvency adequacy ratio is not lower than 100%, excluding pension insurance companies which run the entrusted business; (3) It has conducted the pension annuity insurance, pension fund management, or any other pension insurance business for three consecutive years or more and has mature pension insurance business management experience within China (excluding Hong Kong, Macao, and Taiwan regions); (4) It has relatively strong product actuarial technical capabilities and has no fewer than five professionals who have three or more years of practice experience in the actuarial work and have obtained the membership certificate for an actuary; (5) It has relatively strong long-term fund investment management capability and no fewer than five professionals in the investment team who have five or more years of pension asset management experience; (6) It has a complete tax-deferred pension insurance information management system which is able to link to the Tax-Deferred Pension Insurance Information Platform established by China Insurance Information Technology Management Co., Ltd.; (hereinafter, the CIITM Platform) and has obtained the acceptance certificate issued by the CIITM); (7) It has sound branch offices and a service network and is able to fulfil all kinds of insurance liabilities for the tax-deferred pension insurance and provide relevant services within China; (8) It has relatively strong asset-liability management 120 Yin Bao Jian Fa No.23 [2018].

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capability; (9) It has a sound corporate governance structure; (10) It has sound tax-deferred pension insurance business management, financial management, sales management, and information disclosure management rules; (11) It has not been given any major administrative penalty in the last three years; (12) It meets other conditions prescribed by the CBIRC.121 To conduct the tax-deferred pension insurance business, an insurance company shall continuously meet the following conditions: (1) Its annual composite solvency adequacy ratio is not lower than 150%, and its core solvency adequacy ratio is not lower than 100%; (2) It satisfies the requirements of items (1), (4), and (5) of art.5 as aforementioned; (3) It meets other conditions prescribed by the CBIRC.122 An insurance company shall, in accordance with the provisions of these Measures 2018, submit a report on conducting the tax-deferred pension insurance business to the CBIRC, to which the information system acceptance certificate issued by the CIITM shall be attached, and the content of the report shall be true, accurate, and well documented. The CBIRC shall, in accordance with these Measures, announce and update in a timely manner the list of head offices of insurance companies which satisfy the relevant requirements.123 (b) Product management An insurance company which develops and designs tax-deferred pension insurance products shall be governed by the principles of “stable income, long-term locking, lifelong withdrawal, and actuarial balance”, and meet the insured’s management requirements for the safety, profitability, and long-term nature of pension funds.124 The insured person shall establish a tax-deferred pension insurance plan through an insurance company and complete product selection, payment, consultation, change, withdrawal, and other operations within the plan.125 The tax-deferred pension insurance products may provide three types of insurance liabilities, including pension annuity payment, total disability guarantee, and death guarantee.126 “Pension annuity payment” means that when the insured person reaches the retirement age prescribed by the state or the agreed age for withdrawal (not earlier than the retirement age prescribed by the state), the insurance company shall pay a lifelong or long-term pension annuity as agreed upon in the insurance contract and deduct the corresponding taxes payable. “Total disability guarantee and death guarantee” means that if a total disability or death insured incident as agreed upon in an insurance contract occurs to the insured person, the insurance company shall pay the product account value in a lump sum and deduct the corresponding taxes payable, and at the same time, pay additional insurance benefits as agreed upon in the insurance contract. If the 121 The Notice on Issuing the Interim Measures for the Administration of the Individual Tax-Deferred Commercial Pension Insurance Business 2018, art.5. 122 Ibid., art.6. 123 Ibid., art.7. 124 Ibid., art.8. 125 Ibid., art.9. 126 Ibid., art.10.

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insured person is totally disabled or died before reaching the age of 60 and has not commenced the withdrawal of pension annuity, the insurance company shall pay the product account value in a lump sum and deduct the corresponding taxes payable, and at the same time, pay additional insurance benefits at 5% of the product account value. If the insured person is totally disabled or died after he or she reaches 60 years old and has not commenced the withdrawal of pension annuity, the insurance company shall pay the product account value in a lump sum and deduct the corresponding taxes payable. Tax-deferred pension insurance products are categorized into two stages of the contribution period and withdrawal period. “Contribution period” means the stage during which the insured person makes pension contributions as agreed upon in the insurance contract before he or she commences the withdrawal of pension annuity. “Withdrawal period” means the stage during which the insured person commences the withdrawal of pension annuity as agreed upon in the insurance contract. The return on the pension funds of a tax-deferred pension insurance product during its contribution period may be determinate, guaranteed, or floating, corresponding to category A, B, or C products respectively. “Category A products,” namely, determinate-return products, means products with a determinate yield (compound annual interest) during the contribution period and with returns settled once a month. “Category B products,” namely, guaranteed-return products, means products with a guaranteed yield (compound annual interest) during the contribution period, producing additional returns based on the circumstances of investment, and with returns settled once a month or a quarter. According to different settlement frequency, category B products may be divided into category B1 products (monthly settlement) and category B2 products (quarterly settlement). “Category C products,” namely, floating-return products, means products with settlement made according to the actual circumstances of investment at least once a week during the contribution period.127 An insurance company shall, according to the principle of actuarial balance, provide the insured persons with lifetime withdrawal, long-term withdrawal for a period of not less than 15 years, and other withdrawal methods and determine the corresponding amounts of pension annuity withdrawn. The insured person may apply for modifying the methods of withdrawing pension annuity before commencing the withdrawal of pension annuity. The insurance company shall at least provide the methods of monthly (or annual) withdrawal of pension annuity in lifetime which guarantee the return of the account value. In addition, the insurance company may permit monthly (or annual) withdrawal for a fixed period of 15 (or 20) years and other withdrawal methods.128 The insured person may change products before commencing the withdrawal of pension annuity, including product change within the same insurance company or among different insurance companies.

127 Ibid., art.11. 128 Ibid., art.12.

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“Product change within the same insurance company” means an insured person’s transfer of the account value of a type of product to another type of product of the same insurance company. “Product change among different insurance companies” means an insured person’s transfer of the account value of the tax-deferred pension insurance product of an insurance company to that of another insurance company. Where an insured person changes products of different insurance companies, the person shall file an application with the insurance company holding the product to which the account value is to be transferred.129 When an insurance company has a product change, it shall, in a timely manner, submit relevant information to the CIITM platform, and the operations relating to product change among insurance companies shall be completed through the CIITM platform. The fees that may be charged by an insurance company from insured persons include initial fees, asset management fees, and product change fees. The insurance company shall explicitly indicate charged fee items and rates to the insured persons and in the insurance contract. Fees shall be charged in favour of clients in a clear, transparent, and rational manner. “Initial fees” means the fees charged by an insurance company at a certain proportion of each contribution made by the insured person. Initial fees may be charged with respect to category A, B, and C products; a proportion of not more than 2% shall be charged for category A or B products, and a proportion of not more than 1% shall be charged for category C products. “Asset management fees” means the fees charged by an insurance company according to a certain proportion of the net asset value in the tax-deferred pension insurance product investment account. Asset management fees may be charged for category C products at a rate of not more than 1%. “Product change fees” means fees charged by an insurance company according to a certain proportion of product account value transferred out by the insured person. In the case of product change of category A, B, or C products, product change fees may be charged at a proportion of not higher than 0.5% each time in the case of product change within a company. In the case of product change among different companies, product change fees may be charged at a proportion of not more than 3%, 2%, or 1% in the first, second, or third policy year and shall not be charged in the fourth policy year.130 An insured person may apply for cancelling the tax-deferred pension insurance under any of the following circumstances, and the insurance company shall pay product account value in a lump sum and deduct the corresponding taxes payable as agreed upon in the insurance contract: (1) The insured is totally disabled or died due to an excepted event in the insurance contract before he or she commences the withdrawal of pension annuity; (2) The insured person has any serious disease as agreed upon in the insurance contract. The rules on the definition of serious diseases developed by the Insurance Association of China shall apply,

129 Ibid., art.13. 130 Ibid., art.14.

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mutatis mutandis, to the meaning of serious diseases. Except for the aforesaid circumstances, the insured person shall not cancel his or her insurance.131 An insurance company shall develop tax-deferred pension insurance products in accordance with the Product Guidelines and the model clauses attached to these Measures.132 Tax-deferred pension insurance products developed by an insurance company shall be reported to the China Banking and Insurance Regulatory Commission for approval. The format of the product name shall be: the name of the insurance company + “individual tax-deferred pension annuity insurance” + product type (type A, B1, B2, and C) + (year). Except for the product approval materials as prescribed by the China Banking and Insurance Regulatory Commission, if an insurance company engages in the operation of category C products, it shall establish rules for the management of investment managers, specify product investment managers, strengthen the qualification examination and assessment management of investment managers, and report the relevant system documents and the information on investment managers at the same time.133 An insurance company shall, under the principles of “fairness, rationality and prudence”, make all kinds of provisions for tax-deferred pension insurance products according to actuarial principles and the relevant insurance regulatory provisions and conduct adequacy testing on a periodical basis.134 An insurance company shall track the contribution made for the tax-deferred pension insurance, investment return, and pension annuity payment on a monthly basis; constantly optimize the actuarial balance model of the tax-deferred pension insurance according to actual business operations; continuously enhance the scientificity and validity of estimation and assessment; and guarantee long-term sound business development.135 (c) Sales management An insurance company shall strengthen the training and management of tax-deferred pension insurance salespersons, shall improve their professional ethics and quality, and shall not direct or participate in any activities conducted by salespersons against the principle of good faith.136 An insurance company shall be encouraged to use modern scientific and technological means to improve the sale of tax-deferred pension insurance products through mobile terminals and other internet models and to simplify insurance application procedures.137 An insurance company shall demonstrate the benefits of category B products in the sales process and give sufficient interpretation and explanations to the insured on the expected rational investment return and the uncertainty of benefit 131 132 133 134 135 136 137

Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21.

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demonstration of long-term funds. The two-tier demonstration interest rate shall apply to category B products, and the first-tier demonstration interest rate shall be the guaranteed yield (compound annual interest), while the upper limit of the second-tier demonstration interest rate shall be 4.5% (compound annual interest). Interest demonstration shall not be conducted for category C products.138 An insurance company shall assess the risk tolerance of an insured person who purchases category C products and assist the insured person in selecting products according to the assessment results. If the insured person’s age is more than 55, the insurance company shall not sell category C products to him or her. When the insured person makes each contribution (including transferring the product account value), the contribution made for the purchase of category C products shall not exceed 50% of the current contribution.When the insured person changes products, the account value of category C products shall not exceed 50% of the account value of all his or her products.139 An insurance company shall not mislead the public, exaggerate the investment return, or conduct compulsory tie-in sale of other commercial insurance products.140 (d) Business management An insurance company shall verify the identity and other information of the insured person through the CIITM platform and may grant approval only if the relevant conditions are met.141 An insurance company shall, after confirming that it has received the contribution made by the insured person, issue an invoice and insurance certificate to the insured person indicating the name of the tax-deferred pension insurance product, the amount of contribution and other information. The insurance company shall establish rules for the management of insurance certificates for the tax-deferred pension insurance business, which shall be uniformly designed and printed by the head office of the insurance company or be printed by the authorized branch office, and sample archives shall be established.142 The insured person shall take the deduction vouchers for the tax-deferred pension insurance issued by the CIITM platform as deduction vouchers, and the deduction vouchers may be obtained from the CIITM platform.143 During the period of the pilot programme, when the insured person meets the prescribed conditions for the withdrawal of pension annuity, surrender, or claim settlement, the insurance company shall make withholding declaration for individual income tax at the place where the insured person makes the last contribution for the tax-deferred pension insurance.144

138 139 140 141 142 143 144

Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.24. Ibid., art.24. Ibid., art.24. Ibid., art.28.

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(e) Investment management The use of tax-deferred pension insurance funds shall follow the principles of security, prudence, and long-term stability; asset and liability management and comprehensive risk management shall be conducted according to the nature of funds; long-term value maintenance and appreciation shall be pursued, and the security, profitability and liquidity of funds shall be guaranteed.145 Qualified investment managers may be entrusted to conduct the investment management of tax-deferred pension insurance funds. An insurance company shall give priority to selecting investment managers who have long-term debt fund management experience, a sound asset allocation system, rich experience in fixedreturn investment, equity investment and alternative investment, and a sound risk management and control mechanism.146 Separate investment accounts shall be set up for different tax-deferred pension insurance products and shall be independent from self-owned funds and other insurance products in asset segregation, asset allocation, investment management, valuation and accounting, and other links.147 An insurance company shall establish and improve the management rules, internal control, and risk management mechanism for the utilization of funds for the tax-deferred pension insurance business and on a periodical basis identify, monitor, and assess the management of assets and liabilities, asset allocation, business strategies, investment strategies, and risk status, among others so as to prevent and mitigate risks.148 The utilization of funds for the tax-deferred pension insurance business shall comply with the regulatory provisions on the utilization of insurance funds in such aspects as fund utilization scope, proportion restriction, investment capability, and investment management, unless it is otherwise provided for by the CBIRC.149 (f) Financial management An insurance company shall conduct separate accounting of the tax-deferred pension insurance business and issue separate income statements and other financial reports.150 An insurance company shall strengthen the management of funds for the taxdeferred pension insurance and strictly allocate and use funds in accordance with the requirements of the two lines of income and expenditure.151 An insurance company shall, in accordance with the provisions of the CBIRC on the allocation of expenses, determine and allocate expenses for the tax-deferred pension insurance.152

145 146 147 148 149 150 151 152

Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36.

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An insurance company shall truthfully list the business management expenses for the tax-deferred pension insurance business, strengthen expense control, and enhance the expense management level.153 (g) Information platform management The CBIRC shall organize the CIITM’s development and construction of the CIITM platform, link to the tax system, insurance companies, and commercial banks, among others and provide basic services for the account management, information inquiry, tax audit, and business supervision, among others, of the tax-deferred pension insurance. It shall cover the following specific service functions:154 (1) Checking fund accounts, registering the personal commercial pension fund account of the insured person, and verifying the uniqueness thereof; (2) Managing account information; recording the information on the tax-deferred pension insurance of the insured person; supporting the centralization and processing of information on the underwriting of the tax-deferred pension insurance, product change, and other information; and supporting relevant tax-related operations, among others. The information on the tax-deferred pension insurance shall include the basic personal information, information on personal rights and interests, and personal pre-tax deduction information. Basic personal information shall include the insured’s name, gender, date of birth, identity card number, date of first participation in insurance, and fund account, among others. The information on personal rights and interests shall include the details of payment, expenses and expenditures, income from product accounts, balance of product accounts, and pension annuity payment, among others. The information on personal pre-tax deduction shall include the accumulative deducted amount and the amount to be deducted, among others; (3) Issuing deduction vouchers and issuing deduction vouchers for the tax-deferred pension insurance for the insured person; (4) Consulting account information and providing the insured person with the self-services of consulting the tax-deferred pension insurance information; (5) Announcing the list of products, and releasing to the public the list of tax-deferred pension insurance products approved by the CBIRC; (6) Submitting regulatory information and submitting the statistical data on tax-deferred pension insurance to the CBIRC; (7) Conducting tax audit, submitting to tax authorities the information on the tax-deferred pension insurance business, and supporting the relevant tax audit operations as required by tax authorities; (8) Other functions prescribed by the CBIRC. An insurance company shall be responsible for collecting the basic personal information and information on personal rights and interests of the insured persons; realize system connection, information submission, and data exchange with the CIITM platform; and ensure the authenticity, accuracy, and integrity of the relevant data in the process of information submission and data exchange.155

153 Ibid., art.37. 154 Ibid., art.38. 155 Ibid., art.39.

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Insurance companies and the CIITM shall establish rules for keeping confidential the tax-deferred pension insurance information, strictly manage user authority, and effectively protect the information security of the insured persons.156 (h) Service management An insurance company shall, when conducting the tax-deferred pension insurance business, improve its organizational structure, improve rules and regulations, strengthen staffing, and provide the insured persons with operational management services throughout the life cycle.157 An insurance company shall follow the principles of “convenient, efficient and prompt” services and provide the insured persons with multiple service forms such as mobile terminals, counters, telephone, and Internet so as to satisfy differentiated service demands and match the supporting platform for the integrated online and offline system.158 An insurance company shall voluntarily provide personal account information and product information to the insured persons at least once a year by mobile terminals, written form, and other forms and provide the insured persons with realtime inquiry services through mobile terminals. The service information provided by the insurance company in various forms shall be consistent with each other.159 An insurance company’s service outlets for the tax-deferred pension insurance business shall be equipped with counters or service personnel with clear marks and have service capability such as publicity of policies, business consultation, information inquiry, and complaint acceptance so as to provide convenient services for clients.160 An insurance company shall be able to provide pension annuity payment, total disability insurance benefit payment, death insurance benefit payment, product change, and other services at different places within China so as to satisfy the needs of the insured persons for services at different places.161 An insurance company shall establish a complaint handling mechanism, actively resolve disputes with clients, and effectively protect the lawful rights and interests of clients.162 (i) Information disclosure Insurance companies and CIITM shall disclose the information on tax-deferred pension insurance in accordance with the relevant provisions of the CBIRC.163 An insurance company shall release to the public the insurance clauses, service content, service commitments, pension annuity withdrawal and insurance benefit payment procedures of tax-deferred pension insurance products, information on 156 157 158 159 160 161 162 163

Ibid., art.40. Ibid., art.41. Ibid., art.42. Ibid., art.43. Ibid., art.44. Ibid., art.45. Ibid., art.46. Ibid., art.47.

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the investment managers of category C products, methods for raising inquiries and filing complaints, contact information on customer services, and other information in conspicuous positions on its official website. The insurance company shall be subject to social supervision.164 The information disclosure materials of an insurance company shall be uniformly managed by the head office so as to ensure the authenticity, accuracy, and integrity of the materials disclosed.165 CIITM shall, through the CIITM platform, release to the public the list of insurance companies conducting the tax-deferred pension insurance business, products and business handling process, consulting methods and other information. The insurance companies shall be subject to social supervision.166 (j) Supervision and administration The CBIRC shall oversee the tax-deferred pension insurance business. Insurance companies shall, in accordance with relevant requirements, submit reports on the tax-deferred pension insurance business to the CBIRC on a periodical basis.167 Local offices of the CBIRC shall perform their regulatory functions within the scope authorized by the CBIRC. Local offices shall effectively communicate and cooperate with local public finance, taxation, human resources, social security, and other departments; strengthen the dynamic assessment of the tax-deferred pension insurance business within their respective jurisdictions; summarize experience from the pilot program; maintain the market order; and report problems discovered in a timely manner.168 The tax-deferred pension insurance business operations shall be subject to the supervision of local public finance, taxation, human resources, social security, audit, and other government departments as well as the public and shall be operated in an open and transparent manner.169 When an insurance company fails to meet the relevant conditions prescribed in article 6, it shall cease the operation of new tax-deferred pension insurance business until it meets relevant conditions once again.170 Where an insurance company violates any law or regulation when conducting the tax-deferred pension insurance business, the CBIRC shall impose an administrative penalty on it in accordance with the Insurance Law and the relevant provisions of the CBIRC171 For the purposes of these Measures 2018, “major administrative penalty” means any of the following administrative penalties received by an insurance company: (1) The amount of a single fine is 1.5 million yuan or more; (2) Restricting business scope; (3) Ordering it to cease the acceptance of new business for one year or 164 165 166 167 168 169 170 171

Ibid., art.48. Ibid., art.49. Ibid., art.50. Ibid., art.51. Ibid., art.52. Ibid., art.53. Ibid., art.54. Ibid., art.55.

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more; (4) Ordering the suspension of business operation for rectification; (5) The business permit of a branch company of a city under separate state planning or a provincial branch company is revoked; (6) The office qualification of the chairman of the board of directors or the general manager is revoked or he or she is prohibited from entering the industry; (7) Any other major administrative penalty prescribed by the CBIRC.172 17.7 The Interim Measures for the Administration of the Utilization of Individual Tax-Deferred Commercial Pension Insurance Funds173 For the purposes of regulating the utilization of individual tax-deferred commercial pension insurance funds and promoting the sound development of the pilot programme of individual tax-deferred commercial pension insurance, according to the relevant provisions of the Measures for the Administration of the Utilization of Insurance Funds 2018174 and the Interim Measures for the Administration of the Individual Tax-Deferred Commercial Pension Insurance Business 2018,175 the CBIRC has developed the Interim Measures for the Administration of the Utilization of Individual Tax-Deferred Commercial Pension Insurance Funds 2018 (hereinafter, the Measures for Pension Insurance Funds 2018).176 The Measures for Pension Insurance Funds 2018 consist of 36 articles in six chapters: general provisions (article 1–4), business conditions (articles 5– 9), allocation for general categories of assets (articles 10–14), standard operation (articles 15–21), risk management (articles 22–29), and supervision and administration (articles 30–36). In this section, we consider the provisions of these Measures. 17.7.1 General provisions The utilization of tax-deferred pension insurance funds shall be conducted under the principles of safety, prudence, long period, and steadiness; be subject to asset and liability management and comprehensive risk management according to the nature of funds; insist on market-oriented and professional operation; and realize long-term preservation and appreciation of funds.177 Insurance companies may, on the basis of their own asset and liability management capacity, capacity for allocation of general categories of assets, investment management capacity, and risk management ability, and according to their relevant regulatory provisions, make investment on their own or entrust investment to

172 Ibid., art.50. 173 Yin Bao Jian Fa No. 32 [2018], issued on 22 June 2018 and came into force on the same day. (see

accessed on 13 September 2020). 174 The CIRC Order No. 1 [2018]. 175 Yin Bao Jian Fa No. 23 [2018]. 176 The Interim Measures for the Administration of the Utilization of Individual Tax-Deferred Commercial Pension Insurance Funds 2018, art.1. 177 Ibid., art.2.

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qualified investment managers. “Investment managers” means the insurance asset management institutions, securities companies, securities asset management companies, securities investment fund management companies, and other professional investment management institutions that are legally formed and comply with the provisions issued by the CBIRC.178 The utilization of tax-deferred pension insurance funds shall comply with the regulatory provisions on the investment scope and proportion, investment capacity, investment management, risk management, and other aspects, unless as otherwise prescribed in these Measures 2018.179 17.7.2 Business conditions An insurance company utilizing tax-deferred pension insurance funds shall meet the following conditions: (1) It has sound asset and liability matching status, sound and effective asset allocation mechanism, relatively strong asset and liability management capacity and capacity for allocation of general categories of assets, and no fewer than eight professionals engaging in asset and liability management and asset allocation. Professionals specializing in asset allocation shall be no fewer than five persons, and investment managers and portfolio managers in compliance with the provisions of articles 7 and 8 of these Measures shall not be fewer than two persons; (2) It has relatively strong investment management capability, sound investment decision-making system, perfect investment management system, rich risk management experience, and effective internal control mechanism; (3) It has not committed any gross violation of laws and regulations in the most recent three years; (4) Other conditions prescribed by the CBIRC.180 An investment management institution of tax-deferred pension insurance funds under entrusted management shall meet the following conditions: (1) It has complete corporate governance and sound finance, is responsible and diligent, is self-regulated, complies with the laws, has sound social reputation, and performs social responsibilities; (2) It has relatively strong capacity for allocation of general categories of assets and meets the business conditions for entrusted management of insurance funds; (3) It has registered capital not less than ¥500 million yuan or net assets not less than 1 billion yuan; (4) It has not less than three years of experience in entrusted investment, sound and stable performance, and total non-monetary assets under active management of not less than ¥100 billion yuan; (5) It has a stable investment management team with not less than 20 investment research professionals, including not less than ten portfolio managers and investment managers in compliance with these Measures; (6) It has sound operating procedures, internal control mechanism, and risk management and auditing system, and has established a fair trade and risk isolation mechanism; (7) It has no gross violation of laws and regulations, major investment risk event, or major operational risk event in the most recent three years; (8) Other conditions prescribed by the CBIRC. Funds of an 178 Ibid., art.3. 179 Ibid., art.4. 180 Ibid., art.5.

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affiliated institution under entrusted management of an insurance asset management institution shall not be subject to the restriction of items (3) and (4) of the preceding paragraph.181 An investment manager performing the duties of managing the tax-deferred pension insurance investment accounts shall meet the following conditions (art.7): (1) He or she observes the professional ethics and has relatively strong social responsibility; (2) He or she has financial professional knowledge and relevant qualifications, is familiar with the risk return characteristics of the assets under investment management, and is familiar with the trading rules and valuation pricing; (3) He or she has no fewer than five years of working experience in the financial industry and no fewer than three years of investment experience and available performance records; (4) He or she has stable and sound historical investment performance; (5) He or she has no major violation of laws and regulations, major investment risk events, major dereliction of duty, or bad credit record; (6) Other conditions prescribed by the CBIRC.182 A portfolio manager performing the duties of allocating general categories of assets for the investment accounts of tax-deferred pension insurance shall, besides complying with the provisions of items (1), (5), and (6) of art. 7, also meet the following conditions (art.8): (1) He or she has financial expertise and relevant qualifications, is familiar with the relevant laws, regulations, and policies on the utilization of insurance funds and is familiar with the requirements for asset and liability management, allocation of general categories of assets, investment management, and risk management; (2) He or she has no fewer than eight years of working experience in the financial industry, no fewer than three years of experience in long-term asset funds allocation and investment management, and available performance records; (3) He or she or she has mature investment portfolio management concepts and methods.183 Insurance companies, investment management institutions, investment managers, and portfolio managers shall continue to meet the corresponding business conditions. Insurance companies and investment management institutions shall conduct regular assessments of their continuous compliance with business conditions and accept the assessment, inspection, and inquiry of the CBIRC. Investment managers and portfolio managers shall be registered with the Insurance Asset Management Association of China and continue to receive follow-up training. 17.7.3 Allocation for general categories of assets An insurance company shall, on the basis of the investment objectives, risk appetite, capital duration, liquidity arrangement, and other characteristics of taxdeferred pension insurance funds, and in consideration of the quantitative and qualitative analysis, carry out allocation of general categories of assets and develop

181 Ibid., art.6. 182 Ibid., art.7. 183 Ibid., art.8.

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general plans for strategic allocation of assets and annual plans for allocation of assets.184 An insurance company may entrust an investment management institution to provide professional services and technical support for the allocation of general categories of assets. As the investment management institution, an insurance asset management institution may provide special solutions for allocation of general categories of assets for tax-deferred pension insurance funds, improve the investment management efficiency, and realize long-term stable operation, preservation, and appreciation.185 An insurance company and its investment management institution shall, according to the macroeconomic trends, characteristics of the tax-deferred pension insurance business, characteristics of various assets’ risk return, long-term development plans of the company, overall risk tolerance, and other decision-making factors, specify the long-term profit targets and long-term performance comparison benchmark and develop general plans for strategic allocation of assets. A general plan for strategic allocation of assets shall be valid for three years at a minimum and be assessed once a year at a minimum on a rolling basis.186 An insurance company and its investment management institution shall, according to the general plans for strategic allocation of assets, develop annual plans for asset allocation. An insurance company and its investment management institution shall pay close attention to the price change trends of various assets in the short term and dynamically adjust the investment portfolios on the basis of the target asset allocation ratio and floating range.187 An insurance company and its investment management institution shall, according to the characteristics of the tax-deferred pension insurance products, develop and implement special asset allocation strategies and achieve the investment objectives of tax-deferred pension insurance funds for long-term preservation and appreciation and control of downside risks. An allocation strategy includes the debt-oriented strategy, target date strategy, target risk strategy, and sustainable withdrawal strategy, among others.188 An insurance company and its investment management institution shall establish the asset allocation models, data, and information system commensurate with the scale and allocation strategy, among others, of the tax-deferred pension insurance business.189 17.7.4 Standard operation Separate investment accounts shall be opened for different tax-deferred pension insurance products. An insurance company shall, on the basis of the characteristics of the tax-deferred pension insurance business and funds, and according to the 184 185 186 187 188 189

Ibid., art.10. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14.

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requirements for the management of “general accounts” and “independent accounts”, conduct asset allocation management and asset and liability management of separate accounts. For Class A and Class B products, an insurance company shall adopt the common account management model. For Class C products, an insurance company shall adopt the independent account management model.190 The investment assets of tax-deferred pension insurance funds are divided into five general categories of assets, including liquid assets, fixed income assets, equity assets, real estate assets, and other financial assets. Tax deferred pension insurance funds shall be encouraged to be invested in areas that satisfy the national strategies and industrial policies.191 An insurance company shall calculate the investment ratio of the common accounts of the tax-deferred pension insurance and the common accounts of other insurance products on a consolidated basis and comply with the regulatory provisions on the proportion of the utilization of insurance funds. The investment ratios of the common accounts of the tax-deferred pension insurance separately calculated shall not be higher than the upper limit of the supervision ratio of major assets and the upper limit of the concentration risk supervision ratio. Where, at the initial stage of business development, a common account of tax-deferred pension insurance has been operated for less than six months and the total investment asset scale does not exceed ¥500 million yuan, an insurance company is not required to separately calculate the investment ratio of the common account of tax-deferred pension insurance. In light of the reality of asset and liability management of taxdeferred pension insurance funds and strategies for allocation of general categories of assets, the CBIRC may adjust the classification, variety, and related proportions, among others, of the assets invested.192 An insurance company shall make entrusted investment of tax-deferred pension insurance funds in compliance with the relevant regulatory provisions of the CBIRC on entrusted investment of insurance funds. An insurance company shall give priority to selecting an investment management institution with long-term capital management experience, perfect asset allocation system, rich investment experience, and sound risk management and control mechanism. An investment management institution shall effectively perform the active management duties and shall not transfer the entrustment. The investment guidelines shall specifically include the words “tax-deferred pension insurance,” and concurrently specify the investment objectives, investment scope, investment ratio, and investment strategy, among others, of the entrusted funds, and effective measures shall be taken to manage the investment risks.193 An insurance company and its investment management institution shall develop the valuation management rules for tax-deferred insurance investment accounts and investment assets, specify the procedures and techniques for valuation, and improve the valuation decision-making system; select reasonable valuation data sources and 190 191 192 193

Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18.

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use a reliable valuation business system; ensure that valuers are familiar with the valuation principles and specific valuation procedures for various investment varieties; and improve the relevant risk monitoring, control, and reporting mechanisms. The valuation of investment accounts for Class C products shall insist on the principle of fair value and encourage the use of market value measurement and shall enable the insured to conduct conversion with the value of product account reflecting the fair value when the product is converted to protect the lawful rights and interests of the insured.194 An investment management institution shall disclose to the insurance company the information on the tax-deferred pension insurance investment account in an active, truthful, accurate, complete, and timely manner, mainly including fund investment, leverage level, income distribution, custody arrangements, major investment risks, and other contents.195 The investment records of a tax-deferred pension insurance account include investment decision-making documents and transaction records, among others, and shall be kept for not less than 15 years.196 17.7.5 Risk management An insurance company shall establish the organizational structure, management system, and internal control process for the utilization of tax-deferred pension insurance funds; establish the risk management mechanisms for asset and liability management, allocation of general categories of assets, management of investment portfolio, investment in various varieties, and other respects; and identify, measure, monitor, and evaluate the interest rate risk, liquidity risk, downside risk, and other risks in order to effectively prevent and mitigate risks. An insurance company and investment management institution shall develop rules on fair trading and affiliated transaction, among others; establish and improve the risk isolation and firewall mechanisms; and effectively prevent and control the operating risk, moral hazard, insider trading risk, and tunnelling risk.197 For Class A and Class B products, an insurance company shall, according to the product characteristics and the requirements for the strategies of asset allocation, strengthen cost-benefit management, term structure management, cash flow management, and risk budget management. It shall also evaluate the implementation of the general plans for strategic allocation of assets and annual plans for asset allocation on a regular basis. For Class C products, an insurance company and its investment management institution shall, according to the characteristics of independent accounts, establish an effective evaluation mechanism, monitor and prevent the investment style deviations of investment managers and portfolio managers caused by changes in internal and external factors such as market environment and personnel adjustment, 194 195 196 197

Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

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identify and correct the investment strategy deviations in investment accounts, and conduct performance attribution and performance evaluation on a regular basis.198 An insurance company and its investment management institution shall fully consider the long-term and safety characteristics of tax-deferred pension insurance funds, strengthen the dynamic coordination between debtors and asset providers, and take long-term gap analysis, scenario simulation, pressure test, and other means to manage long-term interest rate risk.199 An insurance company and its investment management institution shall fully consider the impact of the conversion clauses of tax-deferred pension insurance products on liquidity, strengthen the liquidity management of the invested products, and conduct liquidity stress tests to prevent the liquidity impact of the centralized conversion of products on investment accounts.200 An insurance company and its investment management institution shall, according to the business characteristics of tax-deferred pension insurance funds and on the basis of the solvency constraints and asset-liability analysis, continue to manage credit risk, interest rate risk, and market risk, among others, and control the downside risk of the investment accounts.201 An investment management institution shall withdraw risk reserve according to 10% of the management fee income, and withdrawal may be exempted from when the risk reserve balance reaches 1% of the balance of the assets of the entrusted investment account. The risk reserve shall mainly be used for making up for the losses caused to the investment accounts by the investment management institution’s violation of laws and regulations, violation of the entrusted investment agreement, operation mistake, technical failure, and so on.202 An insurance company and its investment management institution shall establish a contingency plan for the risk event of tax-deferred pension insurance and appropriately handle the wild fluctuations in the market, major risk events and other emergencies that seriously affect the interests of the insured according to the risk contingency plan.203 The tax-deferred pension insurance funds shall not be utilized in the following acts: (1) using the funds not in a tax-deferred pension insurance investment account in the name of tax-deferred pension insurance to carry out investment activities or using the funds in a tax-deferred pension insurance investment account to carry out investment activities in the name of others; (2) unfairly treating the tax-deferred pension insurance investment accounts; (3) misappropriating the assets in the tax-deferred pension insurance investment accounts; (4) using the assets under management to seek illicit interests or conducting tunnelling; (5) engaging in insider trading and manipulating the price of securities transactions and other unfair securities trading activities; and (6) other activities prohibited by the laws, regulations and the CBIRC.204 198 199 200 201 202 203 204

Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29.

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17.7.6 Supervision and administration An insurance company and investment management institution utilizing taxdeferred pension insurance funds shall report to the CBIRC and submit selfevaluation reports on the compliance of the business conditions. The submitted materials shall be true, accurate, and complete and comply with these Measures and the relevant regulatory provisions and shall not contain any false record, misleading statement, or major omission.205 An investment management institution shall, within 30 working days after the end of each quarter and before 30 April each year, submit quarterly reports and annual reports on the utilization of tax-deferred pension insurance funds in the subaccounts of investment to the CBIRC. A report includes: (1) the asset and liability management situation during the reporting period, including the maturity structure matching, cost benefit matching, and cash flow matching, among others; (2) the overall implementation of the general plans for strategic allocation of assets and annual plans for allocation of assets during the reporting period; (3) the analysis on the valuation principles, valuation methods, and deviations between the valuation results of investment accounts and fair value; (4) the analysis on investment portfolios, including the characteristics of risk returns of various assets, the distribution of duration and rating of fixed-income assets, the distribution of industries and regions of equity assets, and the concentration of top holding subjects; (5) the performance, including asset scale growth, rate of return on investment, and attribution analysis, among others, during the reporting period; (6) the account risks, including various asset risk status and response measures, risk budget, income volatility, maximum withdrawal, stress test and scenario analysis, among others; (7) the selection, appointment, and dynamic monitoring of the investment management institution; and (8) Other contents prescribed by the CBIRC.206 An investment management institution shall, before 30 April each year, submit an annual report on the utilization of entrusted tax-deferred pension insurance funds in the sub-accounts of investment to the CBIRC. A report includes: (1) analysis on operation of the macro market; (2) the asset allocation strategy and the implementation thereof; (3) the proportion of and changes in investment in general categories of assets; (4) the guidelines for entrusted investment and the implementation thereof; (5) the investment transactions, fund clearing, and asset custody; (6) the analysis on investment returns and performance attribution; (7) the main risk assessment and the implementation of the contingency plans; (8) the disclosure of information to insurance company; (9) the financial reports on tax-deferred pension insurance funds investment audited by professional institutions; and (10) other contents prescribed by the CBIRC.207 An insurance company shall report the following major matters to the CBIRC in a timely manner within five working days: (1) the rate of return on investment of the investment accounts of Class A and Class B products for three consecutive

205 Ibid., art.30. 206 Ibid., art.31. 207 Ibid., art.32.

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months is lower than the determined rate of return or guaranteed rate of return, and the net withdrawal of the investment account for Class C products on a rolling basis within 90 days exceeds 15%; (2) the request for funds for the conversion of normal insurance products when payment is unavailable for an account; (3) the major IT and trading system failures and major operating risks; and (4) other major violations of laws and regulations, major investment risks or major operating risk events.208 The CBIRC shall, through off-site supervision and on-site supervision, conduct follow-up monitoring of the utilization of tax-deferred pension insurance funds on a regular basis and supervise and evaluate the continuous compliance with the business conditions of insurance companies, investment management institutions, investment managers, and portfolio managers.209 Where an insurance company and the insurance asset management institution violate the relevant provisions on the utilization of insurance funds and the provisions of these Measures, the CBIRC shall impose administrative penalties on the company and the responsible person according to the laws and regulations. Where another investment management institution violates the aforesaid provisions, the CBIRC shall record its bad acts and notify its competent industry department. An insurance company and investment management institution shall, according to the measures for the administration of internal accountability, hold the senior executives and main business specialists accountable.210 17.8 Conclusion In 2018, five sets of rules regarding commercial pension insurance were issued: (1) Notice on Carrying out the Pilot Project of Individual Tax-Deferred Commercial Pension Insurance (2 April 2018); (2) Notice on Issuing the Guidelines on Developing Individual Tax-Deferred Commercial Pension Products (25 April 2018); (3) Notice on Issuing the Interim Measures for the Administration of the Individual Tax-Deferred Commercial Pension Insurance Business (16 May 2018); (4) Notice on Issuing the Interim Measures for the Administration of the Utilization of Individual Tax-Deferred Commercial Pension Insurance Funds (22 June 2018); and (5) Notice on Expanding the Scope of Elderly Housing Reverse Mortgage Pension Insurance (31 July 2018). It can be said that 2018 is the year of formulation of regulations on commercial pension insurance. These rules, together with other relevant laws and regulations, lay a solid ground for the development of commercial pension insurance in China. What needs to be done next is for the insurance industry to implement these rules. The two key issues to be addressed next are the rate of participation of the pension insurance programmes and the coordination of the different government departments on the two new pension insurance programmes: the individual taxdeferred commercial pension insurance and the elderly housing reverse mortgage 208 Ibid., art.33. 209 Ibid., art.34. 210 Ibid., art.35.

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pension insurance. It is suggested that the CBIRC should be placed in the leading position for the coordination of the commercial pension insurance programmes. In the most recent regulation of the CBIRC, the Opinions on Promoting the Development of Commercial Insurance in Social Service 2020,211 the direction and the goal are set out to strengthen the protection function of commercial pensions and annuities. Diversified commercial annuities and personal account-based commercial pensions shall be actively developed. On the basis of safety and prudence, the scope of commercial pension fund investment shall be expanded. The goal is to accumulate no less than ¥6 trillion yuan of pension liability reserves for the insureds by 2025. The protection for the elderly aged 60 and older shall be improved. Actions will be taken to optimize the policy support for the reverse mortgage pension insurance for the elderly and improve the enforcement power of notarization on contract execution and the role of notary institutions acting as estate managers. The elderly service industry shall be further developed.

211 Yin Bao Jian Fa No. 4 [2020].

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CHAPTER 18

Agriculture insurance

18.1 Introduction China is an agricultural country. Agriculture plays a fundamental role in China’s national economy and social stability. To maintain a sufficient supply of food for 1.4 billion people is an enormous challenge and the most important task of the government. Agriculture faces a variety of natural disasters such as floods, droughts, hailstones, hurricanes, and so on. Occurrence of these events will devastate crops and livestock and give rise to large-scale economic losses. In order to support a sustained, rapid, and sound development of China’s agricultural economy and to maintain the stability of the society, China has been striving to provide sufficient protection for the development of agriculture and the rural economy by enhancing the role of agriculture insurance. Agriculture insurance is an instrument of choice in many countries for helping farmers and rural communities cope with risks. According to art.2 of the Regulation of Agriculture Insurance,1 agriculture insurance is defined as the insurance activities where an insurance institution (an insurance company or an agricultural mutual insurance company or any other legally established insurance organization)2 is liable to pay indemnities under an agriculture insurance contract to the insured for the property losses caused by the agreed insured events such as a natural disaster, accident, epidemic, and disease that happen to the subject matter insured in the production activities of planting, forestry, animal husbandry, and fishery.3 Agricultural insurance can be generally divided into two categories: plantation insurance and breeding insurance, of which breeding insurance is divided into four categories: livestock insurance, livestock and poultry insurance, aquaculture insurance, and other breeding insurance. In the world, some agriculture insurance is private, sold by insurance companies to farmers on a purely commercial, non-subsidized basis, but most agricultural insurance is provided on a subsidized basis as part of government efforts to further

1 The State Council Order No. 666 [2013] was adopted at the 222nd executive meeting of the State Council on 24 October 2012 and came into force on 1 March 2013; it was amended in accordance with the Decision of the State Council to Amend Certain Administrative Regulations by Order No. 666 of the State Council on 6 February 2016 (see accessed on 16 October 2020). 2 Ibid., art.2(2). 3 Ibid., art.2(1).

DOI: 10.4324/9781351122863-18

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development, including social and political goals. In China, the state supports the development of various forms of agricultural insurance and develops a policy-based agricultural insurance system.4 A policy-based and subsidized agriculture insurance system is the dominant form of agriculture insurance in China. In 2018, the total cost by government for agriculture insurance premium subsidies amounted to ¥19.9 billion yuan to provide insurance for 195 million farmers, with the total amount insured of ¥3,460 billion yuan.5 This chapter considers the regulatory mechanism for agriculture insurance in China. A number of issues will be addressed. First, it begins with a brief overview of the framework of the regulatory mechanism for agriculture insurance. Second, it moves on to discuss the development and the current position of agriculture insurance. Third, it considers the State Council’s Regulation of Agriculture Insurance. Fourth, it examines how agriculture insurance contracts are regulated by the China Banking and Insurance Regulatory Commission (the CBIRC) and its predecessor, the China Insurance Regulatory Commission (the CIRC) in respect of qualification and permission of an insurance institution to engage in agriculture insurance, regulation of agriculture insurance policy clauses and premium rates, underwriting, and claims handling of agriculture insurance. Fifth, it examines the question of how agriculture insurance is supported by financial subsidization and other means. Sixth, it examines the general principles of agriculture insurance service as formulated by the Insurance Association of China (the IAC). Finally, it examines the risks covered and the risks excluded and the rights and obligations of the insurers and the insured under typical agriculture insurance policies. 18.2 An overview of the regulatory framework for agriculture insurance in China Article 184 of the Insurance Law provides that “the state supports the development of insurance business which serves agricultural production. Agriculture insurance shall be provided for separately by laws and administrative regulations”. There is no specific statutory law for agriculture insurance.The primary and top legislation for regulating agriculture insurance is the Regulation of Agriculture Insurance which was first enacted by the State Council in October 2012 and amended in February 2016. This Regulation will be examined in detail in section 18.4. Further, the State Council set out principled requirements in its Several Opinions on Accelerating the Development of the Modern Insurance Service Industry in August 2014.6 Section 11 of the Opinions 2014 puts forth the principles and the directions for active development of agricultural insurance. Farmers and all 4 Ibid., art.3(1). 5 The press conference organized by the Ministry of Finance for the publication of the Notice of Issuing the Guiding Opinions on Accelerating the High-Quality Development of Agriculture Insurance on 16 October 2019 (see accessed on 18 October 2020). 6 The State Council No. 29 [2014] was issued on 10 August 2014 and came into force on the same day (see accessed on 16 October 2020).

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kinds of new types of agricultural business operators are encouraged to voluntarily purchase insurance so as to expand the coverage areas and enhance the extent of agriculture insurance. The pilot programme on the target price insurance of agricultural products shall be conducted; the weather index insurance and other emerging insurance products and services shall be explored; and agriculture insurance risk management tools shall be enriched. The agriculture insurance catastrophe risk reserves system shall be implemented. The agriculture insurance service system shall be improved, and multiple forms of mutual cooperation insurance are encouraged. The mechanism on cooperation among insurance agencies and hazard forecasting departments and competent agricultural departments shall be improved.7 All local governments shall, in light of their actual circumstances, support insurance institutions in providing insurance products for “agriculture, farmers and rural areas” which have moderate coverage, low insurance premiums, and plain language insurance policy clauses. Rural small loan credit insurance, farmhouses insurance, agricultural machinery insurance, agricultural infrastructure insurance, forest insurance, and so on shall be actively developed.8 In implementing the State Council’s regulations, the Ministry of Finance, the CIRC/CBIRC, and other relevant governmental departments have formulated several pieces of regulation for agriculture insurance. The following are the major administrative regulations. (1) The State Council: Regulation of Agriculture Insurance (6 February 2016). (2) The State Council: Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry (10 August 2014). (3) The Ministry of Finance: the Measures for the Administration of Catastrophe Risk Reserve of Agriculture Insurance (8 December 2013).9 (4) The Ministry of Finance: the Measures for the Administration of Agriculture Insurance Premium Subsidies by the Central Treasury (19 December 2016).10 (5) The Ministry of Finance: Notice on the Pilot Programme of Agriculture Catastrophe Insurance in the Main Grain Production Provinces (17 May 2017).11 (6) The Ministry of Finance: Notice on Launching the Pilot Programme of Full Cost Insurance and Income Insurance for the Three Major Grain Crops (20 August 2018).12 7 Several Opinions on Accelerating the Development of the Modern Insurance Service Industry 2014, s.11. 8 Ibid., s.12. 9 The Ministry of Finance No. 129 [2013] issued on 8 December 2013 came into force 1 January 2014 (see accessed on 16 October 2020). 10 The Ministry of Finance No. 123 [2016] issued on 19 December 2016 came into force 1 January 2017 (see accessed on 16 October 2020). 11 The Ministry of Finance No. 43 [2017] issued on 17 May 2017 came into force on the same day (see accessed on 16 October 2020). 12 The Ministry of Finance No. 93 [2018] issued on 20 August 2018 came into force on the same day (see accessed on 16 October 2020).

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(7) The Ministry of Finance, Ministry of Agriculture and Rural Affairs, the CBIRC and the National Forestry and Grassland Administration: Notice of Issuing the Guiding Opinions on Accelerating the High-Quality Development of Agriculture Insurance (19 September 2019).13 (8) The CIRC: Notice on Strengthening the Administration of Agriculture Insurance Clauses and Premium Rates (7 April 2013).14 (9) The CIRC: Notice on Strengthening the Administration of the Operational Qualification of the Agriculture Insurance Business (7 April 2013).15 (10) The CIRC, the Ministry of Finance and the Ministry of Agriculture: Notice on Further Improving the Drafting of Clauses on Agriculture Insurance Products Receiving Insurance Premium Subsidies of the Central Treasury (15 February 2015).16 (11) The CIRC: Notice on Issuing the Interim Measures for the Administration of the Underwriting and Claim Settlement of Agriculture Insurance (17 March 2015).17 (12) The Insurance Association of China: General Principles of Agriculture Insurance Service (1 November 2016).18 (13) The CBIRC: Notice of the General Office of the CBIRC on Further Clarifying the Operating Conditions of Agriculture Insurance Business (1 June 2020).19 18.3 Development of agriculture insurance in China In China, agriculture insurance has experienced a twisted path of development. The development of agriculture insurance was very slow for the period from 1949 when the People’s Republic of China was founded to the early 1980s when China started its economic reform and opening up its door to the outside world. The People’s Insurance Company of China (the PICC) was established in October 1949 as the sole and state-owned insurance company in China. It conducted all kinds of insurance business, including agriculture insurance, in China then. But

13 The Ministry of Finance No. 102 [2019] issued on 19 September 2019 came into force on the same day (see accessed on 16 October 2020). 14 Bao Jian Fa No. 25 [2013] issued on 7 April 2013 became effective on the same day (see accessed on 16 October 2020). 15 Bao Jian Fa No. 26 [2013], issued on 7 April 2013 and became effective on the same day (see

accessed on 16 October 2020). 16 Bao Jian Fa No. 25 [2015] issued on 15 February 2015 came into force on the same day (see

accessed on 16 October 2020). 17 Bao Jian Fa No. 31 [2015] issued on 17 March 2015 came into force on 1 April 2015. (see

accessed on 15 April 2020). 18 The Insurance Association of China (see accessed on 16 October). 19 See accessed on 16 October 2020.

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all insurance business in China was suspended in 1958, and there was essentially no agriculture insurance business from 1958 to 1982.20 The insurance business was resumed and developed after China’s adoption of the reform and opening-up policy. In 1982, the PICC resumed its agriculture insurance. The government did not provide policy support then, and the losses in agriculture insurance were made up by other lines of business within the Company. In 1986, the Agriculture & Animal Husbandry Insurance Company under the Xinjiang Production and Construction Corp (currently known as the China United Property Insurance Company) was set up. Its main business was agriculture insurance. During that period, agriculture insurance was provided on a full commercial basis but suffered sustained underwriting losses. For example, between 1982 and 1993, the agriculture premium income of the PICC totalled ¥2.967 billion yuan, while its total amount of payout for losses reached ¥2.877 billion yuan. Taking 15% of the premium as operating costs, the company suffered a loss of ¥355 million yuan. Because of the lack of government policy support, after reaching a temporary peak of premium ¥817 million yuan in 1992, the market size of agriculture insurance in China shrank every year, with the number of insurance products dropping from more than 60 to about 30.21 In 2004, the Communist Party Central Committee and the State Council set out some requirements in the Opinions on Some Policies of Increasing Farmers’ Income that “to accelerate the establishment of a policy mechanism of agricultural insurance, and to choose a number of products and regions for pilot projects. Eligible places may provide certain premium subsidy for farmers who purchase planting and livestock breeding insurance”. To implement the requirements, the CIRC initiated government promoted agriculture insurance pilot projects in one city (Shanghai) and six provinces or autonomous regions (Heilongjiang, Jilin, Xining, Jiangsu, Sichuan, and Hunan). Government at all levels adopted policies to support agriculture insurance. With steady progress of the pilot projects and continuously improving regulation, agricultural insurance entered into a stage of rapid development.22 On 15 June 2006, the State Council issued the Several Opinions on the Reform and Development of Insurance Industry 2006,23 which recommended the exploration of a new model of agriculture insurance, one with multilayered and multichannelled subsidies. The premium subsidies, from both the central and local governments, would be provided to participating farmers. The Opinions also recommended exploring the establishment of an agriculture reinsurance system financially supported from both the central and local governments. The Opinions 2006 were a milestone for agriculture insurance, because it provided a policy basis for governmental finance support. 20 Zhen Jing, Chinese Insurance Contracts: Law and Practice (1st edn, Informa law from Routledge, 2017), p. 14. 21 Yianli Zhou, “An Introduction to the Development and Regulation of Agricultural Insurance in China” (2009) The Geneva Papers on Risk and Insurance – Issues and Practice, 34, 78–84. 22 Ibid. 23 The State Council No.23 [2006] came into force on 15 June 2006 (see accessed on 16 October 2020).

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Further, in early 2007, the Ministry of Finance and the CIRC jointly formulated the Pilot Proposal of Government Promoted Agriculture Insurance, which set out the special scheme of centrally financial subsidy. The Ministry of Finance allocated for the first time ¥2.15 billion yuan from the budget for the premium subsidy pilot project of planting insurance and livestock breeding insurance. The central and provincial government each provided a subsidy for 25% of the premium. The remaining 50% was jointly assumed by the insured farmers, the leading enterprises, and departments of finance at province, city, and county levels. So the four-level premium subsidy system (the central government, the province, the city, and the county levels) was practiced for the pilot project.24 On 26 February 2008, the Ministry of Finance enacted two pieces of regulation on agriculture insurance premium subsidies: that is, the Measures for the Administration of Planting Insurance Premium Subsidies by the Central Treasury 200825 and the Measures for the Administration of Livestock Breeding Insurance Premium Subsidies by the Central Treasury 2008.26 These regulations for the first time set out the regulatory rules for agriculture insurance premium subsidies and became effective on 1 March 2008. On 1 January 2017, these two regulations were replaced by the Measures for the Administration of Agriculture Insurance Premium Subsidies by the Central Treasury 2016,27 which is the current and effective regulation for premium subsidization of agriculture insurance and will be considered in detail in section 18.10. By the Measures for the Administration of Planting Insurance Premium Subsidies by the Central Treasury 2008,28 the crops which were premium-subsidized included corn, wheat, cotton, soybean, monkey nut, oil seed and other oil-producing crops, and other crops specified by the relevant regulations by the State Council. For subsidized insurance crops, the province finance provided 25% of the premiums; the central finance subsidized 35% of the premiums. The remaining premiums were borne by the farmers or jointly by the farmers and leading enterprises, local financial departments, and so on. The specific proportions were determined independently by the subsidized area. The level of premium subsidization was further increased by the Measures for the Administration of Agriculture Insurance Premium Subsidies by the Central Treasury 2016 and will be discussed later. In summary, since 2007, with the financial premium subsidy by government, agriculture insurance in China has grown steadily and quickly in the last 13 years. The total premium income of agriculture insurance has increased from ¥5.18 billion yuan in 2007 to ¥67.2 billion yuan in 2019.The insured amount has increased from ¥112.6 billion yuan in 2007 to ¥3,810 billion yuan in 2019.29 The crops-growing

24 Yianli Zhou, “An Introduction to the Development and Regulation of Agricultural Insurance in China” (2009) The Geneva Papers on Risk and Insurance – Issues and Practice, 34, 78–84. 25 Ministry of Finance No.26 [2008]. 26 Ministry of Finance No.27 [2008]. 27 Ministry of Finance No. 123 [2016]. 28 Ministry of Finance No.26 [2008]. 29 The statistical data are from the CBIRC published report at its website (see accessed on 26 April 2020).

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land areas under insurance coverage have increased from 0.23 billion mu30 to 2.1 billion mu. About 200 species of crops are insured. The insurance for the three main crops (corn, rice, and wheat) has covered about 70%.31 In 2018, the central government spent ¥19.9 billion yuan in agriculture insurance premium subsidies, providing 195 million farm households with risk protection of ¥3,460 billion yuan, and the subsidy funds were enlarged 174 times. About 80% of agriculture insurance premium income comes from financial subsidies at all levels.32 China has now built 400,000 grassroots agriculture insurance service outlets, with nearly 500,000 grassroots service personnel, basically covering all countylevel administrative regions, more than 95% of townships, and 50% of villages. The agriculture insurance penetration and density were 0.88% and ¥286 yuan per person respectively in 2019.33 The smooth and rapid development of agriculture insurance in recent years is largely due to and safeguarded by the successful formulation and application of the legal and financial regulations in China. These regulations are considered in the following sections. 18.4 The State Council’s regulation of agriculture insurance The Regulation of Agriculture Insurance 201634 is the primary legislation to regulate agriculture insurance activities. It is developed in accordance with the Insurance Law, Agriculture Law of the China, and other laws for the purposes of regulating agriculture insurance activities, protecting the lawful rights and interests of the parties to agriculture insurance activities, improving the risk resistance capacity in agriculture production, and promoting the sound development of the agriculture insurance business.35 The Regulation is composed of 33 articles in five chapters: the general provisions (articles 1–9), agriculture insurance contracts (articles 10–16), rules of operation (articles 17–25), legal liabilities (articles 26–31), and supplementary provisions (article 32 and 33). 18.4.1 The principles for agriculture insurance The state supports the development of various forms of agriculture insurance and the improvement of a policy-based agricultural insurance system.36 The Regulation sets out four basic principles for agriculture insurance: government guidance, market

30 One mu = 666.7 m2. 31 The Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Science Press, Beijing, China) p. 217. 32 The press conference organized by the Ministry of Finance for the publication of the Notice of Issuing the Guiding Opinions on Accelerating the High-Quality Development of Agriculture Insurance on 16 October 2019 (see accessed on 18 October 2020). 33 Ibid. 34 The State Council Order No. 666 [2016]. 35 The Regulation of Agriculture Insurance 2016, art.1. 36 Ibid., art.3(1)

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operation, free will (voluntariness), and coordinated advancement.37 These four principles define the model of agriculture insurance in China, which is a government-guided and supported and market-operated agriculture insurance model. This model has been proved to be successful in China and must be adhered to by all participants of the agriculture insurance market. These principles are further reiterated in the Guiding Opinions of the Ministry of Finance, the Ministry of Agriculture and Rural Affairs, the CBIRC, and the National Forestry and Grassland Administration on Accelerating the High-Quality Development of Agricultural Insurance 201938 as follows: Government guidance. The role of government is to guide and support agriculture insurance by enhancing the extent of policy support (such as premium subsidies) by strengthening insurance business supervision and maintaining market order so as to create a favourable environment for the development of agriculture insurance.39 Market operation. Market operation must be consistent with the inherent rules of agriculture insurance development, and the decisive role of the market in resource allocation is given a full play. The demand-oriented approach shall be adhered to, and innovation shall be strengthened. The autonomy and creativity of insurance institutions in agriculture insurance operations shall be fully exercised.40 Free will. The will of farmers and organizations engaging in agricultural production and other operations shall be fully respected, and they shall not be forced or restricted to take part in agriculture insurance. Agriculture insurance management modes in line with the characteristics of different regions shall be explored in accordance with their realities to fully promote the enthusiasm of agriculture insurance participants.41 Coordinated advancement. Cooperation and coordination shall be strengthened, which shall entail an overall consideration to new types of agricultural businesses and small farming households. The functions of economic compensation and risk management of agricultural insurance shall be used, and at the same time emphasis shall be placed on integrating agriculture insurance into rural social governance so as to jointly advance the work on agriculture insurance.42 The people’s government of a province, autonomous region, or municipality directly under the Central Government may establish an agricultural insurance business model that is adapted to the local situations. Any entity or individual shall not force or restrict a farmer or an agricultural production and operation organization to participate in agricultural insurance.43 The insurance regulatory authority of the State Council shall regulate the agriculture insurance business. The finance, agriculture, forestry, development and reform, taxation, civil affairs, and other relevant departments of the State Council 37 Ibid., art.3(2) 38 The Ministry of Finance No. 102 [2019]. 39 The Guiding Opinions on Accelerating the High-Quality Development of Agricultural Insurance 2019, s.1(2). 40 Ibid. 41 Ibid. 42 Ibid. 43 The Regulation of Agriculture Insurance 2016, art.3.

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shall, according to their respective duties, be responsible for the promotion and administration of agriculture insurance.The finance, insurance regulation, land and resources, agriculture, forestry, meteorology, and other relevant departments and agencies shall establish an agriculture insurance information-sharing mechanism.44 The local people’s governments at and above the county level shall, in a unified manner, lead, organize, and coordinate the agriculture insurance work within their respective administrative regions and establish and improve working mechanisms to promote the development of agriculture insurance.The relevant departments of the local people’s governments at and above the county level shall, according to their respective duties prescribed by the local people’s governments, be responsible for the promotion and administration of agriculture insurance within their respective administrative regions.45 The relevant departments and agencies of the State Council and the local people’s governments at all levels and their relevant departments shall, in various forms, strengthen the publicity of agriculture insurance, raise the insurance awareness of farmers and agricultural production and distribution organizations, and organize and direct farmers and agricultural production and distribution organizations to proactively participate in agriculture insurance.46 18.4.2 Insurance premium subsidies and tax preference The Regulation of Agriculture Insurance 2016 sets forth two major policy supports for agriculture insurance: the insurance premium subsidization and tax relief. Where the subject matter of agriculture insurance taken out by farmers or agricultural production and distribution organizations falls within the scope of premium subsidization from the public finance, the public finance department shall offer premium subsidies as required, and the specific measures shall be developed by the finance department of the State Council in consultation with the agriculture and forestry departments and the insurance regulatory authority of the State Council.47 Accordingly, the Ministry of Finance formulated the Measures for the Administration of Agriculture Insurance Premium Subsidies by the Central Treasury 2016,48 which provide rules for premium subsidies of agriculture insurance. In addition to the subsidies provided by the central government, the state encourages the local people’s governments to support the development of agriculture insurance by taking measures such as offering premium subsidization from the local public finance.49 Insurance institutions engaged in agricultural insurance business enjoy tax preference in accordance with law.50

44 45 46 47 48 49 50

Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.7. The Ministry of Finance No. 123 [2016]. art.7. Ibid., art.9(1).

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18.4.3 Agriculture insurance catastrophe risk-spreading mechanism The state establishes an agriculture insurance catastrophe risk-spreading mechanism supported by the public finance, and the specific measures are developed by the finance department of the State Council in conjunction with the relevant departments of the State Council.51 For this purpose, the Ministry of Finance has formulated the Measures for the Administration of Catastrophe Risk Reserve of Agricultural Insurance 2013.52 The state also encourages the local people’s governments to establish an agriculture insurance catastrophe risk-spreading mechanism supported by the local public finance.53 18.4.4 A grassroots agriculture insurance service network The state favours the establishment of a grassroots service system by insurance institutions featured by adaptation to the development needs of the agricultural insurance business.The state encourages financial institutions to enhance the credit support for farmers and agricultural production and operation organizations that take out agriculture insurance.54 By the end of 2018, China established 400,000 grassroots agriculture insurance service outlets with nearly 500,000 grassroots service personnel, basically covering all county-level administrative regions, more than 95% of townships and 50% of villages in China.55 18.4.5 Agriculture insurance contracts As mentioned earlier, one of the four principles for agriculture insurance is market operation. Agriculture insurance business is carried out in the form of insurance contracts. However, the agriculture insurance is subsidized by government; its operation is not exactly the same as for other types of commercial insurance. The State Council sets out some special rules for agriculture insurance contracts in the Regulation of Agriculture Insurance 2016 (articles 10–16). Where the Regulation is silent regarding agriculture insurance contracts, the relevant provisions of the Insurance Law regarding insurance contracts are applicable.56 The following are the special rules for agriculture insurance contracts. Farmers and agricultural production and distribution organizations may take out agriculture insurance themselves, and farmers may also take out agriculture insurance under the organization of agricultural production and distribution organizations, villagers’ committees, and other entities.57 51 Ibid., art.8. 52 The Ministry of Finance No. 129 [2013]. 53 The Regulation of Agriculture Insurance 2016, art.8. 54 Ibid., art.9. 55 China Economy Website (see accessed on 16 October 2020). 56 The Regulation of Agriculture Insurance 2016, art.16. 57 Ibid., art.10(1).

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Where farmers take out agriculture insurance under the organization of agricultural production and distribution organizations, villagers’ committees, and other entities, insurance institutions shall, when entering into agriculture insurance contracts, prepare a list of insurance applications which includes detailed insurance application information on the insureds and is signed by the insureds for confirmation. Insurance institutions shall publish the underwriting information.58 There is a significantly different feature of agriculture insurance contracts from other types of commercial insurance contracts in that during the term of an agriculture insurance contract, the insurer shall not increase the premium or rescind the contract for any change of the degree of risk in the subject matter insured.59 In comparison, for non-agriculture insurance contracts, the insured has a duty to notify the insurer of a material increase of risk during the term of the contract, and the insurer may increase the insurance premium or rescind the contract as agreed upon in the contract. Where the insured fails to perform the notification obligation and an insured incident occurs because the degree of risk of the subject matter insured significantly increases, the insurer is not liable to pay indemnity.60 The Regulation 2016 provides a stronger protection to the insured of an agriculture insurance contract. After being notified of the occurrence of an insured event, an insurance institution shall conduct on-site survey in a timely manner and assess the losses caused to the subject matter insured in conjunction with the insured. Where farmers take out agriculture insurance under the organization of an agricultural production and distribution organization, villagers’ committee, or any other entity, the insurance institution shall publish the results of survey and loss assessment.61 An insurance institution may, as agreed upon in the agriculture insurance contract, assess the extent of damage to the subject matter insured by taking samples or other means. If the extent of damage is assessed by taking samples, the sampling specifications as prescribed by the relevant departments shall be complied with.62 Where the disposal of the damaged subject matter of agriculture insurance is subject to any provisions of laws and administrative regulations, evidence or supporting materials on the legally required disposal shall be obtained when claims are settled. No insurance institution may claim any right to the residual value of the damaged subject matter insured, except as otherwise agreed upon in the agriculture insurance contract.63 An insurance institution shall make claims payment to the insured within ten days after reaching a compensation agreement with the insured. Where the time limit for payment is specified in the agriculture insurance contract, the insurance institution shall fulfil the obligation of claims payment as agreed upon in the contract.64

58 Ibid., art.10(2). 59 Ibid., art.11. 60 The Insurance Law, art.52. For more on this topic, see Zhen Jing, “The Insured’s Post-Contract Duty of Notification of Increase of Risk: A Comparative Perspective” (2013) Journal of Business Law, 842–867. 61 The Regulation of Agriculture Insurance 2016, art.12. 62 Ibid. 63 Ibid., art.13. 64 Ibid., art.14.

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An insurance institution shall make claims payment in the full amount according to the assessed extent of damage to the subject matter insured and as agreed upon in the agriculture insurance contract. No entity or individual may illegally interfere with an insurance institution’s fulfilment of the obligation of claims payment nor restrict the right of the insured to obtain claims payment. Where farmers take out agriculture insurance under the organization of an agricultural production and distribution organization, villagers’ committee, or any other organization, the claim settlement list shall be signed by the insureds, and the insurance institution shall publish the results of claim settlement.65 Detailed rules regulating underwriting and claims handling for agriculture insurance contracts are provided in the Interim Measures for the Administration of the Underwriting and Claims Settlement of Agriculture Insurance 2015,66 which are to be considered in detail in section 18.9. 18.4.6 Agriculture insurance business operating rules The Regulation of Agriculture Insurance 2016 provides rules of agriculture insurance business operation (articles 17–25). Where the Regulation 2016 is silent regarding the operating rules of agriculture insurance, the relevant provisions of the Insurance Law regarding insurance operating rules and supervision and administration shall apply.67 The first rule is related to the qualification requirement of an insurance company to be permitted to carry out the agriculture insurance business. An insurance institution engaging in the agriculture insurance business shall meet the following conditions: (1) Having a complete and effective basic-level service network; (2) Having a special agriculture insurance department with appropriate professionals; (3) Having an adequate and effective agriculture insurance internal control system; (4) Having steady agricultural reinsurance, catastrophe risk arrangements, and risk response plans; (5) Complying with the solvency provisions issued by the insurance regulatory authority of the State Council; (6) Other conditions as set out by the insurance regulation authority of the State Council. No entity or individual except insurance institutions may engage in the agriculture insurance business.68 The detailed rules as to the qualification requirements are provided by the CIRC in its Notice on Strengthening the Administration of the Operational Qualification of the Agriculture Insurance Business 2013.69 This will be considered in section 18.5. An insurance institution engaging in the agriculture insurance business shall operate independently and be responsible for its own profits and losses. An insurance institution engaging in the agriculture insurance business shall manage its agriculture insurance business separately from other insurance business and conduct separate accounting of the profits and losses of its agriculture insurance business.70 65 66 67 68 69 70

Ibid., art.15. Bao Jian Fa No. 31 [2015]. The Regulation of Agriculture Insurance 2016, art.25. Ibid., art.17. Bao Jian Fa No.26 [2013]. The Regulation of Agriculture Insurance 2016, art.18.

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An insurance institution shall develop fair and reasonable agriculture insurance clauses and premium rates. The insurance clauses and premium rates which receive premium subsidization from the public finance shall be drafted by the insurance institution after fully soliciting the opinions of the finance, agriculture, and forestry departments of the people’s government of a province, autonomous region, or municipality directly under the central government and the representatives of farmers. The agriculture insurance clauses and premium rates shall be reported to the insurance regulatory authority for approval or recordation according to the law.71 The detailed rules regarding insurance clauses and premium rates are set out by CIRC in its Notice on Strengthening the Administration of Agriculture Insurance Clauses and premium Rates 2013,72 and the Notice on Further Improving the Drafting of Clauses on Agriculture Insurance Products Receiving Insurance Premium Subsidies of the Central Treasury 2015.73 These rules are considered in section 18.7. An insurance institution’s preparation of reserve assessment and solvency reports for its agriculture insurance business shall comply with the provisions issued by the insurance regulatory authority of the State Council. Where special principles and methods are required for the financial management and accounting of the agriculture insurance business, the specific measures shall be developed by the finance department of the State Council.74 An insurance institution may authorize basic-level agricultural technology promotion and other institutions to assist in its agriculture insurance business. The insurance institution shall enter into a written contract with an institution authorized to assist in its agriculture insurance business, specifying the rights and obligations of both parties and the payment of fees and expenses and provide business guidance to the institution assisting in its agriculture insurance business.75 An insurance institution shall properly preserve the original materials on survey and loss assessment for agriculture insurance in accordance with the provisions issued by the insurance regulatory authority of the State Council. No entity or individual may alter, forge, conceal, or in violation of relevant provisions, destroy the original materials on survey and loss assessment.76 Premium subsidies shall be obtained and used in accordance with the specific measures developed under art.7 of this Regulation 2016. It shall be prohibited to fraudulently obtain premium subsidies for agriculture insurance by means including but not limited to the following: (1) Fabricating or falsely adding any subject matter insured or taking out insurance multiple times for the same subject matter of insurance; (2) Offsetting the premium payable by an insurance applicant or the premium subsidy from the public finance by means such as filing a false claim, presenting false expenses, making a false surrender, intercepting or misappropriating premiums, or misappropriating operating expenses.77 71 72 73 74 75 76 77

Ibid., art.19. Bao Jian Fa No.25 [2013]. Bao Jian Fa No. 25 [2015]. The Regulation of Agriculture Insurance 2016, art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23.

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No entity or individual may misappropriate, intercept, or encroach upon any claims payment to the insured.78 18.4.7 Legal liability The Regulation of Agriculture Insurance 2016 also provides rules of legal liability for any violation of the provisions in the Regulation (article 26–31). Where an insurance institution that does not meet the qualification requirements and conditions as mentioned earlier (art.17 of the Regulation) engages in agriculture insurance business, the insurance regulatory authority shall order it to take corrective action in a specified period and stop accepting new business; if it fails to take corrective action in the specified period, or if there are any serious consequences, the insurance regulatory authority shall impose a fine of not less than ¥100,000 yuan nor more than ¥500,000 yuan on it and may order it to cease operation for an overhaul or revoke its insurance business permit.79 Where an organization other than an insurance institution or an individual illegally engages in agriculture insurance business, the insurance regulatory authority shall ban the operation, confiscate the illegal income, and impose a fine of not less than one nor more than five times the illegal income or if there is no illegal income or the amount of illegal income is less than ¥200,000 yuan, a fine of not less than ¥200,000 yuan nor more than one million yuan on the organization or individual.80 Where an insurance organization engaging in the agriculture insurance business commits any of the following conduct, the insurance regulatory authority shall order it to take corrective action and impose a fine of not less than ¥100,000 nor more than ¥500,000 yuan on it; if the circumstances are serious, the insurance regulatory authority may restrict its business scope and order it to stop accepting new business: (1) Preparing or providing any false report, statement, document, or material; (2) Refusing or obstructing any supervisory inspection legally conducted; (3) Failing to use the approved or recorded agriculture insurance clauses and premium rates as required.81 Where an insurance institution engaging in agriculture insurance business commits any of the following conduct in violation of the provisions of this Regulation, the insurance regulatory authority shall order it to take corrective action, and impose a fine of not less than ¥50,000 nor more than ¥300,000 yuan on it; if the circumstances are serious, the insurance regulatory authority may restrict its business scope and order it to stop accepting new business: (1) Failing to manage the agriculture insurance business separately from other insurance business or to conduct separate accounting of profits and losses as required; (2) Seeking improper benefits for any other institution or individual by taking advantage of conducting agriculture insurance business; (3) Failing to apply for approval of agriculture insurance clauses and premium rates as required. Where an insurance institution 78 79 80 81

Ibid., art.24. Ibid., art.26. Ibid., art.26. Ibid., art.27.

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engaging in agriculture insurance business fails to report agriculture insurance clauses and premium rates for recordation as required, the insurance regulatory authority shall order it to take corrective action during a specified period, and if it fails to do so, shall impose a fine of not less than ¥10,000 yuan not more than ¥100,000 yuan on it.82 Where an insurance institution violates the provisions of this Regulation, in addition to the punishment under this Regulation, the insurance regulatory authority shall issue a warning to and impose a fine of not less than ¥10,000 yuan and not more than ¥100,000 yuan on the directly liable executive and other directly liable persons of it, and if the circumstances are serious, revoke the office qualification or practicing qualification of the person.83 Whoever fraudulently obtains insurance subsidies in violation of art.23 of the Regulation 2016 shall be handled by the finance department in accordance with the relevant provisions of the Regulation on Penalties and Disciplinary Actions against Illegal Fiscal Conduct, and if the violation is criminally punishable, shall be held criminally liable according to the law.84 Whoever misappropriates, intercepts, or encroaches upon any claims payment in violation of art.24 of the Regulation 2016 shall be handled by the relevant department according to the law, and if the violation is criminally punishable, shall be held criminally liable according to the law.85 Where an insurance institution engages in any agriculture-related insurance with policy support, the relevant provisions of the Regulation 2016 shall apply, mutatis mutandis. “Agriculture-related insurance” means insurance that provides insurance protection for farmers in their agricultural production and life other than agriculture insurance, including rural housing, farming machinery, fishing boats, and other property insurance and short-term accident insurance involving farmers’ life and physical health, among others.86 18.5 Qualification requirements for an insurance company to conduct agriculture insurance The CIRC/CBIRC have promulgated two pieces of regulations specifically for the qualification requirements of a property insurance company to operate an agriculture insurance business: the Notice on Strengthening the Administration of the Operational Qualification of the Agriculture Insurance Business 201387 and the Notice of the General Office of the CBIRC on Further Clarifying the Operating Conditions of Agriculture Insurance Business (1 June 2020). We consider these rules in this section.

82 83 84 85 86 87

Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.30. Ibid., art.32. Bao Jian Fa No.26 [2013].

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18.5.1 Operational qualification of the agriculture insurance business In order to strengthen the administration of the operational qualification of the agriculture insurance business, in accordance with the relevant provisions of the Insurance Law and the Regulation of Agriculture Insurance, the CIRC issued the detailed rules for an insurance company to enter into agriculture insurance market in its Notice on Strengthening the Administration of the Operational Qualification of the Agriculture Insurance Business 2013 (hereinafter, the Notice 2013). Before engaging in the agriculture insurance business, an insurance company shall obtain the approval of the insurance regulatory authority. Without such an approval, no insurance company may engage in the agriculture insurance business.88 To apply for the operational qualification of the agriculture insurance business, the headquarters of an insurance company shall file an application with the insurance regulatory authority. In the application, the insurance company shall specify the province (autonomous region or municipality directly under the Central Government) where the agriculture insurance business is to be launched.89 To apply for the operational qualification of the agricultural insurance business, an insurance company shall satisfy the following conditions: (1) There is agricultural insurance business within the scope of business as assessed by the insurance regulatory authority; (2) The solvency is adequate. The solvency adequacy ratios at the end of the previous year and at the end of the latest four quarters are all above 150%; (3) The headquarters has an agriculture insurance development plan that has been approved by the board of shareholders or the board of directors; (4) The insurance company has a relatively complete basic-level network of agriculture insurance services. In principle, the region at the county level where agriculture insurance business is to be launched shall have the basic-level service network that is consistent with the business scale; (5) The headquarters and the branches in the region where agriculture insurance business is to be launched have a special agriculture insurance operation department and specialized professionals; (6) The insurance company has relatively complete internal control rule and statistical information system for agriculture insurance business; (7) The agriculture insurance business and other insurance business can be managed separately, and the information system supports the independent accounting of agriculture insurance profit and loss; (8) The insurance company has relatively stable agriculture reinsurance, catastrophe risk arrangement, and a risk response plan; (9) If a company that has launched the agriculture insurance business in some provinces (autonomous regions or municipalities directly under the Central Government) is to launch the agriculture insurance business in some other provinces (autonomous regions or municipalities directly under the Central Government), none of its affiliates shall have been given an administrative penalty by the regulatory authority for the agricultural insurance business of the previous year; and (10) Any other condition as prescribed by the insurance regulatory authority. To apply for the operational

88 Notice of the CIRC on Strengthening the Administration of the Operational Qualification of the Agriculture Insurance Business 2013, s.1. 89 Ibid., s.2.

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qualification of the agriculture insurance business, a specialized agriculture insurance company shall not be governed by item (2); however, its solvency adequacy ratio at the end of the previous year shall be not lower than 100%. To apply for the operational qualification of the agriculture insurance business that receives premium subsidies from the public finance, the insurance company shall also comply with the relevant provisions of the measures of the public finance departments for the administration of premium subsidies.90 To apply for the operational qualification of the agriculture insurance business, an insurance company shall submit the following materials: (1) The audited reports on the solvency of the insurance company at the end of the previous year and at the end of the latest four quarters; (2) An agriculture insurance development plan that has been approved by the board of shareholders or the board of directors; (3) The information on the fundamental work of agriculture insurance, including the internal control system of agriculture insurance, the statistical information system, the setup of agriculture insurance operation departments and specialized professionals; (4) The information on the basic-level service network in the region where agriculture insurance is to be launched, including the quantity and business operations of the branches in the region where agriculture insurance is to be launched, the specialized personnel, the software and hardware facilities, and the plan for the construction of an agriculture insurance service network below the county level; (5) The Information on the spreading of agriculture insurance risks, including agriculture reinsurance for the insurance type to be launched, the catastrophe risk arrangement, and a risk response plan; and (6) Any other material as prescribed by the insurance regulatory authority.91 Upon receipt of an insurance company’s application for operation qualification, the insurance regulatory authority shall, on the basis of examination on the materials submitted by the insurance company and by soliciting opinions from the relevant insurance regulatory authority local offices, decide whether to approve the application or not. The insurance company shall engage in the agriculture insurance business only in the region approved by the insurance regulatory authority.92 Where an insurance institution that has launched the agricultural insurance business commits any of the following acts and the circumstances are serious, the insurance regulatory authority shall, in accordance with the Insurance Law, the Regulation of Agriculture Insurance, and other laws and regulations, adopt such measures as restricting the business scope of the insurance institution, ordering it to stop accepting new business, or revoking its operation qualification of the agriculture insurance business: (1) Refuses to perform the obligation of making compensation as agreed in the insurance contract or paying insurance benefits; (2) Deliberately fabricates an insurance accident that has never occurred, makes up an insurance contract or conducts fraudulent claim settlement by deliberately exaggerating loss incurred from an insurance accident that has occurred, gains insurance benefits by cheating, or seeks any other improper interests; (3) Misappropriates, withholds, 90 Ibid., s.3. 91 Ibid., s.4. 92 Ibid., s.5.

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or seizes insurance premiums; (4) Disturbs insurance market order through unfair competitions; (5) Fails to obtain approval for the agricultural insurance clauses and insurance premium rates as required or fails to use the approved or filed agricultural insurance clauses and insurance premium rates as required; (6) Fails to withdraw or carry over various liability reserves as required; or (7) Fails to handle reinsurance as required.93 Where an insurance company and the local government jointly launch the agriculture insurance business or an insurance company launches the agriculture insurance business on behalf of the local government, the headquarters of the insurance company shall submit the agreements to the insurance regulatory authority for filing, or the insurance regulatory authority shall authorize its local offices to file such agreements.94 18.5.2 Further clarifying operational qualification of the agriculture insurance business Recently, the CBIRC issued the Notice on Further Clarifying the Operating Conditions for Agriculture Insurance Business (hereinafter, the Notice 2020), in order to further deepen the supply-side structural reform of agricultural insurance and establish and improve the management mechanism of operating conditions. Aiming to address the agriculture insurance market entry issues as reflected by the industry and following the principles of compliance with laws and regulations, the Notice 2020 establishes and improves the whole-process management system of operating conditions for the agriculture insurance business so as to promote the stable and healthy development of the agricultural insurance market. According to the Insurance Law, the Regulation of Agriculture Insurance and other regulations, insurance institutions that meet the requirements by the relevant laws and regulations and the requirements of this Notice may operate the agricultural insurance business.95 Unless otherwise specified, the insurance institutions mentioned in this Notice refer to the property insurance companies and their branches.The provincial branch of the insurance company mentioned in this Notice refers to the provincial branch of the property insurance company and the branch of municipalities.96 Agricultural insurance adheres to the principle of moderate competition. Insurance institutions are encouraged to operate the agriculture insurance business in the western region, areas in deep poverty, and regions with relatively few agricultural insurance operating institutions. Insurance institutions are encouraged to increase investment, optimize the layout of institutions, and improve the primary service network of agriculture insurance.97

93 Ibid., s.6. 94 Ibid., s.7. 95 The Notice of the General Office of the CBIRC on Further Clarifying the Operating Conditions for Agriculture Insurance Business 2020, art.1. 96 Ibid., art.2. 97 Ibid., art.3.

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The head office of an insurance company engaged in the agricultural insurance business shall meet the following requirements:98 (1) It complies with the Insurance Law, the Regulation of Agriculture Insurance, and other laws and regulations. (2) The company’s business scope includes agricultural insurance. (3) The company has good corporate governance and internal control management and has not received any major administrative punishment for agricultural insurance business in the last three years. (4) There are agricultural insurance development plans approved by the shareholders’ meeting or the board of directors, including business strategy, organizational structure, and risk control system. (5) It has a special agricultural insurance management department and is equipped with more than eight relevant professionals in agriculture, insurance, and so on and has strong agricultural insurance management and risk management capabilities. (6) It has a relatively independent and complete agricultural insurance information management system and realizes data connection with the national agricultural insurance information management platform established at the Bank of China Insurance Information Technology Management Co., Ltd. and can complete and accurately report agricultural insurance data information in a timely manner. (7) There are sound agricultural reinsurance, disaster risk arrangements, and risk response plans. (8) The comprehensive solvency adequacy ratio at the end of the previous year and the last two quarters is more than 180%. For professional agricultural insurance companies, the comprehensive solvency adequacy ratio at the end of the last year and the last two quarters is more than 150%. (9) The agricultural insurance business is managed separately from other businesses, and the profit and loss are accounted for separately. (10) Other conditions prescribed by the CBIRC. The provincial branch of an insurance company operating an agricultural insurance business shall meet the following requirements:99 (1) It complies with the Insurance Law, the Regulation of Agriculture Insurance, and other laws and regulations. (2) The head office meets the agriculture insurance business conditions stipulated in article 4 of this Notice. (3) The head office approves the branch to engage in the agriculture insurance business. (4) It has a complete agriculture insurance management system, good internal control management, and has not received any major administrative punishment for agricultural insurance business in the past three years. 98 Ibid., art.4. 99 Ibid., art.5.

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(5) There is a special agricultural insurance management department, equipped with more than five agricultural, insurance, and other relevant professionals with strong underwriting, claims handling, and risk management capabilities. (6) There are branches in the county-level area that operate an agriculture insurance business, and the office conditions such as the branch’s information system, survey equipment, and transportation can meet the requirements of business management and agriculture insurance services. The provincial branch of an insurance company has established a grassroots service network of agriculture insurance to suit the scale of the business. (7) The county-level branches operating agriculture insurance businesses shall be equipped with full-time agricultural insurance personnel, and the number of full-time personnel shall be able to meet the needs of local agriculture insurance business management and service. If the provincial branch where the insurance company’s head office is located meets the following conditions, it may apply to the local Banking and Insurance Regulatory Bureau (BIRB) for exemption from the application of the provisions of article 5(2) of this Notice 2020, and the BIRB can grant the exemption based on the consideration of the relevant circumstances:100 (1) The proposed agriculture insurance business conforms to the national strategy of targeted poverty alleviation and rural revitalization. (2) The headquarters’ comprehensive solvency adequacy ratio is over 100% at the end of the previous year and the last two quarters. (3) It conforms to other conditions except article 5(2) of this Notice 2020. The number of provincial branches exempted by the local BIRB shall not exceed one. Provincial branch companies that do not have the operating conditions for the agriculture insurance business shall not participate in the local agriculture insurance business in the form of mutual insurance. Agriculture insurance mutual insurance institutions should strengthen their own management, clarify the rights and obligations of all parties, strengthen risk management and control, encourage appropriate competition and innovation, and improve service capabilities and levels.101 If the insurance institution does not meet the requirements to operate the agriculture insurance business, the CBIRC or its local offices shall order it to make corrections within a time limit and stop accepting new business; if it fails to make corrections within the time limit or cause serious consequences, it shall be fined not less than ¥100,000 yuan but not more than ¥500,000 yuan. It may be ordered to suspend business for rectification or its license to operate its insurance business may be revoked.102 If the head office of an insurance company voluntarily withdraws from the agriculture insurance business for its own reasons, it shall report to the CBIRC.

100 Ibid., art.6. 101 Ibid., art.7. 102 Ibid., art.8.

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If a provincial branch of an insurance company voluntarily withdraws from the agriculture insurance business for its own reasons, it shall report that fact to the local BIRB.103 If the head office of an insurance company withdraws from the agriculture insurance business, all its provincial branches will automatically withdraw from the agriculture insurance business.104 If an insurance institution withdraws from the agriculture insurance business, it shall handle the outstanding liability in strict accordance with the regulations, do a good job of handover, and handle follow-up matters properly. Where the insurance institution withdraws and fails to handle the follow-up matters properly, which causes serious consequences, the CBIRC or its local offices shall take regulatory measures in accordance with law and regulations.105 Where an insurance institution has withdrawn from the agriculture insurance business for three years in the situation specified in article 9 of this Notice 2020, if it needs to re-operate in the agriculture insurance business, it shall still meet the conditions specified in this Notice 2020.106 The CBIRC shall comprehensively evaluate the operation and management of the agriculture insurance business of the insurance company’s head office in due course; the BIRB shall comprehensively evaluate the operation and management of the agriculture insurance business of the provincial branch of the insurance company.107 The BIRB shall, in accordance with the requirements of this Notice and in light of local conditions, formulate detailed regulations on the management of agriculture insurance business conditions within its jurisdiction. Each BIRB shall submit the management regulations and the list of insurance institutions that meet the operating conditions of the agriculture insurance business within its jurisdiction to the CBIRC within ten working days from the date of publication. If an insurance institution withdraws from the agriculture insurance business, each BIRB shall report to the CBIRC within ten working days.108 If an insurance institution that has obtained the agriculture insurance business qualification or carried out agriculture insurance mutual insurance business before the issuance of the Notice 2020 does not meet the requirements of this Notice, it shall meet the requirements of this Notice within two years after the implementation of this Notice. If the conditions are not met at that time, the agriculture insurance business shall not be allowed to continue.109 The agriculture insurance business mentioned in this Notice includes agriculture insurance business supported by policy and commercial agriculture insurance business. Insurance institutions operating agriculture insurance with policy support shall comply with the provisions of this Notice.110 103 104 105 106 107 108 109 110

Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16.

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The “significant administrative punishment” mentioned in this Notice means that the directors, supervisors, and senior management personnel of an insurance institution or company are subject to the following administrative punishment for the agriculture insurance business (including insurance business involved in agriculture): limit the scope of business, order to stop accepting new business, order suspension of business for rectification, revocation of business licenses, and company executives have their qualifications revoked or receive industry penalties.111 Other insurance institutions established according to law to operate the agriculture insurance business shall comply with the provisions of this Notice.112 In comparison with the Notice 2013, the Notice 2020 has a number of new features. First, it clarifies the operating conditions for the agriculture insurance business. According to the Regulation of Agricultural Insurance, the Notice 2020 sets out the operating conditions for the agriculture insurance business from the head office level and the provincial branch level respectively. Any insurance institution that meets the operating conditions can carry out the agriculture insurance business locally without applying to the insurance regulatory authority for operating qualifications. Second, it raises the operating standards of agriculture insurance. While removing the market entry approval requirement of agriculture insurance, the Regulation of Agriculture Insurance still retains the corresponding conditions that insurance institutions shall meet to engage in the agricultural insurance business and stipulates that they shall also meet other conditions required by the insurance regulatory authority of the State Council.113 The Notice 2020 further raises the operating standards for agriculture insurance in terms of compliance with laws and regulations, risk control capability, agriculture insurance service capability, and information management. Third, it establishes and improves the market exit mechanism. To align with the reform requirements, the Notice 2020 clearly stipulates the establishment of market exit mechanism for the agriculture insurance business in accordance with the Regulation of Agriculture Insurance. In addition, the Notice 2020 also establishes a comprehensive assessment mechanism for agricultural insurance operation to dynamically evaluate insurance institutions’ management of the agricultural insurance business. 18.6 Agriculture insurance contracts clauses and premium rates In compliance with the Regulation of Agriculture Insurance and the Measures for the Regulation of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies 2010,114 the CIRC formulated the Notice on Strengthening

111 Ibid., art.17. 112 Ibid., art.18. 113 The Regulation of Agriculture Insurance 2016, art.17(6). 114 The Measures for the Administration of the Insurance Clauses and Premium Rates of Property Insurance Companies (The CIRC Order No. 3 [2010]) was issued by the CIRC on 5 February 2010 and came into force on 1 April 2010. (see accessed on 16 October 2020).

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the Administration of Agricultural Insurance Clauses and Premium Rates 2013 (hereinafter, the Notice 2013).115 These rules are considered here. The agriculture insurance clauses and premium rates that are drafted by an insurance company shall, within ten working days after their business operations, be reported by its headquarters to the insurance regulatory authority for filing. The insurance company shall assume corresponding liability for its own insurance clauses and premium rates.116 To draft agriculture insurance clauses and premium rates, an insurance company shall follow the principle of “openness, fairness and reasonableness”. The agriculture insurance clauses and premium rates shall satisfy the following requirements: (1) They comply with laws and regulations and do not infringe upon the lawful rights and interests of farming households; (2) They are complete in content, accurate in wording, easy to understand, and precise in expression; (3) The premium rate is reasonable and the adequacy ratio of premiums is appropriate so that the solvency of the insurance company will not be impaired and fair market competition will not be injured.117 The clauses and premium rates which receive premium subsidies from the public finance shall be drafted by an insurance company after fully soliciting the opinions of the departments of the people’s governments of the provinces, autonomous regions, and municipalities directly under the Central Government in charge of public finance, agriculture, forestry, insurance supervision and administration, and farmers.118 An insurance company shall file the agriculture insurance clauses and premium rates one by one based on the province (autonomous region or municipality directly under the Central Government), unless otherwise as prescribed by the CBIRC.119 To file agriculture insurance clauses and premium rates with the CBIRC, in addition to materials required in the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies 2010, an insurance company shall submit the following materials: (1) A photocopy of the document in which the CBIRC approves it to operate an agriculture insurance business in corresponding areas; (2) A feasibility report; (3) The relevant materials that truthfully reflect the opinions of the departments of local people’s government in charge of public finance, agriculture, and forestry, and the written materials that reflect the opinions of insurance-covered farmers and the opinions of local CBIRC offices, where the insurance company drafts insurance clauses and premium rates which receive premium subsidies from the public finance; and (4) Any other material as required by the CBIRC.120 The agriculture insurance clauses and premium rates that an insurance company files with the CBIRC shall satisfy the following requirements: (1) The name of the clause shall include the relevant information about the opening institution, opening 115 Bao Jian Fa No.25 [2013]. 116 The Notice on Strengthening the Administration of Agricultural Insurance Clauses and Premium Rates 2013, s.1. 117 Ibid., s.2. 118 Ibid., s.3. 119 Ibid., s.4. 120 Ibid., s.5.

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location, and insurance subject matter (for example, insurance of rice planting of Ping An Insurance Company in Zhejiang Province); (2) In principle, the insurance liability shall cover major risks in the area where the insurance subject matter is located. The insurance liability of an agriculture insurance product which receives premium subsidies from the public finance shall comply with the relevant provisions of the public finance department; (3) The insured amount shall be able to meet the risk protection demands of the insured farming households and shall be consistent with the insurance company’s capability of risk assumption; (4) The insurance premium rate shall be specified in a fixed value and may not be in a range of values. The premium rate may be adjusted by a coefficient which can be properly set in accordance with factors such as the management level of insurance subject matter, risk distribution, and payment of compensation over the years; (5) Such clause factors as starting point for compensation and amount (or ratio) of the deductibles shall be set in a scientific and reasonable manner so as to avoid business operational risks and moral risks.121 To draft agriculture insurance clauses, an insurance company shall pay attention to the following matters: (1) Except for mutual insurance clauses, no content that infringes upon the lawful rights and interests of farming households, such as ceiling payment and average payment, may be included in a clause; (2) During the term of an agriculture insurance contract, the insurers may not increase insurance premiums or terminate the agricultural insurance contract due to changes in risks of the insurance subject matter; (3) The insurance company may not claim any right over the residual value of the damaged subject matter insured unless it is otherwise agreed to in the agricultural insurance contract.122 Insurance companies are encouraged to draft innovative agriculture insurance clauses and premium rates such as yield insurance, price insurance, and index-based insurance in light of the actual circumstances of local agricultural development and the characteristics of local agricultural risks; vigorously undertake the pilot work; and provide farmers with insurance products with an appropriate amount of insurance and broader coverage that can satisfy farmer households’ demands at various levels.123 An insurance company shall, in strict accordance with the provisions of the Regulation of Agriculture Insurance and the requirements of this Notice 2013, comprehensively check the agriculture insurance clauses and premium rates that have been filed. In case of any inconsistency, the insurance company shall revise them and submit them again for filing.124 An insurance company shall strengthen the administration of agriculture insurance products and ensure that the product design complies with laws and regulations and is reasonable and that the premium rate that is executed by the insurance company is consistent with that stipulated in the clause.125

121 122 123 124 125

Ibid., s.6. Ibid., s.7. Ibid., s.8. Ibid., s.9. Ibid., s.10.

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Where the agriculture insurance clauses and premium rates that are used by an insurance company violate the Regulation of Agriculture Insurance, the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies 2010, the relevant laws and regulations, and the requirements of this Notice 2013, the CBIRC shall order the insurance company to terminate the use of such insurance clauses and premium rates and make corrections within a prescribed time limit, and where circumstances are serious, the CBIRC shall prohibit the insurance company from applying for any new insurance clause and premium rate within a certain period of time and punish the relevant liable person in accordance with law.126 The Insurance Association of China (the IAC) shall vigorously promote the popularization and standardization of agriculture insurance clauses and premium rates and draft model texts of industrial clauses.127 Indeed, the IAC has formulated the General Principles of Agriculture Insurance Service as the standard of agriculture insurance practice (1 November 2016),128 which will be considered in section 18.14. The agriculture insurance products with government policy support shall be governed by reference to the relevant provisions of this Notice 2013.129 Where there is no corresponding provision in this Notice 2013, the provisions of the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies 2010 shall apply.130 The measures for the administration of agricultural insurance products that are developed by agricultural mutual insurance organizations shall be issued separately.131 18.7 The drafting of clauses on agriculture insurance products subsidized by the Central Treasury For the agriculture insurance products subsidized by the central government, a special set of rules has been formulated jointly by the CIRC, the Ministry of Finance, and the Ministry of Agriculture: the Notice on Further Improving the Drafting of Clauses on Agriculture Insurance Products Receiving Insurance Premium Subsidies of the Central Treasury 2015.132 These rules impose more restrictions or limitation on the drafting of the insurance contracts clauses. Here, we consider these rules in detail. An insurance company shall draft clauses under the following basic principles: (1) Compliance with the laws and regulations, openness and impartiality, fairness 126 Ibid., s.11. 127 Ibid., s.12. 128 The Insurance Association of China (see accessed on 16 October 2020). 129 The Notice on Strengthening the Administration of Agricultural Insurance Clauses and Premium Rates 2013, s.13. 130 Ibid., s.14. 131 Ibid., s.15. 132 Bao Jian Fa No. 25 [2015] was issued on 15 February 2015 and came into force on the same day. (see accessed on 16 October 2020).

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and reasonableness; (2) Complete in elements, plain language and easy to understand, and precise in expression; (3) No infringement upon farmers’ lawful rights and interests, no interference with fair market competition, and no adverse effect on healthy development of the industry.133 Insurance companies shall draft clauses on the basis of fully soliciting the opinions of public finance, agricultural departments, and insurance regulatory authorities of people’s governments of the provinces, autonomous regions, and municipalities directly under the Central Government as well as the opinions of farmers’ representatives.134 Insurance liability shall include the major risks within the regions where the insured subject matter is located so as to effectively meet the demand of the insured farmer households for risk coverage.135 The main insurance coverage for the crops planting industry includes but is not limited to rainstorm, flood (excluding flood discharge and storage by the government), waterlogging, windstorm, hail disasters, frost disasters, drought, earthquakes, and other natural disasters, debris flow, landslides and other accidents, and disasters caused by disease, insect, weeds and rats, among others.136 The main insurance coverage for the breeding industry includes but is not limited to major diseases and epidemics, natural disasters (rainstorm, flood [excluding flood discharge and storage by the government], wind damage, lightning strokes, earthquakes, hail, and frost disasters), accidents (debris flow, landslide, fire disasters, explosion, collapse of buildings, and falling of articles from the air), and governments’ culling, among others. If any highly contagious epidemic disease occurs and the government executes a compulsory culling, insurance companies shall make compensation to insured farmer households and may deduct from the insurance payment the amount corresponding to the special subsidy provided to the insured by the government for culling.137 The insured amount shall cover the directly materialized costs (such as cost of seeds, cost of fertilizers, etc.) or breeding costs. All companies are encouraged to develop multilevel insurance products with a high level of protection that meet the needs of agricultural producers for risk coverage, especially for the new types of agricultural production and business entities. All local governments are encouraged to provide insurance premium subsidies.138 No absolute deductions may be set in the insurance clauses for the crops planting industry and for big livestock insurance purchased on the basis of the number of breeding sows, live pigs, cows, and so on. At the same time, relative deductions shall be set in a scientific and reasonable manner based on the risk status of different categories and the relevant provisions of civil affairs and agricultural departments.139 133 The Notice on Further Improving the Drafting of Clauses on Agriculture Insurance Products Receiving Insurance Premium Subsidies of the Central Treasury 2015, s.1. 134 Ibid., s.2. 135 Ibid., s.3. 136 Ibid., s.3. 137 Ibid., s.3. 138 Ibid., s.4. 139 Ibid., s.5.

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The compensation standards for different growth periods shall be set in the insurance clauses for the crops planting industry in a scientific and reasonable manner based on the distribution proportion of materialized cost during different growth periods of crops. In principle, when total loss occurs, the amount of compensation for loss occurring during the seedling period of the three main food crops (rice, wheat, and corn) shall not be lower than 40% of the insured amount.140 The standards for total loss shall be specified in the insurance clauses for the crops planting industry. In principle, the crops covered by insurance that have a loss rate of 80% or more shall be deemed as having suffered a total loss.141 The harmless treatment of dead livestock and poultry from diseases shall be set as a precondition for claims in the breeding insurance clauses. If harmless treatment has not been confirmed, the insurance company shall not make compensation payment.142 An insurance company may not claim any right over the residual value of the damaged subject matter insured unless it is otherwise agreed upon in the agriculture insurance contract.143 No agreement such as ceiling payment, average payment, and agreement-based payment may be included in a clause.144 The matters on the drafting of price insurance, index insurance, and other innovative products, forest insurance, and mutual insurance clauses will be provided for separately.145 All companies shall pay close attention to the drafting of insurance clauses, and in strict accordance with the requirements of this Notice 2015, comprehensively review the clauses that have been reported for recordation. The insurance regulatory authority shall not grant recordation of the products in non-compliance with the aforesaid provisions. If the circumstances are serious, the insurance regulatory authority shall punish the violator in accordance with law and send the relevant information to the Ministry of Finance and the Ministry of Agriculture.146 18.8 Catastrophe risk reserves of agriculture insurance Insurers running crop insurance face a systematic risk about 20 to 50 times higher than the risk for the insurers running other ordinary insurance business,147 as systemic weather effects induce high correlation among farm-level yields. There must be a mechanism in place to cope with the devastating effect on agriculture caused by occurrence of extremely weather conditions such as drought and flood. Two commonly used methods for coping with the adverse effects of catastrophes are the catastrophe risk reserve and reinsurance.

140 Ibid., s.6. 141 Ibid., s.7. 142 Ibid., s.8. 143 Ibid., s.9. 144 Ibid., s.10. 145 Ibid., s.11. 146 Ibid., s.12. 147 Mario J. Miranda and Joseph W. Glauber, “Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets” (1997) Amer. J. Agr Econ. 79, 206–215.

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In order to improve the agriculture insurance catastrophe risk-spreading mechanism, standardize the management of agricultural insurance catastrophe risk reserves, and promote the sustainable and healthy development of agriculture insurance, the Ministry of Finance issued the Measures for the Administration of Catastrophe Risk Reserve of Agricultural Insurance 2013.148 The Measures 2013 consists of 27 articles in five chapters: the general provisions, setting aside catastrophe risk reserves, the use of catastrophe risk reserves, the management of catastrophe risk reserves, and the supplementary provisions. The Measures are applicable to agricultural insurance businesses such as planting, breeding, forestry, and so on, which are subsidized by the financial authorities at various levels according to regulations.149 Here we briefly consider the Measures 2013. 18.8.1 Setting aside of catastrophe risk reserve The catastrophe risk reserves of agriculture insurance are composed of premium reserve and profit reserve. Insurance institutions shall set aside catastrophe reserves according to a certain percentage of agricultural insurance premium income and excess underwriting profit and roll over each year.150 The percentage of premium reserve varies at different provinces and for different types of agriculture insurance, being 2 to 8% (of the total premium income) for plantation insurance, 1 to 4% for breeding insurance, and 4 to 10% for forest insurance.151 If the rollover balance of the premium reserve reaches the retention premium of the agricultural insurance of the year, the setting aside of the premium reserve can be suspended.152 The percentage of excess underwriting profit is 75% of the excess underwriting profit.153 18.8.2 The use of catastrophe risk reserve Insurance institutions can use the comprehensive compensation rate for major types of agricultural insurance (plantation, breeding, and forestry) as the triggering standard for the use of catastrophe reserves.154 The insurance organization may use the catastrophe reserve fund in the following circumstances:155 (1) For relevant provincial branches or headquarters of the insurance institution, if the comprehensive compensation rate of the major types of agricultural insurance at the end of June and the end of December of that year exceeds 75% (specifically determined by the insurance institution in light of the actual situation, hereinafter referred to as the catastrophe compensation rate), and 148 The Ministry of Finance No. 129 [2013] issued on 8 December 2013 came into force 1 January 2014 (see accessed on 16 October 2020). 149 The Measures for the Administration of Catastrophe Risk Reserve of Agricultural Insurance 2013, art.3. 150 Ibid., art.5. 151 Ibid., the annex table of the percentage of premium reserve from the total premium income at different provinces and for the three types of agriculture insurance. 152 Ibid., art.9. 153 Ibid., art.10. 154 Ibid., art.13. 155 Ibid., art.14.

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at least one of the settled compensation cases has an annual reported compensation rate of not less than the catastrophe compensation rate, the insurance institution’s local premium reserves can be used on the basis of the reinsurance; (2) If the premium reserve is insufficient to pay the compensation, the headquarters of the insurance institution may use the profit reserve; if it is still insufficient, it may pay for the compensation by coordinating the catastrophe reserves of its provincial branches and by other means. 18.8.3 The management of catastrophe risk reserve The insurance company’s current premium reserves shall be included in the cost and included in the current profit and loss.156 An insurance institution shall, in accordance with the relevant regulations on the use of insurance funds and in accordance with its internal investment management system, prudently carry out the use of funds for catastrophe reserves, and the proceeds from the use of funds shall be included in the special catastrophe reserves account.157 Insurance institutions setting aside catastrophe reserves can enjoy pre-tax deduction policy in accordance with tax laws and relevant regulations.158 18.8.4 Impact analysis of the Measures The Measures 2013 may affect the operating methods and performance of agriculture insurance institutions in the following respects.159 First, the Measures 2013 are conducive to insurance institutions establishing a long-term mechanism to deal with the risk of agricultural disasters. Regardless of the performance of agricultural insurance in the current year, insurance institutions need to set aside a certain percentage of the premium reserve. Until the rollover balance reaches the current agricultural insurance retention premium, the setting aside can be suspended. Therefore, in the long run, this can help insurance institutions to resist the impact of agricultural insurance disasters through their own accumulation of reserves and help insurance institutions establish long-term mechanisms to deal with agricultural disaster risks. Second, the Measures 2013 have an impact on the annual underwriting profits and profit distribution of insurance institutions. Since the premium reserve can be treated as the cost and included in the current profit and loss accounting, in the year when there is no agricultural insurance catastrophe, the setting aside of the premium reserve may affect the underwriting profit of the insurance institution. In addition, because the profit reserve needs to be listed in the owner’s equity and 156 Ibid., art.17. 157 Ibid., art.19. 158 Ibid., art.20. 159 See Li Xiaoxuan and Li Hongjun, “Management Method of Agricultural Insurance Catastrophe Risk Reserve and Its Impact Analysis” China Property and Casualty Reinsurance Co. Ltd, 17 June 2014 (see accessed on 16 October 2020).

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cannot be used for dividends and capital increase, the profit reserve will affect the distribution of profits of insurance institutions. In short, the Measures 2013 can promote the development of China’s agriculture insurance catastrophe risk management system and have refined the current regulations for the calculation, use, and management of agriculture insurance catastrophe risk reserves. 18.9 Underwriting and claim handing of agriculture insurance Underwriting and claims handling are the two key processes of an insurance contract. The CIRC issued the Interim Measures for the Administration of the Underwriting and Claim Settlement of Agriculture Insurance on 17 March 2015, and these Measures came into force on 1 April 2015.160 The Measures consist of 43 articles in six chapters: the general provisions (articles 1 and 2), insurance underwriting (articles 3–12), claims handling (articles 13–26), management of business which needs assistance (articles 27–31), internal control (articles 32–39), and supplementary provisions (articles 40–43). In this section, we consider the Measures 2015 in detail. Matters not prescribed in these Measures 2015 shall be governed by the relevant provisions on business rules, supervision, and administration in the Insurance Law and the Regulation of Agriculture Insurance.161 These Measures 2015 apply to plant insurance and breeding insurance. For innovative insurance products such as price insurance and index insurance and for forest insurance, separate provisions will be developed.162 These Measures 2015 also apply to agricultural mutual insurance institutions.163 18.9.1 Insurance underwriting (a) Insurance Application An insurance company shall strictly perform the duty of explanation of insurance clauses to the insurance applicants, give prompts conspicuous enough to attract the attention of the applicants on insurance application forms and insurance policies, and explain the contents of insurance liability, liability exemption, rights, and obligations of both parties to insurance contracts, and claim settlement standards and modes to insurance applicants. Where agricultural production and operation organizations or villagers’ committees organize rural households to take out insurance, an insurance company may hold a briefing for all insurance applicants and the insured, issue the insurance clauses of the type of insurance product they have taken out on the scene, and explain the important contents of insurance clauses.164 160 Bao Jian Fa No. 31 [2015]. 161 The Interim Measures for the Administration of the Underwriting and Claim Settlement of Agriculture Insurance 2015, art.42. 162 Ibid., art.2. 163 Ibid., art.41. 164 Ibid., art.3.

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Insurance companies and the entities organizing the purchase of insurance shall protect rural households’ right to know and right to make decisions independently, right to not be deceived or misled into purchasing insurance, and right to not be forced to purchase insurance or be prevented from purchasing insurance by illegitimate means. Insurance companies and their employees shall not promise any premium rebates or other benefits beyond insurance contracts to insurance applicants and the insured.165 Insurance companies shall record insurance purchase information, which shall at least include (1) client information: the name or organization name, identity certificate number or organization code, contact information, and place of residence of the insurance applicant and the insured; (2) information about the subject matter insured: the quantity of the subject matter insured and the location of the plot or village (plant) or the breeding place and identification information (breeding); and (3) other information: type of insurance, premium amount, premium rates, premiums paid by the insured, amount insured, and insured period. The aforesaid information shall be set in the business system as items that must be entered so as to ensure the compliance, integrity, and accuracy of insurance purchase information.166 (b) Insurance acceptance An insurance company shall, according to the risk status and distribution of the subject matter insured, make full inspection or sampling inspection of the subject matter insured to verify its location, quantity, ownership, and risk status. When conditions permit, an insurance company shall acquire relevant information about the subject matter insured from the agricultural, land and resources, financial, and other departments or relevant institutions to verify the authenticity of insurance purchase information.167 To underwrite plant insurance, an insurance company shall examine the certificate of the right to contracted management of land or the lease for the contracted management of land of the insured. If the insured cannot provide such certificate or contract, the insured shall apply to the competent authority for issuing a relevant certificate. To underwrite breeding insurance, an insurance company shall examine the number of animals to be covered, the disaster and epidemic prevention situation, and tag wearing. If the insured is a large-scale breeding farm, the insurance company shall examine its business license and other relevant materials.168 An insurance company shall take pictures of the subject matter insured. Such pictures shall be able to indicate the inspectors, the date of inspection, and the characteristics and scale of the subject matter insured. Such pictures shall be clear and integrated, unmodified, and uploaded to the business system as necessary contents for underwriting.169

165 166 167 168 169

Ibid., art.4. Ibid., art.5. Ibid., art.6(1). Ibid., art.6(2). Ibid., art.6(3).

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Where an agricultural production and operation organization or a villagers’ committee organizes rural households to take out insurance, an insurance company shall prepare a household-based list itemizing information of the insured and the subject matter insured. The list shall be published at a public area of the village or the agricultural production and operation organization in an appropriate manner for at least three days after the agricultural production and operation organization or the villagers’ committee verifies it and affixes its seal to it. Where any rural household has any demur, the list shall be adjusted accordingly after confirmation upon investigation. Once it has been confirmed correct, the list shall be entered into the business system.170 (c) Underwriting An insurance company shall mark the identity of the insured in the business system, strictly examine the ownership of the subject matter insured, and not list any organization or individual without an insurable interest in the subject matter insured as the insured. An insurance company shall confirm that the insured affixes its signature or seal on the underwriting documents (including the household-based insurance list) in person. Under special circumstances, the insurance applicant or a linear relative of the insured may act on behalf of the insured, provided that his or her relationship with the insured shall be specified.171 An insurance company shall strengthen underwriting management and reasonably set the underwriting authority which shall be centralized to the provincial branch offices or the head office. An insurance company shall strictly examine the insurance list, the ownership and quantity of the subject matter insured, the on-site inspection results, the announcement of insurance underwriting, and other key factors. Any insurance application that fails to meet the prescribed requirements or lacks relevant contents shall not pass underwriting.172 An insurance company shall strengthen endorsement management, and the endorsement of key underwriting information shall be approved by a provincial branch office or the head office.173 (d) Premium collection and policy issuance An insurance company may issue insurance policies only after confirming the receipt of premiums paid by the rural households. Insurance policies or certificates shall be issued to rural households.174 For an insurance category enjoying the financial subsidies of the state, an insurance company shall provide insurance underwriting information to the relevant departments as required in a timely manner so as to facilitate the allocation and settlement of financial subsidies.175

170 171 172 173 174 175

Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12.

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18.9.2 Claims handling An insurance company shall, by taking protecting the lawful rights and interests of the insured as the starting point, stick to the principle of “being active, quick, scientific and reasonable”, comply with contracts and honour promises, and well perform the duty of claims handling and settlement.176 (a) Claim reporting An insurance company shall strengthen the administration of the reporting and receipt of claims and maintain the availability of claim reporting channels. Agricultural insurance claims shall be accepted by the provincial branch offices or the head office of an insurance company in a centralized manner, and the claim information shall be accurately entered into the business system in a timely manner. Where a branch office below the provincial level or any employee thereof receives a claim report from a rural household, the insurance company shall guide or assist the rural household in reporting the claim. For a claim beyond the time limit for claim reporting, the specific reason for delayed reporting shall be entered into the business system. After a claim is reported, a claim reporting number shall be generated and a survey task shall be assigned in a timely manner, and the claim reporter shall be immediately informed of the follow-up arrangements.177 (b) Survey and loss assessment An insurance company shall conduct a site survey within 24 hours after receiving the reporting of a claim. Where the surveyors cannot arrive at the scene in time due to force majeure or a major disaster, they shall contact and explain to the claim reporter without delay. In the event of a large-scale disaster in the planting industry, an insurance company may take samples to measure the extent of loss of the subject matter insured in accordance with the relevant agricultural technical norms. Insurance companies are encouraged to entrust agricultural technological institutions and other specialized third-party institutions to assist in developing survey standards.178 In the event of a breeding accident, an insurance company shall take pictures of the dead subject matter and enter its tag into the business system. The business system of an insurance company shall have the functions of examining and verifying the uniqueness of tags. The ear tags of the subject matter insured shall be automatically cancelled in the business system. The insurance company shall cooperate with the relevant competent authorities in urging the breeding households to conduct harmless treatment of the subject matter dead of sickness in accordance with the relevant state provisions and take harmless treatment as a precondition for claim settlement so that no indemnities will be paid before harmless treatment is confirmed.179 An insurance company shall take pictures of the loss. Such pictures shall be able to indicate the surveyors, the place and date where and when they are taken, the 176 177 178 179

Ibid., art.13. Ibid., art.14. Ibid., art.15(1). Ibid., art.15(2).

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insured or the agent thereof, and the characteristics, scale, or extent of loss of the damaged subject matter. Such pictures shall be clear and integrated, unmodified, and uploaded to the business system as necessary files for claim adjustment.180 After the survey is completed, an insurance company shall prepare a survey report without delay.The survey report shall specify the time and place of the survey and state express opinions on the loss of the subject matter, the cause of accident, and whether the insurance company is responsible. The survey report shall be prepared on the basis of the original records of site survey, and the original records shall be signed by the surveyors and the insured and shall not be lost, supplemented, or modified in any way.181 An insurance company shall assess losses in a timely manner. Where an insurance accident occurs under plant insurance, which results in total crop failure, an insurance company shall complete the loss assessment within 20 days after receiving a claim report. If the insurance accident results in partial losses, the loss assessment shall be completed within 20 days after crops are harvested. Under breeding insurance, the loss assessment shall be completed within three days after a claim is reported. The aforesaid provision shall not apply in the event of any major disaster, widespread epidemic situation, or other special circumstance. Where it takes a relatively long period of time to assess losses, an insurance company shall conduct well the explanation work.182 An insurance company shall scientifically assess losses in accordance with the loss assessment standards and norms and assess the losses of each rural household. The provincial branch offices or the head office shall make random inspection of the original loss assessment results.183 An insurance company shall strengthen claim rejection management. If it is not responsible, it shall issue a claim rejection notice to the insured within three days after verification and conduct well the explanation work. Survey photos, the survey report, the claim rejection notice, and other claim settlement materials shall be uploaded to the business system for management.184 (c) Claim registration An insurance company shall, after the insurance liability is determined, register a claim in a timely manner. If no claim is registered ten days after a claim is reported, a claim will be automatically registered compulsorily by the business system. An insurance company shall in a timely manner register a claim and estimate the losses for each claim and adjust the amount of estimated losses according to the survey and loss assessment results.185 (d) Claim settlement announcement Where an agricultural production and operation organization or a villagers’ committee organizes rural households to take out plant insurance, an insurance company 180 181 182 183 184 185

Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.10. Ibid., art.10. Ibid., art.21.

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shall announce the survey and loss assessment results and the claim settlement results in a public area of the village or the agricultural production and operation organization for at least three days. The insurance company shall prepare a claim settlement statement for each rural household in view of the feedback results, which shall specify the name; identify the certificate number, bank account number, and amount of indemnities of the insured; and be signed by the insured or any lineal relative thereof. Where any rural household raises any objection, the insurance company shall investigate, verify, and make adjustments accordingly and inform the rural household of the result.186 (e) Claim adjustment An insurance company shall strengthen claim adjustment management and reasonably set the claim settlement authority. In principle, such authority shall be centralized at provincial branch offices or the head office.187 An insurance company shall strictly examine such key factors as survey reports, claim statements, survey photos, and announcement materials, focusing on verifying the authenticity of claims and the reasonableness of the loss assessment results.188 (f) Payment of indemnities An insurance company shall, if responsible, pay indemnities within ten days after reaching an indemnity agreement with the insured. If the agricultural insurance contract has stipulated a time limit for paying the amount insured, the insurance company shall fulfil the payment obligation as agreed upon in the contract.189 In principle, agricultural insurance indemnities shall be paid to the bank account of the insured by bank transfer, for which valid payment vouchers shall be retained. The name of the payee in the financial payment shall be identical with the name of the insured.190 18.9.3 Management of businesses requiring assistance An insurance company shall strengthen capability development, operate independently, and establish business network on its own. In areas where a grassroots network service is not sound, an insurance company may entrust the grassroot financial or agricultural departments to assist in the handling of agricultural insurance businesses.191 To entrust a basic-level financial or agricultural department to assist in handling agricultural insurance businesses, an insurance company shall, under the principles of fairness, independence and free will, enter into a written contract with the assisting institution, specifying the rights and obligations of both parties, and the assisting institution shall assign relevant employees to handle the specific agricultural insurance 186 187 188 189 190 191

Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27.

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business. An insurance company shall submit a list of assisting institutions and employees to the local insurance regulatory authority for recordation every year.192 An insurance company shall provide training to assisting employees on a regular basis regarding matters including state policies, regulatory requirements, handling processes, and responsibilities.193 Both sides to a business requiring assistance shall, under the principles of fairness, justness, and payment according to work, reasonably determine the working expenses and establish an incentive and restraint mechanism for working expenses. An insurance company shall strengthen the management of working expenses and ensure that they are exclusively used for assisting the handling of agricultural insurance businesses and not used for other purposes. Working expenses shall be paid by bank transfer. Except for working expenses, an insurance company shall not give or promise any rebates or other benefits beyond the contract to assisting institutions or employees.194 An insurance company shall strengthen the management of businesses requiring assistance and ensure their compliant operation; develop measures for the administration of businesses requiring assistance and strengthen the guidance and management thereof; and list the compliance of such businesses as a key point of the internal audit of the company and handle and correct problems discovered in a timely manner.195 The local CBIRC offices shall, in view of the local situations, determine the types of businesses that may be entrusted by insurance companies to third-party institutions to assist with, the proportion of such businesses, and the proportion of such businesses to be inspected on-site.196 18.9.4 Internal control management An insurance company shall establish a return visit system for clients. For the insured that are entities with scale operations, return visits shall be made to all of them, while for other insured parties, an insurance company shall select a certain proportion of them to make return visits. During the insurance underwriting, the focus of return visits shall be put on verifying the ownership and quantity of the subject matter insured, the premiums paid by policyholders, the fulfilment of the notification obligation, and the announcement of insurance underwriting. During the claim settlement, the focus of return visits shall be put on verifying the type of disaster-stricken product, the extent of loss, the loss assessment process, the payment of indemnities, and the announcement of claim settlement. An insurance company shall record the time, place, object, and result of return visit in detail and retain the audio recordings or visit records for inspection.197 An insurance company shall establish a complaint-handling system. When rural households file complaints about agricultural insurance matters, an insurance 192 193 194 195 196 197

Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31(1). Ibid., art.31(2). Ibid., art.32.

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company shall accept and seriously investigate them in a timely manner, and give replies within the prescribed time limit.198 An insurance company shall establish a hierarchical examination system for agricultural insurance, reasonably determine the examination authority in accordance with the quantity and amount involved in insurance underwriting and claim settlement, keep the examination paperwork, and determine the management responsibility of each level and each link.199 An insurance company shall establish internal audit rules for agricultural insurance to inspect the agricultural insurance businesses of its branch offices in accordance with the Regulation of Agriculture Insurance, the relevant regulatory provisions, and the internal control rules of the company on a regular basis and report the inspection results to the insurance regulatory authority in a timely manner.200 Insurance companies shall establish file management rules. Insurance underwriting files shall include insurance application forms, insurance policies, on-site inspection pictures, announcement pictures, and premium invoices or receipts, among others. Claim settlement files shall include notices of loss or claim forms, survey reports, announcement pictures, and indemnity payment certificates, among others. Announcement pictures shall be able to indicate the time and place when and where they are taken and the announcement contents. The aforesaid materials shall be filed in a timely manner, managed in a centralized manner, and properly kept.201 Insurance companies shall strengthen disaster and loss prevention, carry out warning, disaster prevention, and loss reduction in view of the local actualities according to the characteristics of agricultural disasters so as to improve the ability to resist agricultural risks.202 Insurance companies shall strengthen information management system construction and realize system management throughout the entire process of agricultural insurance. Insurance underwriting, claim settlement, reinsurance, and financial systems shall be seamlessly connected. The information management system shall be able to monitor insurance underwriting and claim settlement on a real-time basis and have data management and statistical analysis functions.203 Insurance companies shall strengthen service capability development, establish service capability standards for branch offices, improve the basic-level service networks, improve the quality of employees, and ensure that their service capability matches their size of business.204 18.10 Premium subsidies by governments It is the general practice that agriculture insurance is subsidized by government finance in a number of ways, such as premium subsidy, insurance company operation subsidy, 198 199 200 201 202 203 204

Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39.

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reinsurance subsidy, capital support for national agriculture insurance company, catastrophe risk reserve, and tax relief. In China, the ways of supporting agriculture insurance are primarily by premium subsidy205 and tax relief.206 In order to strengthen the management of the central government’s agriculture insurance premium subsidy funds, the Ministry of Finance formulated the Measures for the Administration of Agriculture Insurance Premium Subsidies by the Central Treasury 2016.207 The Measures 2016 have 44 articles in eight chapters: the general provisions, the policy of subsidies, insurance plans, the measures of protection, budget administration, administration of organization, supervision and administration, and supplementary provisions. The policy of subsidies is the main part of the Measures, so we consider that part in detail in this section. The agriculture insurance subject matters which are subsidized for premiums by the Ministry of Finance are the main bulk agricultural products (which are important to the national economy, people’s livelihood, food, and ecological security) and other agricultural products determined in accordance with relevant documents of the Central Committee of the Communist Party and the State Council.208 Provinces, autonomous regions, municipalities directly under the Central Government, and cities with separate planning are encouraged, in accordance with the local realities and financial capability, to provide certain policy support such as premium subsidies for agriculture insurance that meets agricultural policies and meets the development needs of local agriculture, rural areas, and farmers.209 The main subject matters of insurance which can be subsidized by the central finance includes: (1) Plantation insurance: corn, rice, wheat, cotton, potatoes, oil crops, sugar crops; (2) Breeding insurance: sows which are capable of breeding, cows, fattening pigs; (3) Forest insurance: the public welfare forests and commercial forests which have basically completed the reform of the ownership system and have clear property rights and normal production and management; (4) Other varieties: highland barley, yak, Tibetan sheep, natural rubber, and other breeds determined by the Ministry of Finance according to the requirements of the Central Committee of the Communist Party and the State Council.210 The types of insurance for these subsidies can be voluntarily carried out in all parts of the country. After the Ministry of Finance confirms the eligible regions for premium subsidies, the Ministry of Finance shall provide insurance premium subsidy support to these regions in accordance with regulations.211

205 The Regulation of Agriculture Insurance 2016, art.7. 206 Ibid., art.9. 207 The Ministry of Finance No. 123 [2016]. 208 The Measures for the Administration of Agriculture Insurance Premium Subsidies by the Central Treasury 2016, art.4. 209 Ibid. 210 Ibid., art.5. 211 Ibid., art.6.

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On the basis of local voluntary development and meeting the conditions, the Ministry of Finance shall provide insurance premium subsidies in accordance with the following provisions:212 (1) Plantation insurance.The provincial finance subsidizes 25% of the premium, the central government subsidizes 40% of the premium in the central and western regions and 35% in the eastern regions of China. The central government subsidizes 65% of premiums to the central entities such as the Xinjiang Production and Construction Corps, the reclamation area directly under the central government, China National Grain Reserve Management Corporation, and China Agricultural Development Group Co. Ltd. (2) Breeding insurance. On the basis of subsidies of at least 30% at the provincial level or below (local finance), the central government subsidizes 50% for the central and western regions and 40% for the eastern regions. For central entities, the central government subsidizes 80%. (3) Forest insurance. Public welfare forests are subsidized at least 40% by the local government and 45% by the central government; the central government subsidizes 90% for the Daxinganling Forestry Group Corporation.213 Commercial forests are subsidized at least 25% by the provincial finance and 30% by the central government; the central government subsidizes 55% for the Daxinganling Forestry Group Corporation. (4) Varieties in Tibetan areas and natural rubber insurance. On the basis of the provincial government subsidizing at least 25%, the central government subsidizes 40%; for central units, the central government subsidizes 65%. On the basis of the subsidy policy just described, the central government shall further increase support for the three major grain crop (rice, wheat, and corn) insurance in major grain-producing counties.214 If the proportion of agriculture insurance premium subsidies from the provincial finance for the three major food crops in the major grain-producing counties is higher than 25%, the central government is responsible for 50% of the higher portion.215 When the county-level financial subsidy drops to zero, the central government’s subsidy percentage for the central and western regions shall be increased to 42.5% if it is lower than 42.5%, or to 45% if it is between 42.5% and 45%, or to 47.5% if it is between 45% and 47.5%. For the subordinate units of the central entities that meet the requirements of the major grain-producing counties, the central government has increased the subsidy percentage for the three major grain crops from 65% to 72.5%.216 212 Ibid., art.7. 213 Daxinganling Forestry Group Corporation is located at Hilongjiang Province and is the largest forestry company in China. The total operating area of forestry is 7,912,967 hectares. 214 The Measures for the Administration of Agriculture Insurance Premium Subsidies by the Central Treasury 2016, art.8(1). The major grain-producing counties refer to those counties which are determined in accordance with the incentive measures for major grain (oil) counties of the Ministry of Finance (art.8[4]). 215 Ibid., art.8(2). 216 Ibid., art.8(3).

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Provincial financial departments are encouraged to implement differentiated agriculture insurance premium subsidy policies for different types of insurance and different regions in accordance with the actual situation and to increase support for important agricultural products, large-scale business entities, major grain-producing counties, poor areas, and poor households.217 On 30 July 2018, the Ministry of Finance, the Ministry of Agriculture and Rural Affairs, and the CBIRC jointly issued the Notice on Matters of Including the Seed Production of Three Main Grain Crops in the Catalogue of Agricultural Insurance Premium Subsidies from Central Finance 2018.218 The seed production of three major grain crops is now included in the catalogue of agricultural insurance premium subsidies from central finance and enjoys the same subsidies as provided for by the Measures for the Administration of Agriculture Insurance Premium Subsidies by the Central Treasury. It can be said that in China the main policy support for agriculture insurance is premium subsidies, which accounts for about 60 to 80% of the premiums. The extent of subsidies largely determines the scope of agriculture insurance. The subsidies to agriculture insurance in China are far less than those in the United States. The Federal Government in the United States subsidizes agriculture insurance to an amount accounting for about 5% of the agricultural GDP. In 2017, China’s agricultural GDP was ¥6,546.8 billion yuan, while the central government’s subsidies for premium were only ¥17.9 billion yuan, which accounts for only 0.027% of China’s agricultural GDP.219 It is necessary to explore other forms of subsidization and to increase the subsidies in various forms in order to promote further development of agriculture insurance in China. 18.11 The Pilot Programme on agricultural catastrophe insurance To increase the protection of agriculture insurance to farmers, the Ministry of Finance issued the Notice on the Pilot Programme of Agricultural Catastrophe Insurance in the Main Grain Production Provinces 2017.220 According to the deployment of the State Council, 200 large grain-producing counties are selected from 13 major grain-producing provinces, and pilots of agricultural catastrophe insurance are conducted for farmers with moderate scale operation. Considering that the causes of agricultural catastrophe and general disasters are basically similar, but the degrees of loss are different, the demand for agricultural catastrophe insurance products of moderately sized farmers mainly focuses on increasing the amount of coverage (thus the amount of compensation),

217 Ibid., art.9. 218 The Ministry of Finance No. 91 [2018]; It became effective on 30 July 2018 (see accessed on 16 October 2020). 219 Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economics Science Press, China, 2018) p. 224. 220 The Ministry of Finance No. 43 [2017] issued on 17 May 2017 came into force on the same day.

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and the pilot work thus has mainly focused on increasing the insurance coverage and compensation standards of agricultural insurance.221 The Pilot Programme is carried out in 13 major grain-producing provinces, including Hebei, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Jiangsu, Anhui, Jiangxi, Shandong, Henan, Hubei, Hunan, and Sichuan. Two hundred large grainproducing counties are selected from these provinces for the Pilot Programmes, among which, Heilongjiang, Henan, and Shandong were the top three in terms of grain production. Twenty counties are selected from each of these three provinces. Fourteen counties are selected from each of the remaining ten provinces for the Pilot Programme.222 On the basis of covering the direct materialized cost (seeds cost, fertilizers cost, etc) of agriculture insurance in the pilot counties according to the regulations in the pilot areas, special agricultural catastrophe insurance products for farmers with moderate-scale operation are developed, and the level of insurance coverage includes direct materialized cost and the cost of land rent so as to increase the insured amount and enhance the ability of farmers with moderate-scale operation to respond to the risk of agricultural catastrophes.223 The specific standards for farmers with moderatescale operation are determined by each province on the basis of the actual local situations. In principle, the operation scale of farmers with moderate-scale operation is about 10–15 times of the average contracted cropland area of local households. The direct materialized cost and cost of land rent incurred during the growth period of the subject-matter insured are determined in accordance with the latest price and other data released or approved by the relevant competent authority.224 On the basis that the proportion of farmers’ self-paid premiums remains unchanged and that at least 25% of premiums is subsidized from the provincial finance, with the goal of cancelling county-level financial premium subsidies, the proportion of central government premium subsidies has been further increased to 47.5% of premiums in the central and western regions and 45% in the eastern regions for all farmers with the insured amount covering only the direct materialized cost in the pilot counties and for farmers with moderate-scale operation with the insured amount covering both the direct materialized cost and the cost of land rent in the pilot counties.225 In summary, the Pilot Programme has several new features: First, the proportion of the central government premium subsidies for the three main crops (rice, wheat, and corn) and for all insured farmers has been increased from 40 to 47.5% in the central and western regions and from 35 to 45% in the eastern regions of China. Second, the central government subsidizes premium for insurance product covering only the direct materialized cost for all farmers in the pilot counties. Third, the central government subsidizes premium for insurance product covering both the direct materialized cost and the cost of land rent for farmers with moderate-scale 221 The Notice on the Pilot Programme of Agricultural Disaster Insurance in the Main Grain Production Provinces 2017, s.1. 222 The Notice on the Pilot Programme of Agricultural Disaster Insurance in the Main Grain Production Provinces 2017, appendix 1: the Pilot Programme Working Plan, s.4. 223 Ibid., s.5. 224 Ibid. 225 Ibid., s.6.

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operation in the pilot counties; this feature reflects the main purpose of the Pilot Programme, that is, to develop special agricultural insurance products for farmers with moderate-scale operation. 18.12 The Pilot Programme of full-cost insurance and income insurance for the three major grain crops 18.12.1 The current position and the inadequacy of the insured amount As mentioned earlier, the insurance products for the three grain crops mainly cover the direct materialized costs (the cost of seeds and the cost of fertilizers, on average, about ¥400 yuan per mu)226 and sometimes also cover land rent cost. The insured amount for these kinds of coverage is relatively low; once an insured event occurs and causes loss, the insured farmer can recover at most the insured amount as specified in the insured contract which is small as compared with the full cost or the income of the production of grains. There is a market demand for promoting the level of insurance protection to cover full agricultural production costs (including mainly seeds cost, fertilizers cost, and labour cost, on average, about ¥1000 yuan per mu) or to cover income of grain products. This can effectively promote the transformation and upgrading of agricultural insurance and protect farmers’ enthusiasm for growing grains. In order to develop such new agriculture insurance products to meet the demand of farmers and to expand the penetration and density of agriculture insurance, the Ministry of Finance set out the Notice on Launching the Pilot Programme of Full Cost Insurance and Income Insurance for the Three Major Grain Crops 2018 (hereinafter, the Notice 2018),227 with an annex of the Notice 2018, that is, the Working Plan for the Pilot Programme of Full Cost Insurance and Income Insurance for the Three Major Grain Crops. 18.12.2 The main content of the Pilot Programme (a) Pilot insurance types and the targeted farmers to be insured The pilot insurance types are full cost insurance and income insurance. Full cost insurance is agriculture insurance that covers the total cost of agricultural production such as material and service costs, labour costs, and land costs. Income insurance is the agriculture insurance that covers the price and output of agricultural products and covers the output value of agricultural production. The total agricultural production cost and output value data are based on the latest “Compilation of National Agricultural Product Cost and Benefit Information” issued by the National Development and Reform Commission. The targeted insureds are all farmers, including both large-scale farmers and small farmers.228 226 One mu is about 666 m2. 227 The Ministry of Finance No. 93 [2018] issued on 20 August 2018 came into force on the same day. 228 The Working Plan for the Pilot Programme of Full Cost Insurance and Income Insurance for the Three Major Grain Crops 2018, s.3.

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(b) The pilot period and the subject matters of insurance The pilot period is tentatively scheduled from 2018 to 2021, a total of three years. The pilot insurance targets are the three major grain crops of rice, wheat, and corn, which are important to the national economy, people’s livelihood, and food security.229 (c) The pilot areas Inner Mongolia autonomous region and Liaoning province each selected four major corn-producing counties, of which two counties carried out full cost insurance and two counties carried out income insurance. Anhui and Hubei provinces each selected four major rice-producing counties to carry out a full cost insurance pilot. Shandong and Henan provinces each chose four major wheat-producing counties to carry out full cost insurance. The list of pilot counties is determined by the provinces themselves. In principle, a county to be chosen should have a strong economic foundation, a high land turnover rate, and a good agriculture insurance work foundation. The scope of the main grain-producing counties is determined according to the incentive method of the major grain-producing (oil) counties of the Ministry of Finance.230 (d) Insurance plan231 (1) The pilot insurer is selected and determined by the pilot region among insurance institutions with agricultural insurance qualifications. In principle, each county has chosen one insurance institution as the pilot insurer. During the pilot period, if there is no special reason, the pilot insurer shall not be changed. (2) The pilot insurance institution shall formulate insurance terms and insurance premium rates fairly and reasonably, and after consulting local financial, agricultural, and rural departments and representatives of farmers, report the insurance terms and the premium rates to the insurance regulatory authority for record. (3) The insurance liability of full cost insurance shall cover major local natural disasters, major diseases and insect pests, and accidents. The insurance liability of income insurance shall cover the loss of income caused by the decrease in agricultural product price and the output of grains. The insurance premium rate shall be determined according to the principle of maintaining the balance of incomes and costs with low profit. In principle, the risk premium (including catastrophe risk reserve) is not less than 80%, and the cost surcharge is not more than 20%. The pilot insurance products shall not be set with absolute deductible, and the relative deductible shall not be higher than 30%.

229 Ibid., s.4. 230 Ibid., s.5. 231 Ibid., s.6.

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(4) The pilot insurance institution shall strengthen the management of underwriting and claims handling. For farmers with moderate-scale operation and small- and medium-sized farmers, it is necessary to provide underwriting service and claims service at the households of the insureds. It is necessary to study and formulate standards and norms for damage survey and investigation according to local conditions. Based on the agreement of the insured farmers, in principle, the loss rate can be determined by taking samples from a township as a unit. (5) The pilot insurance institution shall pay great attention to spreading the risk of catastrophe through reinsurance to ensure the robustness and sustainability of the pilot. In principle, the pilot insurance shall reinsurance not less than 20% of the risk to the China Agricultural Insurance Reinsurance Pool.232 For regions and insurance institutions that fail to meet the requirements of the described pilot program, the pilot qualifications will be disqualified. (e) Subsidy standards On the basis that the proportion of farmers’ self-paid premium is not less than 30%, the central government subsidizes 40% in the central and western regions and the northeast region, and 35% in other regions in the east, and cancels countylevel financial premium subsidies. At the same time, the central government will support areas where conditions permit to reduce or exempt the part of the premiums paid by poor households.233 18.12.3 The significances of the Pilot Programme The Pilot Programme of carrying out the three major grain crops full cost insurance and income insurance is of great significance for improving the agriculture insurance system and promoting the transformation and upgrading of agriculture insurance in China. First, it is conducive to improving the capacity of agricultural insurance services. Unlike the current agriculture insurance which mainly protects the direct materialized costs, the full cost insurance covers the average price of production factors such as land and labour and reflects the real property income and labour income of farmers. It is quasi-income insurance. In the long run, now that the market prices of wheat and rice are liberalized, full cost insurance can lay the foundation for income insurance. At the same time, in the areas where the price of corn is completely liberalized, income insurance can be directly carried out. The pilot of full cost insurance and income insurance has taken a key step in China’s agriculture 232 The China Agricultural Insurance Reinsurance Pool was jointly established by 23 non-life insurance companies and agricultural property reinsurance limited companies in China in November 2014. As a community organization, it is specialized in reinsurance for agriculture insurance (see the website of the CAIRP at accessed on 16 October 2020). 233 The Working Plan for the Pilot Programme of Full Cost Insurance and Income Insurance for the Three Major Grain Crops 2018, s.7.

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insurance from “cost protected” to “income protected”, which is of great significance for promoting the improvement of agriculture insurance service capabilities and the transformation and upgrading of agriculture insurance. Second, the Pilot Programme is conducive to improving the mechanism of agriculture insurance disaster risk spreading. With the elevation of the level of agriculture insurance protection, insurance companies face the risk of an increase in the scale of indemnity, which puts forward higher requirements for the construction of a complete disaster risk-spreading mechanism. The Notice 2018 makes it clear that pilot insurance companies should attach great importance to spreading catastrophe risks through reinsurance transfers, and in principle, should not be less than 20% of the risk to be ceded to the China Agricultural Insurance Reinsurance Pool to ensure that the pilot is stable and sustainable.234 The provisions of the Notice 2018 on the spreading of catastrophe risks have an important role in further enhancing the effectiveness of the pilot and promoting the construction of a multilevel agriculture insurance catastrophe risk-spreading mechanism in line with China’s national conditions. 18.12.4 An example of the Pilot Programme Shandong Province is one of the two provinces to carry our Pilot Programme on wheat full cost insurance. The insured farmers have benefited from their participation in the Pilot Programme on wheat full cost insurance. For example, in June 2019, a thunderstorm caused serious damage to wheat at Jiyang District, Jinan City, Shandong Province. The storm affected 21,000 mu of wheat to varying degrees. The full cost insurance for wheat covered 98.47% of the total wheat growing areas in Jiyang District. The insurer, China United Insurance Company, paid a total of ¥5,077,500 yuan for the loss caused by the storm to the insured farmers, which sufficiently covered the full costs of the wheat.235 An insured farmer said: [B]efore the implementation of the wheat full cost insurance, I bought insurance for direct materialized cost for wheat by self-paying premium of ¥3.6 yuan per mu of wheat with the maximum insured amount of ¥450 yuan per mu. Now the self-paid premium is ¥11 yuan, and the insurance amount has also been increased to ¥930 yuan per mu. It is equivalent to the full cost of wheat production in one season.236

Interviewed by Farmers’ Daily, Mr Li Jixiao, the director of the Jinan Municipal Agriculture and Rural Bureau, stated: In order to give full play to the role of agriculture insurance, since 2007, Jinan has continued to increase financial investment and strengthened agricultural insurance products. We innovate and expand insurance coverage, basically forming a multiinsurance, wide coverage agriculture insurance system. Since 2017, the city’s plantation 234 Ibid., s.6(5). 235 “Observation of Jinan City’s ‘Multi-insurance,Wide Coverage’ Promotion of Agricultural Insurance”, Farmers’ Daily, 28 October 2019 (see accessed on 16 October 2020). 236 Ibid.

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underwriting area has reached 47.76 million mu, with a premium scale of ¥638 million yuan, of which ¥110 million yuan has been paid by farmers. Farmers received claim payments of ¥421 million yuan.237

This example can demonstrate the importance and success of the Pilot Programme of full cost insurance in Jinan City, Shandong Province. 18.13 Further development of agriculture insurance Agriculture insurance, as an important means of spreading risks of agricultural production and management, plays an important role in promoting the development of modern agriculture, promoting the revitalization of rural industries, improving rural social governance, and safeguarding farmers’ income. In recent years, all regions and all relevant government departments have actively promoted the development of agriculture insurance, continuously improved the agriculture insurance policy system, and secured remarkable achievements. However, the development of agriculture insurance is still faced with difficulties and problems, and there is still a large gap with the actual needs of serving “agriculture, rural areas and farmers”. For the purposes of accelerating the high-quality development of agriculture insurance, on 29 May 2019, the Eighth Meeting of the Central Committee for Comprehensive Deepening Reform reviewed and adopted in principle the “Guiding Opinions on Accelerating the High-Quality Development of Agriculture Insurance” (hereinafter, the Guiding Opinions 2019). On 19 September 2019, the Ministry of Finance, the Ministry of Agriculture and Rural Affairs, the CBIRC, and the National Forestry and Grassland Administration jointly issued the Notice of Issuing the Guiding Opinions on Accelerating the High-quality Development of Agriculture Insurance 2019.238 The Guiding Opinions 2019 from the top-level design clarify the guiding ideology, basic principles, main objectives, and safeguard measures for accelerating the high-quality development of agriculture insurance. They are important measures to promote the reform and development of agriculture insurance in the years to come in China. The CBIRC, in conjunction with the Ministry of Finance, the Ministry of Agriculture and Rural Affairs, the National Forest and Grassland Administration, and other departments, will implement the Guiding Opinions 2019 in accordance with the principles of “government guidance, market operation, free will and coordinated advancement”,239 to expand the agriculture insurance coverage, improve the level of insurance protection, broaden service areas, optimize the operating mechanism, improve the catastrophe risk-spreading mechanism, strengthen infrastructure construction, standardize market order, and promote the high-quality development of agriculture insurance. The Guiding Opinions 2019 set out the main objectives for the next three and ten years

237 Ibid. 238 The Ministry of Finance No. 102 [2019]. 239 The Regulation of Agriculture Insurance 2016, art.3.

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18.13.1 Main targets By 2022, a multilevel agricultural insurance system will have been basically in place that has complete functions, standardized operation, and complete foundation and that is in conformity with the development stage of agricultural and rural modernization as well as consistent with the needs of farmers for risk protection and the respective responsibilities between the central and local governments. The agriculture insurance coverage of three major grain crops (rice, wheat, and corn) will be above 70%, and income insurance will become an important type of agriculture insurance in China. The targets of an insurance penetration (premium/ agricultural GDP) of 1% and an insurance density (premium/farming population) of ¥500 yuan per capita will be reached.240 By 2030, agriculture insurance will continue to improve its quality and efficiency and achieve transformation and upgrading, and its overall development will basically reach the internationally advanced level. Thus, a mutually beneficial situation will be achieved with the features of efficient subsidies, protected agriculture, beneficious to farmers, and sustainable insurance institutions.241 18.13.2 Improving agricultural insurance service capacity (a) Expanding the coverage of agriculture insurance The pilot programme for reforming policy-oriented agriculture insurance shall be advanced. On the basis of making agriculture insurance products intrinsically more attractive, the insurance coverage of bulk agricultural products that affect the national economy, people’s livelihood, and national food security shall be steadily expanded by implementing the strategy of protecting important agricultural products so that the percentage of small farming households with agriculture insurance may increase and those who are willing to buy insurance can have insurance. Innovative breeding insurance models and financial support methods shall be explored for breeding enterprises and large-scale livestock and poultry farms (households) to promote the enthusiasm of insurance institutions in carrying out breeding insurance. To carry out insurance on agriculture products with distinctive advantages and local features shall be encouraged in line with local conditions to gradually increase the proportion of these products in agriculture insurance. The forest and grassland insurance systems shall be adjusted and improved when appropriate, and the relevant management measures shall be developed.242 (b) Improving the level of agriculture insurance protection Combined with the adjustment of agricultural structure and changes in production costs, a dynamic adjustable mechanism for the level of agriculture insurance protection will be established. On the basis of wide coverage of the direct materialized 240 The Guiding Opinions on Accelerating the High-Quality Development of Agriculture Insurance 2019, s.3. 241 Ibid. 242 Ibid., s.4.

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costs by agriculture insurance, the pilot programme of agricultural catastrophe insurance will be expanded to gradually increase the level of protection. The pilot programme of full cost insurance and income insurance for rice, wheat, and corn will be promoted for the purpose of developing full cost insurance and income insurance products. Income insurance will be developed steadily and orderly so as to promote the stability of farmers’ income.243 (c) Broadening the scope of agriculture insurance services To meet diversified risk protection needs, an agriculture insurance products system covering basic insurance, commercial insurance, and additional insurance will be explored and established. Index insurance, regional production insurance, and agriculture-related insurance will be promoted. A comprehensive insurance package, including agricultural production facilities and equipment such as agricultural machinery sheds, farmhouse warehouses, and so on will be explored. Insurance products that meet the needs of new agricultural business entities will be developed. Environmental pollution liability insurance and agricultural product quality insurance will be carried out innovatively. The development of short-term accidental injury insurance for farmers will be supported. Insurance institutions are encouraged to provide good insurance services for the cooperation in agriculture with foreign entities. Agriculture insurance shall be incorporated into the agricultural disaster and risk prevention and rescue system to fully exercise the insurance function of risk prevention, risk control, risk spreading, and loss compensation.244 (d) Implementing measures of facilitating and benefiting insured farmers The insured farmers’ right to know must be fully protected; agriculture insurance contract terms must be in plain language, easy to understand, and standardized. Insurance institutions should implement the policy of transparency and openness in respect of agricultural benefit policies, underwriting conditions, claims results, service standards, and regulatory requirements. Insurance institutions must increase the efficiency of underwriting and claim settlement and pay claims promptly to the insureds’ households. An accurate and efficient damage detection and investigation mechanism must be established. A loss verification committee according to local conditions should be encouraged to set up at the local areas. Insurance institutions shall be encouraged to implement a policy of preferential treatment to the insureds if no claims are being made by them.245 18.13.3 Optimizing the operating mechanism of agriculture insurance (a) Clarifying the boundary between the government and the market Local governments at all levels shall not participate in the business operation of agriculture insurance. On the basis of fully respecting the operating autonomy of 243 Ibid., s.5. 244 Ibid., s.6. 245 Ibid., s.7.

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insurance institutions such as product development, actuarial pricing, underwriting, and claims, local governments can mobilize the activity of the insurers by giving them necessary premium subsidies and catastrophe compensation and by providing information and data. Grassroots governmental departments and relevant units may assist in handling the agriculture insurance business in accordance with relevant regulations.246 (b) Improving the catastrophe risk-spreading mechanism The establishment of a financially supported, multiparty participated, risk sharing, multilayered, and decentralized agriculture insurance catastrophe risk-spreading mechanism must be speeded up. The agriculture insurance catastrophe risk reserve system must be implemented to enhance the insurance institutions’ ability to respond to agricultural catastrophe risks. Agriculture reinsurance shall be expanded to increase the underwriting capacity of reinsurance. The reinsurance system and reinsurance mechanism must be improved. The market positioning of insurance institutions and reinsurance institutions must be reasonably defined. The respective responsibilities and obligations of the central and local governments must be clearly defined.247 (c) Cleaning up and standardizing the agriculture insurance market The supervision of financial subsidy funds must be strengthened. Those insurance institutions that defraud financial subsidy funds must be dealt with according to law and disciplinary sanctions must be imposed upon them for their dishonesty. The order of the agriculture insurance market must be further standardized to reduce the operating costs of agriculture insurance and to increase the penalties for insurance institutions with inaccurate capital, insufficient catastrophe risk arrangements, false underwriting, false claims, and so on. Insurance institutions with hidden risks or violating law or regulations must be resolutely withdrawn from the agricultural insurance market according to law.248 (d) Encouraging exploration and development of “agriculture insurance plus” The cooperation mechanism between insurance institutions and disaster forecasting, agricultural and rural areas, forestry and grasslands, and other departments must be established and improved to strengthen the coordinated use of agriculture insurance compensation funds and government catastrophe relief funds. The linkage of agriculture insurance with credit, guarantee, futures (rights), and other financial instruments must be promoted. The pilot of “insurance + futures” and the pilot of “orders agriculture + insurance + futures (rights)” shall be explored and established. The rural credit system and the credit rating of farmers shall be improved through the credit-increasing function of agriculture insurance so as to alleviate the problem of “difficult loans and expensive loans” for farmers.249 246 247 248 249

Ibid., s.8. Ibid., s.9. Ibid., s.10. Ibid., s.11.

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18.13.4 Strengthening the construction of agriculture insurance infrastructure (a) Improving the insurance clauses and premium rate formulation mechanism The Guiding Opinions 2019 require insurance institutions to strengthen agricultural insurance risk zoning research; construct agricultural production risk maps; publish agricultural insurance pure-risk loss rates; and study and formulate major crops, major livestock, important “cabbage basket” species, forest, and grassland insurance model clauses in order to provide technical support for premium rate adjustment and for developing insurance products by insurance institutions. A scientific insurance rate formulation and dynamic adjustment mechanism to achieve differentiated pricing based on regional risks and to truly reflect the risk status of agricultural production shall be established.250 (b) Strengthening agriculture insurance information sharing The level of agriculture insurance information shall be continuously improved. The agricultural-related data and information of the finance, agriculture, and rural areas; insurance supervision and management; forestry and grassland departments; and insurance institutions shall be gradually integrated to dynamically grasp the relevant conditions of insured farmers and agricultural production and operation organizations and to prevent fraud and fraudulent acquisition of financial subsidies.251 (c) Optimizing the distribution of insurance institutions Insurance institutions shall be supported to establish and improve the grassroots insurance service system and to effectively provide insurance services. Insurance institutions operating policy-based agriculture insurance business shall establish branches in the county-level areas. A uniform national bidding and tendering method for agriculture insurance shall be formed. The standardized management of insurance institutions shall be strengthened. All localities shall establish a service capability oriented insurance institution bidding and dynamic evaluation system on the basis of the actual situation of the local areas. Insurance organizations such as mutual agriculture insurance established according to law may carry out the agriculture insurance business in accordance with regulations.252 (d) Improving the risk prevention mechanism Insurance institutions must adhere to prudent operation; improve the ability of early risk warning, identification, management, and control; increase investment in prevention; and improve risk prevention and emergency response mechanisms. Insurance institutions shall be urged to strictly abide by financial accounting rules and financial regulatory requirements in order to strengthen solvency management and to ensure adequate risk absorption capacity. The corporate governance of 250 Ibid., s.12. 251 Ibid., s.13. 252 Ibid., s.14.

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insurance institutions shall be strengthened to refine and improve the internal control system and to effectively prevent and resolve various risks.253 18.13.5 Organization and implementation (a) Strengthening coordination and cooperation All regions and relevant departments shall attach great importance to accelerating the development of high-quality agriculture insurance, strengthening communication and coordination, and forming a joint workforce. The Ministry of Finance, together with the Central Agricultural Office, the Ministry of Agriculture and Rural Affairs, the CBIRC, and the National Forestry and Grassland Administration, shall set up an agricultural insurance working group to coordinate planning and promote agriculture insurance. Relevant departments shall pay close attention to formulating relevant supporting measures to ensure the implementation of various policies. Provincial party committees and governments shall organize and formulate work plans; establish agricultural insurance working groups led by the financial department and participated in by agricultural and rural areas, insurance supervision, and forestry and grassland departments; determine the financial support policies and priorities of agriculture insurance in the region; and promote the advance of agriculture insurance co-ordinately.254 (b) Increasing policy support The Guiding Opinions 2019 set out the requirements to optimize the financial support policies for agriculture insurance, explore and improve the methods of agriculture insurance subsidies, and strengthen the integration of agriculture insurance and related financial subsidy policies. The central government’s agriculture insurance premium subsidies shall focus on supporting grain production areas, important agricultural products production areas, and areas of deep poverty and are gradually turning towards safeguarding market risks. The central government shall support agriculture insurance products with local advantages and special features by substituting awards for subsidies. When formulating industry plans and related policies, the agricultural, rural, and forestry and grassland departments shall focus on guiding and supporting the development of agriculture insurance, promote insurance institutions to develop agriculture insurance product innovation, encourage and guide farmers and agricultural production and operation organizations to participate in insurance, and help insurance institutions effectively identify and prevent agricultural risks.255 (c) Creating a good market environment The system of agriculture insurance laws and regulations shall be improved. A plan for agriculture insurance publicity, education, and training shall be established. The role of self-regulatory organizations such as insurance industry associations

253 Ibid., s.15. 254 Ibid., s.16. 255 Ibid., s.17.

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shall be strengthened. Supervision and inspection in the field of agriculture insurance shall be strengthened to establish a normalized inspection mechanism, make full use of the local offices of the CBIRC, strengthen grassroots insurance supervision, seriously investigate and deal with violations of laws and regulations, and strictly investigate and prosecute abuses of power. Where there is negligence of duty, malpractice for personal gains, and ineffective investigation, the liabilities of the relevant departments and relevant personnel shall be resolutely investigated, if a crime is found, criminal liability will be pursued according to law.256 Having considered the laws and regulations enacted by the central government and governmental departments, we now turn our attention to see how agriculture insurance is regulated by the self-regulatory organization in section 18.14; after that, we move on to see how agriculture insurance is actually carried out in practice by examining typical crop insurance clauses in section 18.15. 18.14 Self-regulation of agriculture insurance As the main self-regulatory institution of the insurers in China, the Insurance Association of China issued the General Principles of Agriculture Insurance Service (T/IAC 0001-2016) on 1 November 2016.257 These principles are formulated in accordance with the Insurance Law, the Regulation of Agriculture Insurance 2016, the Interim Measures for the Administration of the Underwriting and Claim Settlement of Agriculture Insurance 2015, and other relevant laws and regulations. These General Principles turn the statutory and regulatory requirements into practical and detailed guidance for the insurers to follow. Although these principles are not compulsory to the insurers, they are usually followed by insurers as the standard for agriculture insurance practice. We thus refer to the General Principles of Agriculture Insurance Service 2016 as the Standard and discuss it in this section. This Standard specifies the basic requirements for agriculture insurance services: internal control management, underwriting services, claims services, query services, value-added services, consulting, complaints handling, and other aspects of quality requirements. This Standard is applicable to the planting and breeding insurance business but not to innovative insurance businesses such as forestry insurance, price insurance, and index insurance,258 as these innovative insurance products are at the stage of pilot and development, and a set of general principles for these new products has yet to be developed and formulated. 18.14.1 Basic principles The Standard requires that insurers must follow the basic principles of good faith, standard operation, high quality and high efficiency, and innovation and development. 256 Ibid., s.18. 257 The Insurance Association of China,T/IAC 0001-2016 (see accessed on 16 October 2020). 258 The General Principles of Agriculture Insurance Service 2016, s.1.

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(1) Good faith: to carry out business activities in accordance with insurance contracts, to earnestly perform various obligations, to not deceive or conceal, and to earnestly achieve fairness and justice. (2) Standard operation: to abide by national laws and regulations and industry regulations and carry out agriculture insurance business operations in accordance with laws and regulations. (3) High quality and high efficiency: to take “farmers first” as the basic starting point of work, to improve service awareness, to strengthen service methods, and to provide high-quality and efficient insurance services for farmers. (4) Innovation and development: to actively carry out product innovation and technological innovation to continuously improve the level of agriculture insurance services in accordance with the real situations of agriculture insurance in various regions.259 18.14.2 Basic service capabilities The basic service capabilities embrace five components: institutional settings, team building, infrastructure, product development, and technical innovation.260 (1) Institutional settings: Insurance institutions that operate an agriculture insurance business should have a specialized agriculture insurance operation department and a complete grassroots service network. Branches should be established in county-level areas, and service points suitable for the scale of agriculture insurance business should be established at the township level. A grassroots service system that meets the needs of agriculture insurance business development should be gradually established. (2) Team building: County-level branches should be equipped with full-time personnel who can meet the management and service requirements of an agriculture insurance business. (3) Infrastructure: The business system should have data management and statistical analysis functions which can monitor the underwriting and claims settlement in real time and realize a seamless link with the reinsurance and financial systems. Hardware facilities such as vehicles and office equipment should be able to meet the needs of an agriculture insurance business. (4) Product development: Insurance institutions should have the ability to develop agriculture insurance products and actuarial technology and report to the regulatory authorities on agricultural insurance products that meet market needs in a timely manner. During the business start-up, the registered agriculture insurance contract terms and premium rates shall be used. (5) Technical innovation: Insurance institutions should have strong scientific and technological innovation capabilities and new technology application 259 Ibid., s.3. 260 Ibid., s.4.

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capabilities and make full use of modern scientific and technological means to improve the level of agriculture insurance services. 18.14.3 Internal control management Insurers are required to strengthen the internal control management, including management system, catastrophe risk management, cooperators, and business self-check.261 (1) Management system: Insurance institutions should establish a complete internal control management system for agriculture insurance business management, customer return visits, complaint handling, graded review, internal audit, information management, and file management. (2) Catastrophe risk management: Insurance institutions should establish early warning mechanisms for major disasters, deal with emergencies in agriculture insurance in a timely manner, establish a catastrophe risk-spreading mechanism that matches business scale and solvency, and make arrangements for reinsurance system. (3) Cooperator: An insurance institution should sign a written contract with an institution that assists in the handling of the agriculture insurance business and regularly conduct training for personnel of the cooperator. (4) Business self-check: Insurance institutions should conduct regular selfexaminations in light of business development and discover and solve problems in their work in a timely manner. 18.14.4 Underwriting services Underwriting service includes three aspects of requirements: publicity and disclosure, underwriting process requirements, and other underwriting requirements. (a) Publicity and disclosure262 Insurance institutions should proactively carry out agricultural insurance publicity through the distribution of brochures and centralized publicity.263 The insurance institution shall perform the obligation of explanation, make prompts on the insurance application form and the insurance policy sufficient to attract the attention of the proposer,264 and explain to the proposer the insurance coverage, exemption clauses, rights and obligations of both parties to the contract, the standard and method of claims, and other important clauses.265

261 Ibid., s.5. 262 The General Principles of Agriculture Insurance Service, s.6.1. 263 Ibid., s.6.1.1. 264 An insurance applicant is referred to as proposer and can become policyholder when he has entered into an insurance contract with the insurer. 265 The General Principles of Agriculture Insurance Service, s.6.1.2(a). This is the requirement as provided for in art.17 of the Insurance Law.

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If the agricultural production and operation organization or the village committee organizes the farmers to apply for insurance, insurers can organize the proposer and the insureds to hold a briefing meeting to circulate the insurance clauses on the spot and to explain to them the key contents of the insurance clauses.266 Insurance institutions and insurance organizers should respect the farmers’ right to know and free will. They should not deceive and mislead farmers to enter into the insurance contract and should not force farmers to take out insurance or improperly restrict them from being insured. The insurance institution and its staff shall not promise to the proposers and the insureds to give insurance premium rebates or other benefits other than those stipulated in the insurance contract and shall not mislead them in any way.267 (b) Underwriting process requirements268 (I) Underwriting methods.269 If the agricultural production and operation organization or the village committee organizes the farmers to take out insurance, a separate insurance list for each farmer should be prepared; if large agricultural households, leading enterprises, and economic cooperation organizations are insured as the proposers and the insureds, they can be underwritten individually.270 Insurers should be encouraged to use scientific and technological means, to innovate underwriting methods, to simplify underwriting procedures, and to improve the accuracy of information on insurance subject matters. (II) Information collection.271 Insurance institutions should collect insurance information accurately and completely. Insurance information includes but is not limited to the following: (1) Customer information: Names of the proposer and the insured or the name of the organization, ID card number or unified social credit code (organization code), bank account number, contact information, residential address; (2) Information on the subject of insurance: Number of insurance subjects, location of plots or village groups (planting industry), breeding location and identification information (breeding industry); (3) Other information: Type of insurance, premium amount, insurance rate, self-paid premium, the insured amount, insurance period. This information should be set as a mandatory item in the business system to ensure that the insurance information is standardized, complete, and accurate. (III) Inspection of the insurance subject matter272 (1) Insurance institutions should conduct full inspections or spot checks on the subject matter of the insurance based on the risk status and distribution of the subject matter

266 267 268 269 270 271 272

The General Principles of Agriculture Insurance Service, s.6.1.2(b). Ibid., s.6.1.3. Ibid., s.6.2. Ibid., s.6.2.1. Ibid., s.6.2.1(a). Ibid., s.6.2.2. Ibid., s.6.2.3.

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insured to verify the location, number, ownership, and risk status of the subject matter insured. If conditions permit, the relevant information of the insurance subject should be obtained from the local agricultural, land resources, financial, and other departments or relevant institutions to verify the authenticity of the underwriting information; (2) The false insurance found during the inspection or the insurance subject matter that does not meet the insurance conditions shall not be covered. If it has been insured, the insurance shall be rescinded. (IV) Underwriting announcement.273 (1) The household insurance list should detail the information of the insured and the subject matter insured. After verification and stamping by the agricultural production and operation organization or the village committee, the information should be displayed in the public area of the village or agricultural production and operation organization in an appropriate manner not less than three days; (2) The insurance institution should preserve the publicity situation through photographing, video recording, and so on. The publicity image data (photos or videos) shall be able to reflect the shooting date, location, and publicity content and shall be uploaded to the business system. If the farmer raises an objection, it should be adjusted after the investigation is confirmed. After confirming the correctness, the household insurance list should be entered into the business system. (V) Information confirmation.274 The underwriting business documents (including the household insurance list) shall be signed or sealed by the proposer or the insured himself or herself. Special cases may be handled by the proposer’s or the insured’s immediate family members or by the insurance organizer. If the proposer’s or the insured’s immediate family member handles the matter, the relationship with the insured shall be indicated at the same time; if the insured organizer handles the matter, the power of attorney of the insured shall be provided. (c) Other underwriting requirements (I) Identity verification.275 (1) The insurance institution should indicate the identity of the insured person in the business system, review the ownership of the insurance subject matter, and should not take the organization or individual that has no insurance interest in the insurance subject as the insured; (2) The insurance institution shall review the signatures or seals of the insureds, the insureds, or their immediate family members on the underwriting business documents (including the household insurance list). (II) Underwriting management.276 Provincial branches or head offices of insurance institutions shall centrally underwrite and strictly check key elements 273 274 275 276

Ibid., s.6.2.4. Ibid., s.6.2.5. Ibid., s.6.3.1. Ibid., s.6.3.2.

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such as the insurance list, the ownership and quantity of insurance subject matters, on-site inspection results, and underwriting announcements.Those who do not meet the requirements and lack relevant content shall not be approved for underwriting. (III) Correction or amendment of information.277 Insurance institutions should strengthen the management of correction or amendment of information, and the correction and change of important underwriting information should be approved by the provincial branch or head office. (d) Premium collection and policy issuance278 After confirming the receipt of the premium paid by the insured, the insurance institution should print and issue insurance policies or insurance certificates to each insured through the business system. The insurance institution shall print the telephone number for reporting a case and the national unified customer service hotline on the policy or insurance certificate. Insurance institutions should be encouraged to adopt electronic information technologies to innovate the issuance of insurance policies or insurance certificates. (e) Underwriting return visit279 The insurance institution should make a telephone or home visit to the insured. If the insureds are the main body of scale operation, a return visit (or a follow-up visit) shall be made to each of them. Other insured persons shall be selected for a certain percentage of return visits. Insurance institutions should use the return visits to verify the ownership and quantity of insurance subject matters, premiums paid by the insured himself or herself, performance of duty of disclosure, and underwriting announcements. The insurance institution shall keep a record in detail, including the time, place, the insured, and results of the return visit and keep data such as the audio record of the visit or the written record of the visit for reference. 18.14.5 Claims services (a) Claim reporting280 The insurance institution’s reporting channel should be kept open 24 hours a day to receive farmers’ reports. Insurance institutions should organize special personnel in provincial branches or head offices to centrally receive and handle reports. For branches below the provincial level, if they receive reports from farmers, they should guide or assist them in reporting the claims. After receiving the report, the insurance institution shall record the information provided by the reporter in a timely and accurate manner in the business system, generate a report number and 277 278 279 280

Ibid., s.6.3.3. Ibid., s.6.4. Ibid., s.6.5. Ibid., s.7.1.

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assign investigation tasks, and immediately notify the reporter of the follow-up work arrangements. (b) Investigate loss281 (I) Time limit for investigation.282 (1) The insurance institution should conduct on-site investigation within 24 hours after receiving the report. If it is difficult for the insurance institution to reach the site due to force majeure or major disasters, it should contact the informant or the insured in time and explain the reason. (2) Insurance institutions should verify accident losses in a timely manner. The time limit requirements are as follows: (i) In the case of plantation insurance, if the insurance accident causes a complete failure of the crop insured, the loss verification shall be completed within 20 days after receiving the report; if the accident causes a partial loss of the crop, the loss verification shall be completed within 20 days after the crop is harvested; (ii) The aquaculture insurance should complete the loss verification within three days after receiving the report; (iii) In the event of a major disaster, a large-scale epidemic situation, or other special circumstances, the insurance institution is not subject to the aforesaid time limit requirements. (3) If the loss verification takes a longer time, the insurance institution should explain the reasons. (II) Requirements for investigation and assessment of loss.283 (1) The insurance institution shall meet the following requirements for the investigation and assessment of loss: (i) In principle, the investigation for plantation insurance shall take place at the village. For large-scale disasters, the loss degree of the insurance subject can be verified by sampling in accordance with the technical regulations of the agricultural department or with reference to the opinions of agricultural experts; (ii) The loss assessment of the aquaculture insurance should take place at the site, except for special circumstances. Insurance institutions can use high-tech means to achieve remote surveys while effectively controlling risks; (iii) Insurance institutions should standardize and scientifically determine the loss, so that the determination of the loss can happen at the household. Provincial branches or head offices should conduct spot checks on the original results of determined losses. (2) Insurance institutions should be encouraged to actively use satellite remote sensing and other advanced technologies to carry out loss investigation and assessment. 281 Ibid., s.7.2. 282 Ibid., s.7.2.1. 283 Ibid., s.7.2.2.

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(3) The insurance institution shall actively cooperate with the relevant competent authorities to urge farmers to harmlessly deal with the insured animals that died from disease in accordance with the relevant regulations and take the harmless treatment as the precondition for claims. If the harmless treatment cannot be confirmed, no compensation will be made. (III) Investigation procedures.284 (1) Insurance institutions should collect data and information that can reflect the loss and also the survey process. Data and information can be collected by written recording, audio recording, video recording, photographing, aerial photography, remote sensing, and so on and stored properly. (2) The survey image (audio, video, or photos) should reflect the following: (i) Investigation personnel, insured, or their agents; (ii) The characteristics, scale, or loss degree of the damaged subject; (iii) the location and the site of shooting. The survey image data should be clear, complete, unmodified, and uploaded to the business system. (3) When preparing the survey report, the survey time and place should be indicated, and clear opinions should be given on the damage or loss of the insured subject, the cause of the accident, and whether it is an insurance liability. (4) The investigation report shall be based on the original records of the on-site investigation. The original records shall be signed and confirmed by the investigation personnel and the insureds participating in the investigation. (IV) Notification of claims.285 The insurance institution shall promptly notify the insured of the claim procedure and claim material list according to the characteristics of the case and provide relevant claim documents. (V) Claims refusal.286 For claims that do not fall within the insurance liability, the insurance institution shall issue a notice of refusal to the insured within three days from the date of determination and give him or her the reason for refusal. The claim materials such as the survey photos, survey report, and rejection notice shall be uploaded to the business system. (c) Claims registration287 After the insurance institution confirms the insurance responsibility, it should file a case in the business system in a timely manner. The business system should have a mandatory automatic case filing function if the claim has not been filed for more than ten days. Insurance institutions should conduct case-by-case assessment of

284 285 286 287

Ibid., s.7.2.3. Ibid., s.7.2.4. Ibid., s.7.2.5. Ibid., s.7.3.

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losses and adjust the amount of losses in a timely manner based on the investigation and assessment. (d) Adjustment288 The insurance institution shall accurately calculate the insurance compensation according to the insurance contract and the results of the survey and assessment. For the case with a large amount of loss and great social impact, if the insurance liability has been clarified and the insured has applied for compensation, the insurance institution should prepay part of the compensation within the insurance amount that can be determined. (e) Claims announcement289 Agricultural production management organizations, village committees, and other organizations that organize farmers to take out plantation insurance shall publicize the results of investigation and assessment of damages and claims in villages or public areas of agricultural production management organizations for no fewer than three days. The contents of the investigation and assessment of the damage results and claims settlement should include important information such as the name of the insured, the name of the subject matter, the amount of loss, and the amount of compensation. The insurance institution should record the publicity situation through photographing, video recording, and so on. The publicity image data should be able to reflect the shooting date and location and the publicity content and uploaded to the business system. During the public announcement, if the insured gives different opinions, the insurance institution shall verify and inform the insured of the verification results. If the verified situation is true, the claim result shall be adjusted accordingly. For the insurance business organized by agricultural production management organizations, village committees, and other organizations, if an accident causes losses to multiple households, the insurance institution should issue a settlement statement for each household, specifying the insured ’s name, ID number, bank account number, and amount of compensation.The statement shall be signed by the insured, his or her immediate family members, or the insurance organizer. If it is signed and confirmed by the immediate family members of the insured, the relationship with the insured shall be indicated at the same time; if it is signed and confirmed by the insurance organizer, the power of attorney of the insured shall be provided. (f) Claims adjustment290 The insurance institution should make clear the responsibility and authority of the agriculture insurance business claims handlers, and in principle the claim authority should be kept at the provincial branch or head office. Loss adjusters should verify the time, place, cause of the risk, the name of the damaged subject, the number of losses, and the extent of the loss by reviewing the report 288 Ibid., s.7.4. 289 Ibid., s.7.5. 290 Ibid., s.7.6.

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records, claim application, accident certificate, survey report, loss list, survey image, publicity materials, and so on. They should check and verify the authenticity of the compensation case, the accuracy of the insurance liability determination, the standardization of the damage assessment process, the reasonableness of the loss determination result, the accuracy of the compensation calculation, the integrity of the compensation document, the accuracy of the payment and should sign the compensation document. (g) Payment of compensation291 (I) Time limit for payment.292 The insurance institution shall make payment according to the following time limit requirements: (i) Pay the compensation within ten days after reaching the compensation agreement with the insured; (ii) For insurance business organized by the agricultural production and operation organization or the village committee, the payment of the compensation to each insured farmer shall be made within ten days after obtaining the list of claims for settlement by the insured or his or her immediate family members; (iii) If the agriculture insurance contract stipulates the time limit for making compensating payment, follow the time limit. (II) Payment methods.293 The insurance institution shall pay the claims to the insured’s bank account directly and retain valid payment receipts or valid bank payment certificates. Under special circumstances, the on-site cash payment can be approved by the provincial branch and above. (h) Claim return visit294 After paying the compensation, the insurance institution shall make a return visit to the insured. If the insureds are persons who run agriculture business on a relatively large scale, return visits shall be made to all of them; other insureds shall be return visited for a certain percentage. The return visits should focus on the matter of verifying the disaster-affected species, the situation of the loss, the process of investigation and assessment of the loss, compensation payment, settlement of claims, and so on. The insurance institution shall record in detail the time, place, the person visited, results of the return visit. The data such as the audio record of the return visit or the written record of the visit should be kept for reference. 18.14.6 Inquiry service295 Insurance institutions should gradually provide insured farmers with independent enquiry services for underwriting and claims information through the internet or mobile phone software.

291 292 293 294 295

Ibid., s.7.7. Ibid., s.7.7.1. Ibid., s.7.7.2. Ibid., s.7.8. Ibid., s.8.

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Insurance institutions should gradually set up a public information query column in a prominent position on their websites, set different query contents and query interfaces according to product characteristics, and provide insurance product names, policy numbers, insured persons, insurance premiums, information such as self-paid premium, insurance amount, insurance period, quantity insured, type of disaster, time of disaster, amount of loss, degree of loss, amount of compensation, and so on. When insurance institutions provide public inquiry services, they should strengthen information security management to protect the privacy of policyholders and insureds. 18.14.7 Value-added services296 Insurance institutions should cooperate with the construction of the national agriculture insurance information management platform or gradually establish the company’s agriculture insurance information platform through mobile phone text messages, internet, and other channels to provide participating farmers with national agricultural benefits policies, agricultural production technology, agricultural product prices, agricultural product supply and marketing information, production materials procurement, weather warning, disaster prevention information, and so on. Insurance institutions shall be encouraged to cooperate with relevant departments to carry out agricultural disaster prevention and loss mitigation, explore effective disaster prevention and loss mitigation methods, and carry out disaster prevention and loss mitigation projects such as artificial weather modification in the planting industry, farmland infrastructure construction, and disease prevention and control in the breeding industry, so as to effectively improve service capabilities. 18.14.8 Consultation and complaints297 Insurance institutions should publish consultation and complaint service telephone numbers to the public and provide farmers with a variety of easy to use consultation and complaint service channels. The insurance institution shall designate a person to be responsible for receiving and handling complaints from letters and visits and establish a register of complaints from letters and visits. Detailed records shall be made of the content of complaints from letters and visits, facts, processing results, and processing time. Insurance institutions should contact the farmers who make consultation or complaints within seven working days and inform them of preliminary handling opinions. Consultation or complaints that require further verification and handling should be clearly answered within 30 working days after being received. Complaints transferred via insurance supervision or other departments or industry associations shall be replied to the complainant within the prescribed time limit.

296 Ibid., s.9. 297 Ibid., s.10.

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Insurance institutions should cooperate with insurance supervision and other departments and local governments to carry out investigation and handling of complaint cases. 18.15 Typical crop insurance clauses There are a variety of agriculture insurance policies to cover the risks for planting or breeding. The most commonly used planting insurance is the insurance covering direct materialized costs for corn, wheat, and rice. As mentioned earlier, the Pilot Programme of full cost insurance and income insurance for the three major grain crops are carried out in some provinces, the amount of coverage for the full cost insurance is much higher than that for the direct materialized cost. The insurance policy clauses for direct materialized costs and for full costs are similar; the main difference is the amount insured. The direct materialized costs amount to about ¥400 yuan per mu, including the seeds cost, fertilizer cost, pesticide cost, irrigation cost, and ploughing cost, while the full costs amount to about ¥1000 yuan per mu, including labour cost and land rent cost, on top of the direct materialized costs. In this section, we examine the insurance policy clauses for direct materialized costs and make comparison with the policy clauses for full costs. We take the People’s Insurance Company of China (PICC) Corn Planting Insurance Clauses (hereinafter, the PICC Corn Insurance Clauses)298 as a typical example and also make comparisons with policy clauses used by other insurers. The PICC Corn Insurance Clauses consist of 33 articles in 12 parts, including general matter, insurance subject matter, insured amount and deductible rate, risks covered, exclusions, insurance period, insurer’s obligations, the obligations of the policyholder and the insured, claim settlement, dispute resolution and applicable law, other matters, and the interpretation of terms. We will not discuss all parts of the Clauses, but focus on the main parts. 18.15.1 Insurance subject matter Corn that meets the following conditions may be the subject of insurance: (1) Qualified species approved by the government department and planted in compliance with the local planting standards and technical management requirements generally adopted by the local government; (2) Non-flood storage and flood discharge areas where the planting site is above the local flood water level; (3) Normal growth.299

298 The People’s Insurance Company of China Corn Planting Insurance Clauses. (see accessed on 16 October 2020) 299 The PICC Corn Insurance Clauses, art.2.

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The insured shall insure all corn that meets the above conditions and may not select some corn to insure. Other crops growing with the corn in the same land are not covered by the insurance contract.300 18.15.2 Risks covered During the insurance period, if the loss of insured corn is directly caused by the following events and the loss rate reaches more than 30% (inclusive), the insurer is liable for paying indemnity in accordance with the provisions of this insurance contract:301 (1) Heavy rain, flood (except for flood storage by the government) and waterlogging; (2) Wind and hail disasters; (3) Frost disaster. 18.15.3 Exemptions from liability The insurer is not liable for losses and expenses caused by:302 (1) Intentional, malicious acts of mismanagement by the policyholder or his or her family members, the insured or his or her family members, or the employees of the policyholder or the insured. (2) Administrative acts or judicial acts. The following losses and expenses shall not be compensated by the insurer:303 (1) After the happening of a loss which is within the scope of insurance liability, the insured destroys or renounces the cultivation of insured corn; (2) The deductible amount calculated according to the deductible rate stated in this contract; (3) Other losses and expenses that are not within the scope of this insurance liability. 18.15.4 Insured amount and deductible rate The insurance amount per mu304 of corn refers to the direct materialized costs incurred during the growth period of the insured corn, including seed cost, fertilizer cost, pesticide cost, irrigation cost, ploughing cost, and mulching cost, which shall be determined by the policyholder and the insurer in consultation and specified in the insurance policy.

300 301 302 303 304

Ibid. Ibid., art.3. Ibid., art.4. Ibid., art.5. One mu = 666.7 m2 = 0.165 acre.

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Insured amount = insured amount per mu × insured area; (The insured area is specified in the insurance policy.)305 The deductible rate for each accident is 10%.306 In some other policies, the insured that has the main insurance coverage for more than 100 mu corn can purchase additional insured amount on top of the main insurance coverage. The insured amount can be increased to ¥800 per mu, but not more than 80% of the real value of the corn.307 For full cost insurance, the insured amount can be increased to cover the full costs. For example, in the Full Costs Wheat Insurance Clauses of Chinese Property Insurance Co. Ltd. Henan Province Branch, the full costs insured can be up to ¥900 yuan per mu.308 18.15.5 The insurance period The insurance period of this contract shall be from the time when the insured corn is planted to the time when it is ripe for harvesting, but it shall not exceed the insurance period stated in the insurance policy.309 18.15.6 The insurer’s obligations Where the contract is concluded using the standard clauses of the insurer, the insurer shall provide an insurance policy with the standard clauses attached and explain the contents of the contract to the proposer. For those clauses exempting the insurer from liability in the insurance contract, the insurer shall sufficiently warn the proposer of those clauses in the insurance application form, the insurance policy, or any other insurance certificate, and expressly explain those clauses to the proposer in writing or verbally. If the insurer fails to make a warning or express explanation thereof, those clauses shall not be effective.310 After the insurance contract is concluded, the insurer shall issue an insurance policy or other insurance certificates to the insured in a timely manner.311 If the insurer deems that the relevant certificates and proof are incomplete according to the contract, it shall notify, in a timely manner and at one time, the proposer or the insured of all additional certificates and materials to be provided.312 After receiving a claim from the insured, the insurer shall make a timely verification as to whether it is an insurance liability. The insurer shall notify the insured of the result of the verification, and if it is an insurance liability, after reaching an agreement with the insured to pay the insurance compensation within ten days, 305 The PICC Corn Insurance Clauses, art.6. 306 Ibid., art.7. 307 For example, see the PICC Henan Province Branch Corn Planting Insurance Insured Amount Expansion Clauses (see accessed on 16 October 2020). 308 The Full Costs Wheat Insurance Clauses of Chinese Property Insurance Co. Ltd Henan Province Branch (see accessed on 16 October 2020). 309 The PICC Corn Insurance Clauses, art.8. 310 Ibid., art.9. This article is almost the same as art.17 of the Insurance Law. 311 Ibid., art.10. 312 Ibid., art.11. This article is almost the same as art.22(2) of the Insurance Law.

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shall fulfil the obligation of paying insurance compensation. If the insurance contract stipulates the time limit for paying the insurance money, the insurer shall pay the compensation according to the agreement. If the insurer is not liable for the loss, the insurer shall notify the insured of the refusal of the claim within three days from the date of the insurer’s decision and explain the reasons for the refusal.313 18.15.7 The proposer’s and insured’s obligations (a) The duty to disclose information The proposer has a pre-contract duty of disclosure and a duty to not misrepresent material information about the subject matter of the insurance or of the insured. The PICC Corn Insurance Clauses set out this duty in the same way as in art.16 of the Insurance Law. Where the insurer makes an inquiry about the insured corn or about the insured when entering into an insurance contract, the proposer shall tell the truth.314 Where the proposer fails to perform the obligation of telling the truth as prescribed in the preceding paragraph, intentionally or by gross negligence and affecting the insurer’s decision on whether to underwrite the insurance or raise the insurance premium, the insurer shall have the right to rescind the insurance contract.315 Where the proposer intentionally fails to perform the obligation of telling the truth, the insurer shall not be liable for paying indemnity for an insured incident which occurs before the contract is rescinded and shall not refund the insurance premium.316 Where the proposer fails by gross negligence to perform the obligation of telling the truth, the misrepresented fact materially affects the occurrence of an insured incident, the insurer shall not be liable for paying indemnity for an insured incident which occurs before the contract is rescinded but shall refund the insurance premium.317 (b) The duty to pay insurance premium Unless otherwise agreed, the proposer shall pay the insurance premium when the insurance contract is concluded. If the proposer fails to pay the insurance premium in full and on time in accordance with the provisions of the insurance contract, the insurer may terminate the insurance contract. The contract is terminated when the written notice of the termination has been received by the proposer.The insurer shall have the right to charge the proposer a premium for the amount from the beginning of the insurance liability until the termination of the contract.The insurer shall be liable to pay the loss which occurred before the termination of the contract

313 314 315 316 317

Ibid., art.12. Ibid., art.13(1). Ibid., art.13(2). Ibid., art.13(3). Ibid., art.13(4).

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in accordance with the proportion of the premium paid at the time of the insurance accident to the premium payable under the contract.318 (c) The duty to maintain safety of the subject matter of insurance The insured should abide by the national and local regulations on corn planting management; establish, improve, and implement the rules and regulations of field management; accept the disaster prevention inspections and reasonable suggestions of the agricultural department and the insurer; and maintain the safety of insured corn.319 The insurer may inspect the insured’s compliance with the provisions of the preceding paragraph and promptly submit written suggestions to the proposer or the insured to eliminate unsafe factors and hidden dangers. The proposer and the insured shall seriously consider implementing such suggestions.320 If the proposer or the insured fails to perform their duty to maintain the safety of the insured corn in accordance with the agreement, the insurer has the right to request an increase of premium or to terminate the insurance contract.321 (d) The duty to notify the insurer of transfer of the insured subject matter If the insured corn is transferred, the insured or the transferee shall notify the insurer in a timely manner. If the degree of risk due to the transfer of insured corn has increased significantly, the insurer may increase the premium or rescind the contract within 30 days from the date of receiving the notice of transfer. If the insured or the transferee fails to notify the insurer of the transfer, the insurer is not liable for any loss caused by the significant increase of the risk after the transfer.322 (e) No duty to notify the insurer of increase of risk during the insurance period According to art.11 of the Regulation of Agriculture Insurance 2016, during the term of an agriculture insurance contract, the insurer shall not increase the premium or rescind the contract for any change of the degree of risk in the subject matter insured. This differs significantly from other non-agriculture insurance contracts where the insured has a duty to notify the insurer of any material increase of risk during the insurance period.323 In the PICC Corn Insurance Clauses, art.17 imposes on the insured the duty of notification of any material increase of risk during the insurance period. This clause is not in compliance with art.11 of the Regulation of Agriculture Insurance 2016 and thus should not be effective.324 318 Ibid., art.14. 319 Ibid., art.15(1). 320 Ibid., art.15(2). 321 Ibid., art.15(3). 322 Ibid., art.16. 323 The Insurance Law, art.52. For more on this topic, see Zhen Jing, “The Insured’s Post-Contract Duty of Notification of Increase of Risk: A Comparative Perspective” (2013) Journal of Business Law, 842–867. 324 According to art.19 of the Insurance Law, the following terms and conditions in an insurance contract concluded by adopting the standard-form contract provided by the insurer shall be invalid: (1)

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In some other corn planting insurance contracts, there is no requirement for the insured to notify the insurer of increase of risk during the insurance period.325 (f) The duty to mitigate loss and notify the insurer of the occurrence of the insured event After knowing that an insurance accident has occurred, the insured should: (1) Take necessary and reasonable steps to prevent or mitigate further loss; if the insured does not do so, the insurer shall not be liable for the loss thus expanded. (2) Inform the insurer in a timely manner and explain in writing the cause, process, and loss of the accident. If the insured intentionally fails to inform the insurer of the loss or because of gross negligence on the part of the insured the nature, the cause, and the loss are difficult to determine, the insurer shall not be liable for the part of the loss which cannot be determined, except if the insurer had already known or should have been aware of the occurrence of the accident through other channels. (3) Protect the scene of the accident and allow and assist the insurer to conduct accident investigation.326 (g) The duty to provide claim documents When the insured makes a claim, he or she shall provide the insurer with the following certificates and materials: (1) (2) (3) (4)

The original insurance policy; Application for claim; List of losses; The certificates and materials that the proposer or the insured can provide to confirm the nature, the cause, and the extent of loss of the insurance accident.

If the insured fails to perform the obligations stipulated in the preceding paragraph, resulting in the insurer being unable to verify the loss, the insurer shall not be liable for the part that cannot be verified.327

those that exempt the insurer of the obligations that the insurer should have born according to law or that aggravate the obligations of the proposer and the insured; and (2) those that deny the proposer, the insured or the beneficiary the rights that they should have been entitled to according to law. 325 For example, see the Sunlight Agricultural Mutual Insurance Company, Heilongjiang Province Corn Planting Insurance Clauses at accessed on 25 April 2020. 326 The PICC Corn Insurance Clauses, art.18. 327 Ibid., art.19.

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18.15.8 Claims handling and settlement When an insurance accident occurs, the insured person who does not have an insurable interest in the insured corn shall not have right to request compensation from the insurer.328 After the loss of the insured corn, if there is residual value, it shall be dealt with by both the insurer and the insured through negotiation. If it is retained by the insured, both parties shall negotiate to determine the value and deduct it from the insurance compensation.329 The insurer shall calculate the compensation in the following ways for losses within the scope of the insurance liability:330 The amount of compensation = the maximum compensation amount for different growth periods × loss rate × damaged area × (1- deductible rate). Loss rate = the number of plants lost per unit area (or average lost yield) ÷ average number of plants per unit area (or average normal yield). Maximum compensation amount per mu during different growing period from young plant to ripe varies from 40% of the insured amount per mu to 100% of the insured amount. In the event of an insurance accident, if the insured amount per mu of corn is less than or equal to the actual value at the time of the loss, the insured amount per mu is the calculation standard for compensation; if the insured amount per mu of corn is higher than the actual value at the time of loss, the actual value at the time of loss is the calculation standard for compensation.331 When an insurance accident occurs, if there is double insurance, the insurer shall be liable for the amount calculated on the ratio of the insured amount in this contract and the total insured sum in this and other insurance contracts. Where other insurers should bear their amount of compensation, the insurer is not liable for advance of that amount. If the insured fails to truthfully inform the insurer of the double insurance which results in the insurer to have paid more than his or her share, the insurer has the right to recover the overpaid portion from the insured.332 If there is no insurance accident, and the insured falsely claims that an insurance accident has occurred and submits a claim to the insurer, the insurer has the right to terminate the insurance contract without refunding the insurance premium. If the proposer or the insured intentionally causes an insurance accident, the insurer has the right to terminate the insurance contract and shall not be liable for self-inflicted loss or refunding the insurance premium paid. After an insurance accident occurs, if the proposer or the insured fabricates a false cause of the loss or exaggerates the extent of the loss with forged or altered documents or evidence, the insurer shall not be liable for the false part of the loss but will be liable for the genuine part of the loss.333 328 329 330 331 332 333

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.24. Ibid., art.25. Ibid., art.27.

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The limitation period for the insured to claim for compensation from the insurer is two years from the time when the insured becomes aware or should have been aware of the occurrence of the insured accident.334 18.16 Conclusion The agriculture insurance market in China is the second largest in the world and is regulated by law and regulations at four levels: the statutory law, the State Council’s regulations, the government departmental regulations, and the industry self-regulation. Agriculture insurance has been developing dramatically during the last 13 years, since the practice of the government policy of premium subsidies. The government has set the 2022 targets for an insurance penetration (premium / agricultural GDP) of 1% and an insurance density (premium / farming population) of ¥500 yuan per person.335 There is no doubt agriculture insurance has made significant achievements and is playing a key role in the process of modernization of agriculture in China. However, in comparison with the agriculture insurance in some advanced countries, China’s agriculture insurance has a number of major challenges. First, there is no specific statutory legislation for agriculture insurance. The State Council’s Regulation of Agriculture Insurance 2016 is the top legislation and plays a bridging role between the Agriculture Law of China and the Insurance Law of China. The primary feature of agriculture insurance in China is that it is a policy-supported insurance practice. It is different from pure commercial insurance practice but similar to the insurance activities for other lines of insurance. This hybrid feature needs to be addressed and regulated by a special statutory law. The Regulation of Agriculture Insurance 2016 takes a more principle-based approach, and it thus is lacking in practical significance. For the important issues such as agriculture insurance contracts, business operation, financial subsidies, reinsurance, and so on, the rules in the Regulation are too brief or do not exist at all. Certain conduct is prohibited in the Regulation, but no remedies are provided for non-compliance with the rules. For example, art.11 of the Regulation bars an insurer from increasing the premium or terminating the contracts due to an increase of risk during the insurance period, but there is no remedy for the insurer’s breach of the rule. In the PICC Corn Insurance Clauses, clause 17 imposes on the insured the duty of notification of any material increase of risk during the insurance period. This clause is not in compliance with art.11 of the Regulation of Agriculture Insurance. The Regulation does not provide any rules for the construction and operation for the mechanism of catastrophe risk spreading but simply shows the supportive attitude of the government toward this issue (art.8 of the Regulation 2016). It is suggested that the Regulation of Agriculture Insurance 2016 should be significantly amended and elevated to the status of Agriculture Insurance Law of China. All other agriculture insurance regulations 334 Ibid., art.28. 335 The Guiding Opinions on Accelerating the High-Quality Development of Agriculture Insurance 2019, s.3.

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should be formulated and implemented under the umbrella of the statutory rules of the Agriculture Insurance Law. Second, one of the four principles (government guidance, market operation, free will, and coordinated advancement) for agriculture insurance as provided for in art.3 of the Regulation of Agriculture Insurance 2016 is coordinated advancement, but there are no detailed rules in respect of the mechanism of coordination between different government departments. At the central government department level, the Ministry of Finance makes the policy for subsidies, the CBIRC is responsible for regulating the insurance business operation, the Ministry of Agriculture and Rural Affairs is responsible for organizing and advancing the practice of agriculture insurance, and many other departments also take part in the regulatory mechanism of agriculture insurance in China.There is, however, no effective coordination between them. It is suggested that a leading group for nationwide agriculture insurance should be set up within the State Council which would lead and coordinate all insurance policy activities of the Ministry of Finance, the Ministry of Agriculture and Rural Affairs, the CBIRC, the National Forestry and Grassland Administration, and other relevant government departments. The establishment of this united and powerful leading group will certainly increase the effectiveness of coordination for the further development of agriculture insurance in China. Third, the mechanism and policy of subsidization needs improvement. In China the main policy support for agriculture insurance is premium subsidies, which accounts for about 60 to 80% of the premium. The extent of subsidies largely determines the scope of agriculture insurance because of the higher systematic risk for agriculture insurance than for other lines of insurance. The subsidies to agriculture insurance in China are far less than those in the United States. The Federal Government in the United States subsidizes agriculture insurance to an amount accounting for about 5% of the agricultural GDP; while China’s government subsidizes for premiums only 0.027% of China’s agricultural GDP.336 It is necessary to explore other forms of subsidization, such as insurance company operation subsidy, reinsurance subsidy, capital support for national agriculture insurance companies, catastrophe risk reserve, and tax relief. Fourth, new agriculture insurance products need to be developed to meet the increasing demand of farmers. At present, the major product is the direct materialized cost insurance and full cost insurance for crops. To meet diversified risk protection needs, an agriculture insurance products system covering basic insurance, commercial insurance, and additional insurance should be explored and established. Index insurance, regional production insurance, and agriculture-related insurance should be promoted. A comprehensive insurance package that includes agricultural production facilities and equipment such as agricultural machinery sheds, farmhouse warehouses, and so on should be explored. Agriculture insurance should be incorporated into the agricultural disaster, risk prevention, and rescue

336 Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economics Science Press, China, 2018) p. 224.

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system to fully exercise the insurance function of risk prevention, risk control, risk spreading, and loss compensation.337 Fifth, a catastrophe risk-spreading mechanism needs to be established. Catastrophe risk reserve and reinsurance are the two main methods to spreading the risk. The establishment of a financially supported, multiparty participated, risk sharing, multilayered and decentralized agriculture insurance catastrophe riskspreading mechanism should be speeded up. The agriculture insurance catastrophe risk reserve system must be implemented to enhance the insurance institutions’ ability to respond to agricultural catastrophe risks. Agriculture reinsurance should be expanded to increase the underwriting capacity of reinsurance. The reinsurance system and reinsurance mechanism must be improved. A four-layered catastrophe spreading mechanism may be explored:338 the first layer of an insurance company for catastrophe risk reserve which bears the loss for up to 150% of the insurer’s payout rate; the second layer of a provincial government for loss compensation reserve which is used to pay loss compensation for losses above 150 to 300% of the insurer’s payout rate; the third layer of the central government for loss compensation reserve which is used to pay loss compensation for losses above 300 to 500% of the insurer’s payout rate; the fourth layer of the capital market for loss compensation reserve which is used to pay loss compensation for losses above 500% of the insurer’s payout rate.

337 The Guiding Opinions on Accelerating the High-Quality Development of Agriculture Insurance, s.6. 338 Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economics Science Press, China, 2018) p. 232.

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CHAPTER 19

Catastrophe insurance

19.1 Introduction China is one of the countries in the world with frequent natural disasters. The disaster statistics of the Ministry of Emergency Management of China show that in 2018, various natural disasters caused a total of 97,000 houses to collapse, agricultural crops affected by natural disasters amounted to 208.143 million hectares, and direct economic losses due to natural disasters were ¥264.46 billion yuan.1 The development of catastrophe insurance in China began in 2008 after the “5.12” Wenchuan earthquake (Sichuan Province), which caused direct economic losses of ¥845.1 billion yuan. Insurance companies paid about ¥2 billion yuan, accounting for only 0.2% of the total loss.2 That earthquake caused Chinese society to think about the importance and necessity of establishing a catastrophe insurance system. In recent years, China has been building a catastrophe insurance system to spread risks and the losses caused by natural disasters in order to protect and improve the people’s livelihood in a more effective manner. This effort is to shift the disaster relief mechanism from the traditional and single way of post-event or post-loss relief by the central and local governments to the multilayered risk assumption and loss sharing mechanism. Commercial insurers and reinsurers are encouraged and supported to actively participate in the building of the catastrophe insurance system and gradually to play an increasingly important role in the system. Although insurance cannot prevent the occurrence of natural disasters and the deaths of humans and livestock, it can help to recover the property losses and increase the resilience of communities. The so-called catastrophe insurance refers to a risk-spreading and loss sharing system that provides protection against property loss and personal injury caused by sudden, unpredictable, unavoidable, and particularly serious natural disasters such as earthquakes, hurricanes, and tsunamis. Natural catastrophes have enormous power and often cause devastating impact on society. Post-disaster economic compensation and reconstruction are closely related to the country’s overall catastrophe 1 The CCTV News, 18 June 2019 (see accessed on 16 October 2020). 2 Yang Xiao and Mengxi Dai, “Suffering from the earthquake: can catastrophe insurance act as the safety net” 26 June 2019, Financial Daily (see accessed on 16 October 2020).

DOI: 10.4324/9781351122863-19

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insurance system. Most developed countries use the national system of catastrophe insurance to spread the risk of catastrophes. Due to the large differences in the economic development level and types and probability of catastrophe risk of various countries, the level of the system of catastrophe risk management in different countries are also different. Countries with high economic levels and high frequency of catastrophes have relatively high levels of catastrophe risk management. In the UK, for example, the development of catastrophe insurance has been focused on flooding as the major disaster,3 while in New Zealand, earthquakes are the major catastrophe in the country, so the catastrophe insurance is primarily focused on earthquakes, with a very high level of insurance coverage for households.4 In China, because of the large variety of natural disasters and the large regional differences, the catastrophe insurance model cannot be “one size fits all”. While encouraging the development of catastrophe insurance to cope with the main regional disasters, China takes the earthquake insurance for urban and rural residential housing as a priority for the development of the catastrophe insurance system in the country. In this chapter, we will see how the earthquake catastrophe insurance system is regulated in China. To begin with, we present an overview of the legal framework for catastrophe insurance. 19.2 The legal framework for catastrophe insurance On 15 June 2006, the State Council issued the Several Opinions on the Reform and Development of the Insurance Industry 2006,5 in which the State Council for the first time set out the target of “establishing a catastrophe risk insurance system supported by the national finance”. In s.12 of the Decisions of the Third Plenary Session of the 18th Communist Party of China (CPC) Central Committee (2013),6 the CPC Central Committee for the first time put forward the following requirement: “To improve the insurance economic compensation mechanism and establish a catastrophe risk insurance system.” On 10 August 2014, the State Council enacted the Several Opinions on Accelerating the Development of the Modern Insurance Service Industry 2014.7 In this milestone policy document, the State Council reiterated the target of establishing a catastrophe insurance system. It provides that the catastrophe insurance system should be established by centring on protecting and improving the people’s

3 In the UK, a flood catastrophe scheme known as Flood Re was created in 2016 to ensure that homeowners in high-risk flood areas could still access affordable home contents and building insurance. It is estimated that 350,000 UK households could benefit from the scheme. 4 About 97% of households were insured at the time of the enactment of the New Zealand Earthquake Commission Act 1993. 5 The State Council No.23 [2006] came into force on 15 June 2006 (see accessed on 16 October 2020). 6 The Third Plenary Session of the 18th Central Committee of the Communist Party of China was held in Beijing from November 9 to 12, 2013.The Decisions were passed on 12 November 2013, s.12 (see accessed on 16 October 2020). 7 The State Council No. 29 [2014] was issued on 10 August 2014 came into force on the same day (see accessed on 16 October 2020).

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livelihood in a more effective manner, by basing on system building, by taking commercial insurance as the platform, and by taking multilayered risk assumption as the guarantee. Research should be conducted in establishing catastrophe insurance funds, catastrophe reinsurance, and other rules, and a multilayered catastrophe riskspreading mechanism supported by public finance should be gradually established. All localities are encouraged to explore the effective protection model for typhoons, earthquakes, landslides, debris flows, floods, and forest fire disasters, among others, based on the characteristics of risks. Catastrophe insurance regulations should be prepared. The catastrophe liability reserves system for nuclear insurance should be established. The catastrophe risk management database should be established.8 In order to implement the spirit of the Third Plenary Session of the 18th CPC Central Committee and the Several Opinions of the State Council on Accelerating the Development of Modern Insurance Service Industry 2014, the China Insurance Regulatory Commission (the CIRC, the former insurance regulatory authority) and the Ministry of Finance, jointly with other relevant departments, issued the Notice of Issuing the Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes 2016 (hereinafter the Notice 2016).9 The purposes of the Notice 2016 are to establish a catastrophe insurance system for urban and rural housing in earthquakes as the priority according to the principle of giving priority to the people’s livelihood, by selecting earthquake disasters as main disaster causes. The practice and explorations are carried out before the issuance of the Regulation on Earthquake Catastrophe Insurance.10 The details of the Notice 2016 will be considered in section 19.4. On 2 May 2017, the Ministry of Finance issued the Measures for the Administration of the Special Reserve Fund for Urban and Rural Residents’ Earthquake Catastrophe Insurance 2017.11 The purposes of the Measures 2017 are to promote the pilot programme of urban and rural residents’ earthquake catastrophe insurance, to further standardize the special reserve fund for the urban and rural residential earthquake catastrophe insurance system, to improve the multilayered catastrophe risk-spreading mechanism, and to promote the formation of the urban and rural residential earthquake catastrophe insurance system. The Measures 2017 is formulated in accordance with the Insurance Law, the Financial Rules for Financial Enterprises, and the Notice of Issuing the Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes 2016 and other relevant regulations. The details of the Measures 2017 will be discussed in section 19.5.

8 The Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry 2014, s.10. 9 Bao Jian Fa No. 39 [2016] issued on 11 May 2016 came into force on the same day (see

accessed on 16 October 2020). 10 The State Council is drafting the Regulation of Earthquake Catastrophe Insurance, but it is unknown when such a Regulation will be enacted. 11 The Ministry of Finance No. 38 [2017]; the Measures became effective on 1 June 2017 (see accessed on 16 October 2020).

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To implement the Notice of Issuing the Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes 2016 and to standardize the insurance industrial practice, the Insurance Association of China formulated the Model Insurance Clauses for Urban and Rural Residents Housing Earthquake Catastrophe Insurance (Trial Version) (hereinafter, the Model Insurance Clauses) on 8 June 2017.12 The Model Insurance Clauses are being used by insurance companies for urban and rural residents’ housing earthquake catastrophe insurance nationwide, particularly by the members of the China Urban and Rural Residential Building Earthquakes Catastrophe Insurance Pool. 19.3 The China Urban and Rural Residential Building Earthquakes Catastrophe Insurance Pool and the early development of the catastrophe insurance system On 16 April 2015, 40 insurers and five reinsurers jointly formed the China Urban and Rural Residential Building Earthquakes Catastrophe Insurance Pool (hereinafter, the CECIP). The formation of the CECIP is a useful exploration of the insurance industry for the establishment of a catastrophe insurance system. The CECIP has promoted the first trial of the earthquake catastrophe insurance system nationwide, marking a solid step forward in the construction of a catastrophe insurance system in China. The CECIP is an important part of the catastrophe insurance system. It undertakes the important functions of providing earthquake insurance services and participating in the sharing of disaster losses. It has the ability to improve the insurance protection needs of residents, enhance the ability of the insurance industry to coordinate its insurance operation and management of earthquake insurance among the members of CECIP, and improve the national comprehensive disaster management level. The important role of the CECIP is of great significance to the final operating effect of the earthquake insurance system in China. The CECIP is composed of property insurance companies which joined the CECIP on the principle of voluntary participation and risk sharing. As long as a property insurance company in China is established for more than three years, the solvency adequacy ratio in the latest quarter is more than 150%, and it has a relatively complete network of branches, strong service capabilities, and experience in underwriting and claims handling in earthquake business-related types of insurance, a property insurance company can apply to join the CECIP. As a country prone to natural disasters, China’s current catastrophe compensation mostly relies on state financial allocations and social assistance. The catastrophe insurance compensation of the entire insurance industry is less than 1% of the disaster losses, while the proportion for compensation of catastrophe losses in the world is generally 30 to 40% from the insurance industry. Under such circumstances, the establishment of a catastrophe insurance system in China will significantly alleviate the financial burden of the government. At the end of 2013, 12 The Insurance Association of China (see accessed on 16 October 2020).

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China’s catastrophe insurance system was introduced, and the CIRC approved Shenzhen and Yunnan as the first pilot areas of China’s catastrophe insurance.13 On 1 June 2014, the pilot catastrophe insurance was officially started in Shenzhen City. In 2016, the Shenzhen Municipal Government spent ¥36 million yuan to purchase a catastrophe insurance service from three commercial insurance companies. The maximum amount insured for each catastrophe was ¥2.5 billion yuan. This insurance service is used for personal injury and death relief and emergency transfer assistance for all personnel in Shenzhen when a catastrophe occurs. In addition to commercial insurance, the Shenzhen government also injected ¥30 million yuan in the first phase to set up a catastrophe fund to provide more comprehensive protection for the affected people.14 The catastrophe insurance pilot programme was also carried out in Chuxiong Prefecture, Yunnan. It mainly insured rural housing for earthquakes. Individuals voluntarily bought insurance policies paying ¥100 yuan premiums for an insured amount of ¥20,000 yuan. Ningbo City took the lead in piloting the first catastrophe insurance that provided protection for both life and property. The municipal government paid ¥38 million yuan to provide insurance coverage to 10 million permanent residents for property loss and for personal injury and death caused by typhoons, rainstorms, and floods.15 In April 2017, the CIRC and the China Earthquake Administration (CEA) entered a strategic cooperation agreement to create an earthquake catastrophe insurance system for the nation. The earthquake insurance system harnesses the private sector to support the government’s disaster relief operations and reduce the financial burden on the state for loss compensation. Both organizations cooperate closely to establish China’s earthquake risk and earthquake insurance laboratory, as well as manage disaster relief and promote the insurance system that is adapted to China’s circumstances. The partnership enhances China’s earthquake and disaster relief capabilities and creates a paradigm shift from a government assistance-dependent one to that of multisectoral collaboration. The Chinese insurance industry has been moving towards a market-driven approach to managing catastrophe risks.16 19.4 The Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes The State Council will enact the Regulation on Earthquake Catastrophe Insurance, but before the enactment of the Regulation, the practice and exploration of earthquake insurance need to be carried out. The Notice on Issuing the Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural 13 Yuhan Dong,“Forty five insurance companies set up CECIP”, People’s Daily, 28 April 2018 (see accessed on 16 October 2020). 14 Ibid. 15 Ibid. 16 Gabriel Olano, “China to form earthquake insurance system”, 10 Apr 2017 (see accessed on 16 October 2020).

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Residential Housing in Earthquakes 201617 was issued for the purpose of institutional implementation of the earthquake insurance system. It presents the current and detailed regulatory rules for earthquake insurance in China. It consists of five parts: the basic thought and implementation principles, the details of the scheme, the operation modes, the implementation procedures, and security measures. We consider these rules in detail now. 19.4.1 The basic thoughts and implementation principles (a) Basic thoughts The CBIRC and the Ministry of Finance (MOF) take the practical needs and long-term planning into overall consideration, launch catastrophe insurance products for urban and rural residential housing in earthquakes with the earthquake catastrophe insurance as the breakthrough, establish the China Urban and Rural Residential Building Earthquakes Catastrophe Insurance Pool (the CECIP), and promote the implementation of the catastrophe insurance system for urban and rural residential housing in earthquakes across the country so as to be beneficial to the people’s livelihood.18 (b) Implementation principles The principles of “government promotion, market operation, and people’s livelihood security” shall be followed.19 (1) Government promotion. The roles of governments shall be brought into full play and good institutional environment, legal environment, and policy environment shall be created for the establishment and stable operation of the earthquake catastrophe insurance system. The top-level design shall be planned, the framework of the earthquake catastrophe insurance system shall be formulated, the relevant legislation shall be researched, and the supporting policies shall be made. (2) Market operation.The decisive roles of market in the allocation of resources shall be brought into play, commercial insurance companies shall be guided in actively participating in establishing the earthquake catastrophe insurance system, and the management level of earthquake disaster risks of the whole society shall be improved. By bringing the advantages of commercial insurance companies in aspects of risk management, professional technology, service capacity, and business outlets into full play, commercial insurance companies shall provide underwriting and claim settlement services for earthquake catastrophe insurance. By utilizing the price adjustment roles of insurance products and by means of risk pricing and differential rates, commercial insurance companies shall guide society in improving

17 Bao Jian Fa No. 39 [2016]. 18 The Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes 2016, s.1(1). 19 Ibid., s.1(2).

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the anti-seismic quality of buildings and effectively spread risks by utilizing domestic and overseas reinsurance markets and capital markets. (3) People’s livelihood security. The people’s needs for earthquake disaster risk security shall be satisfied and disaster-affected areas shall be provided with economic compensation so as to accelerate recovery and reconstruction. The people’s basic security needs shall be satisfied by scientifically designing insurance products and rationally setting premium rates, fully expanding the security coverage, and effectively reducing the security costs. 19.4.2 The details of the scheme (a) The insurance subject matter and the coverage of risks Urban and rural residential housing shall be the insurance subject matter. By taking the diversity of China’s geographical conditions and differences in regional disasters and urban and rural residential housing into consideration, at the preliminary operation stage, in light of the actual circumstances of housing in all regions, housing that reaches the national building quality requirements (including the anti-seismic standards) and the indoor ancillary facilities shall be taken as the main insurance subject matter, and destructive earthquakes and secondary disasters caused thereby such as tsunami, fire, explosion, land subsidence, debris flow, and landslide shall be taken as the primary insurance coverage.20 (b) Insured amount At the preliminary operation stage, the insured amount shall be determined in light of the overall structure of residential housing in China, the average reconstruction costs, the level of post-disaster compensation and relief, and on the basis of differences in China’s urban and rural areas. The basic insured amount for urban residential housing per household shall be ¥50,000 yuan and for rural residential housing per household ¥20,000 yuan. Each household may negotiate with the insurance company in determining the insured amount as required by reference to the market value of its housing. In view of the development level of the insurance industry, at the preliminary operation stage, the maximum insured amount may not exceed one million yuan, and it shall be gradually increased according to the operation conditions in the future. The portion of insured amount exceeding one million yuan may be supplemented by the commercial insurance provided by the insurance company. Where a household owns multiple houses, each house shall be deemed as a household on the basis of its address, and the household may buy insurance for such multiple houses.21 (c) Insurance clauses and premium rates At the preliminary operation stage, the model clauses issued by the Insurance Association of China that are applicable to earthquake insurance for urban and rural residential housing across the country shall be the main clauses, which may 20 Ibid., s.2(1). 21 Ibid., s.2(2).

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separately serve as the main insurance or the additional insurance of the general household property insurance. Differentiated premium rates shall be set according to regional risks, building structures, and urban and rural differences and shall be adjusted at an appropriate time.22 (d) Handling of compensation Due to great differences between the market value of housing and the re-establishment value thereof in all localities, at the preliminary operation stage, insurance products shall be designed as valued insurance from the perspective of simplified operation and rapid popularization. In the settlement of claims, losses shall be evaluated subject to the insured amount, by reference to the national standards as formulated by the China Earthquake Administration, the Ministry of Civil Affairs, and other departments, and in light of the actual practice of rural housing insurance that has been carried out in all localities, and claims shall be settled by grades according to the following damage grades: where the subject matter is basically intact, the damage grade will be grade I or II, for which no compensation shall be made. Where the subject matter is moderately damaged, the damaged grade will be grade III, for which the compensation shall be determined as 50% of the insured amount. Where the subject matter is seriously damaged or completely destroyed, the damage grade will be grade IV or V, and losses shall be determined as 100% of the insured amount. Once determined, losses shall be calculated and compensated within the scope of the insured amount.23 19.4.3 Operation modes The operation modes of “integrating underwriting capacity, accumulating reserves year by year on a rollover basis, and rationally layering of losses” shall be adopted. (a) Operation mechanism Insurance companies with sufficient solvency and complete service outlets shall be selected as operating entities of earthquake catastrophe insurance to provide such services as earthquake catastrophe insurance sales, underwriting, and settlement of claims. By selling earthquake catastrophe insurance products, insurance companies shall centralize insurance premiums, set schemes for the layering of losses in response to earthquake disasters, and assume earthquake risks by layers. The special reserves for earthquake catastrophe insurance shall be calculated and set aside to serve as fund reserves for response to serious earthquake disasters.24 (b) Layering of losses Losses to urban and rural residential housing caused by earthquakes shall be assumed under the principle of “risk sharing and layered sharing”. The total quota shall be set in the scheme for the layering of losses; the policyholder, insurance 22 Ibid., s.2(3). 23 Ibid., s.2(4). 24 Ibid., s.3(1).

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company, reinsurance company, special reserves for earthquake catastrophe insurance, and government financial support shall assume losses in layers. As the purchaser of an earthquake catastrophe insurance product, the policyholder shall assume the first layer of losses in a small sum by means of retention. The insurance company engaging in earthquake catastrophe insurance shall assume the second layer of losses corresponding to the retained premiums of the earthquake catastrophe insurance.The reinsurance company participating in the reinsurance business of earthquake catastrophe insurance shall assume the third layer of losses corresponding to the ceded-in premiums of the earthquake catastrophe insurance. The special reserves for earthquake catastrophe insurance shall be withdrawn according to the specific management measures of the relevant departments and shall assume the fourth layer of losses, subject to the balance of such special reserves. Where a severe earthquake disaster occurs, and the losses exceed the quota of the four grades, the government financial support shall be provided or emergency funds such as catastrophe bonds shall be arranged to assume the fifth layer of losses. Where the financial support and other emergency funds arranged at the fifth layer fail to be fully in place, the insurance regulatory authority of the State Council shall, jointly with the relevant departments, report to the State Council for approval, initiate the proportional compensation call-back mechanism, and implement proportioned compensation for contracts on earthquake catastrophe insurance, within the total of accumulated quotas of losses of the four layers plus the financial support and emergency funds in place.25 At the preliminary operation stage, with the main thoughts of “control over the total amount and management within the quota”, on the one hand, the losses of one earthquake that may devastate the country nationwide shall be controlled within a prescribed quota so as to ensure that the insurance company, reinsurance company, and special reserves should assume such losses by layers, and on the other hand, regions with high earthquake risks shall implement the quota management of insurance sales so as to avoid the excess of earthquake catastrophe insurance indemnity over the total funds that can be raised at the aforesaid layers in case of a great earthquake disaster.26 (c) Operation guarantee (1) The role of the CECIP. In April 2015, 45 property insurance companies initiated and established the CECIP under the principle of “voluntary participation and risk sharing”.The CECIP may integrate the underwriting capacity of the insurance industry, set up a platform for services of the CECIP, develop standardized earthquake catastrophe insurance products, establish the uniform underwriting and claim settlement service standards to jointly respond to earthquake disasters, and accumulate and manage disaster information in a centralized manner.27

25 Ibid., s.3(2). 26 Ibid. 27 Ibid., s.3(3)(1).

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(2) Special reserves for earthquake catastrophe insurance are special reserves that are set aside specifically for enhancing the risk-withstanding capacity and responding to major disasters in the operation process of the earthquake catastrophe insurance system.These special reserves exercise such functions as inter-temporal risk sharing. The special reserves for earthquake catastrophe insurance shall be calculated and set aside at a prescribed proportion of premium income, subject to independent accounts and accumulation year by year on a rollover basis, and managed by special authorities. The withdrawal, accumulation, and use of the special reserves for earthquake catastrophe insurance shall be governed by the specific management measures as formulated by the financial departments.28 Currently, such special measures refer to the Measures for the Administration of the Special Reserve Fund for Urban and Rural Residents’ Earthquake Catastrophe Insurance 2017,29 which will be considered in detail in section 19.5. 19.4.4 Implementation procedure In light of the current actual circumstances, the catastrophe insurance system for urban and rural housing in earthquakes is to be implemented by steps and stages. With the future issuance of the Regulation of Earthquake Catastrophe Insurance (the Regulation) as the dividing point, there are two stages. (a) Stage one Before the issuance of the Regulation, the catastrophe insurance products for residential housing in earthquakes shall be sold to urban and rural residents. Insurance companies shall sell insurance products, assume insurance liabilities, and provide claim settlement services. At the same time, studies are conducted in respect of the establishment of the system of special reserves for earthquake catastrophe insurance. Insurance companies are allowed to withdraw the special reserves, realize the inter-year accumulation of the special reserves, and authorize a specialized regulatory authority (for instance, China Insurance Security Fund Co., Ltd.) to establish special accounts for management of the special reserves. Information on the operation of the earthquake catastrophe insurance system shall be summarized and assessed, the scale of premiums for the subsequent year shall be calculated, and products, services, and operation of the earthquake catastrophe insurance system shall be further improved.30 At this stage, local governments shall be encouraged to expand the coverage of earthquake risk security through rural housing insurance and other insurance products and achieve the effective linkage with the catastrophe insurance for urban and rural residential housing in earthquakes. At the same time, studies shall be conducted to launch earthquake catastrophe insurance products adapting to the existing 28 Ibid., s.3(3)(2). 29 The Ministry of Finance No. 38 [2017]. 30 The Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes 2016, s.4(1).

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pilot programmes of rural housing insurance and local catastrophe insurance, and the aforesaid business lines shall be gradually incorporated into the building of China’s catastrophe insurance system.31 For example, the Sichuan Province Governmental Office issued the Sichuan Province Urban and Rural Resident Housing Earthquake Insurance Pilot Programme Plan 2015,32 which started in April 2015. This example of carrying out the earthquake insurance pilot programmes will be further considered in section 19.7. (b) Stage two After the issuance of the Regulation, the operation modes and framework of the earthquake catastrophe insurance system shall be improved. Historical operation data shall be calculated, the schemes for the layering of losses shall be optimized, and the security capacities shall be improved. Under the guidance of the Regulation, the operation modes of the catastrophe insurance system for urban and rural residential housing in earthquakes shall be further improved.33 19.4.5 Security measures (a) The speed-up of the process of legislation for earthquake catastrophe insurance The legislation for the catastrophe insurance system is the key to securing the implementation of various measures in catastrophe insurance systems in countries in the world. The establishment and implementation of the catastrophe insurance system must rely on a good legal system. It is necessary to accelerate the issuance of the Regulation and provide legal guarantees for the implementation of the catastrophe insurance system for urban and rural residential housing in earthquakes.34 (b) The establishment of a leading group for the implementation of the system Multi-sector cooperation is required for promoting the catastrophe insurance system for urban and rural residential housing in earthquakes. In order to strengthen communication and coordination, and overall management, the CBIRC and the MOF shall take the initiative in establishing a leading group for the implementation of the system jointly with the relevant departments, with the office set up in the Property and Casualty Insurance Supervision Department of the CBIRC, and shall be responsible for promoting the implementation of the system. The interdepartmental coordination and cooperation mechanism shall be established, and

31 Ibid. 32 Sichuan Government Office No. 84 [2015] issued on 28 April 2015 became effective on the same day (see accessed on 16 October 2020). 33 The Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes 2016, s.4(2). 34 Ibid., s.5(1).

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communication, coordination, and cooperation shall be strengthened so as to promote the effective linkage between commercial insurance and social security, the mutual integration between insurance services and social governance, and the close combination of commercial mechanisms and government administration. An information sharing mechanism shall be established so as to gradually realize data sharing of earthquakes and other disasters and improve the risk screening level and risk management capacity.35 (c) The formulation of the measures for the management of special reserves At the preliminary operation stage, the MOF shall formulate measures for the management of special reserves for earthquake catastrophe insurance and realize the inter-temporal accumulation and inter-regional overall planning. China Insurance Security Fund Co., Ltd. shall temporarily open special accounts for managing such special reserves.36 (d) Encouragement of providing fiscal and tax policy support In order to enhance the public’s enthusiasm for purchasing insurance products, expand the coverage of the catastrophe insurance for urban and rural residential housing in earthquakes, and realize the important functions of spreading risks and safeguarding the people’s livelihood, the local financial departments shall be encouraged to give premium subsidies to the public for their purchase of catastrophe insurance products for urban and rural residential housing in earthquakes and give tax preferences to earthquake catastrophe insurance products in accordance with the relevant provisions of the state tax laws and regulations.37 (e) Sources integration to improve the level of disaster prevention and loss mitigation The local governments at the regions with higher occurrence of risks shall be encouraged to formulate supporting policies for the earthquake catastrophe insurance system, positively explore various effective patterns for increasing the coverage of the earthquake catastrophe insurance, and gradually expand the coverage. Insurance companies shall be encouraged to establish effective linkage between their own service systems and governments’ disaster relief systems and enhance the survey and loss assessment efficiency of the insurance industry by virtue of the relevant system resources of governments.The catastrophe insurance database shall be established, the fortification standards for buildings and infrastructure shall be improved, prior risk prevention and interim risk control shall be strengthened, and the national comprehensive disaster prevention and relief system shall be further improved. At the same time, publicity and education about the earthquake catastrophe insurance system shall be strengthened so as to raise the awareness of the whole society of utilizing the insurance mechanism to spread risks and enhance the risk management capacities of the whole society.38 35 36 37 38

Ibid., s.5(2). Ibid., s.5(3). Ibid., s.5(4). Ibid., s.5(5).

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19.5 The Measures for the Administration of the Special Reserve Fund for Urban and Rural Residents’ Earthquake Catastrophe Insurance The Measures for the Administration of the Special Reserve Fund for Urban and Rural Residents’ Earthquake Catastrophe Insurance (the Measures 2017)39 are composed of 21 articles in five chapters: general provisions, the setting aside of reserve for earthquake insurance, the use of reserve funds for earthquake insurance, management of reserve fund for earthquake insurance, and supplementary provisions. 19.5.1 The general provisions The term “earthquake insurance reserve” in the Measures 2017 refers to a special reserve fund to deal with residential earthquake insurance losses which is set aside by residential earthquake insurance institutions in accordance with relevant laws and regulations and these Measures.40 The Measures 2017 is applicable to the residential earthquake insurance business conducted by the member companies of the CECIP in accordance with the provisions of the Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes.41 The management of the residential earthquake insurance reserve fund follows the following principles:42 (1) Separate accounting. The member companies set aside a residential earthquake insurance reserve fund in accordance with the provisions of these Measures, use the residential earthquake insurance reserve, and conduct independent accounting in accordance with the relevant accounting regulations. (2) Separate setting aside of the reserve. The headquarters and provincial branches of member companies operating the residential earthquake insurance business shall set aside separate reserve for residential earthquake insurance in accordance with the provisions of these Measures. (3) Unified use of the reserve. The reserve funds for residential earthquake insurance provided by member companies shall be used as a whole by the CECIP in order to jointly deal with the risk of residential earthquakes. (4) Centralized management. The reserve funds for residential earthquake insurance accrued by member companies shall be appropriately handed over to market-oriented institutions for centralized management and shall be subject to the supervision of relevant departments according to law.

39 The Ministry of Finance No. 38 [2017]. The Measures came into force on 1 June 2017. 40 The Measures for the Administration of the Special Reserve Fund for Urban and Rural Residents’ Earthquake Catastrophe Insurance 2017, art.2. 41 Ibid., art.3. 42 Ibid., art.4.

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19.5.2 The setting aside of reserve for earthquake insurance A member company shall, according to the provisions of the Measures 2017, set aside a residential earthquake insurance reserve fund according to a certain percentage from the premium income of residential earthquake insurance, roll it over year by year, and show it separately in the annual financial statements.43 The member company sets aside the residential earthquake insurance reserve fund at 15% of the residential earthquake insurance premium income. Before 1 May each year, the MOF will work with the relevant departments to adjust the withdrawal ratio based on the previous year’s residential earthquake insurance development, reserve accumulation balance, and so on.44 When the rollover amount of the earthquake insurance reserve of a member company reaches the upper limit of the single accident retention liability of the earthquake insurance liability it has not completed, it may be suspended from setting aside. If the rollover balance is reduced due to payment of compensation, or the upper limit of the retention liability for a single accident is raised, the setting aside shall be resumed.45 The member companies shall, in accordance with the provisions of the Measures 2017, complete the setting aside of the reserve of the previous year before the end of June every year, roll over each year, and gradually accumulate the ability to deal with earthquake risks.46 19.5.3 The use of reserve fund for earthquake insurance The special reserve fund for residential earthquake insurance is used to make up for the risk loss of residential earthquake insurance. When a member company uses the housing earthquake insurance reserve fund, it shall perform relevant internal procedures.47 When a member company operates a residential earthquake insurance business, if a major earthquake disaster occurs and the amount of compensation payable exceeds the sum of the direct insurance limit and the reinsurance limit that CECIP should bear in that year, the residential earthquake insurance reserve fund may be used.48 The use of the residential earthquake insurance reserve fund shall be limited to the sum of the amount of compensation payable that exceeds the sum of the direct insurance limit and the reinsurance limit that the CECIP should bear in that year. The member companies shall, through reinsurance or other catastrophic riskspreading mechanisms, bear the contractual liability for compensation in accordance with the regulations and pay the insurance indemnity in full in a timely manner.49

43 44 45 46 47 48 49

Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11.

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19.5.4 Management of reserve fund for earthquake insurance The residential earthquake insurance reserve management agency shall, in accordance with the principles of special account management and independent accounting, strengthen the management of the residential earthquake insurance reserve fund.50 The earthquake insurance reserve which has been set aside by a member company in the current period shall be listed in the cost and included in the current profit and loss.51 If a member company no longer operates residential earthquake insurance business, the residential earthquake insurance reserve provided by it shall be used by the CECIP as a whole.52 The residential earthquake insurance reserve management agency shall, in accordance with the relevant regulations on the use of insurance funds, prudently carry out the use of the residential earthquake insurance reserve fund, and the proceeds from the use of funds shall be included in the management of the special account for the residential earthquake insurance reserve fund.53 The CECIP and its member companies shall formulate the detailed implementation rules for the management of the residential earthquake insurance reserve. The residential earthquake insurance reserve management agency shall formulate measures for the management of the residential earthquake insurance reserve and report it to the MOF and the CBIRC.54 Before the end of June every year, the executive agency of the CECIP shall summarize the collection, use, and management of the residential earthquake insurance reserves of all member companies and report to the MOF and the CBIRC. The residential earthquake insurance reserve management agency shall report the management situation of the reserves to the MOF and CBIRC.55 The financial and insurance regulatory authorities at all levels shall supervise the provision, management, and use of the reserves according to law.56 A member company shall strengthen disaster prevention and loss mitigation with relevant parties and improve the mechanism of earthquake catastrophe risk spreading through reinsurance and other means. The member companies should be encouraged to spreading the risk of earthquake catastrophe through multiple channels, such as catastrophe bonds.57 All localities may, in light of the actual local situations, explore and improve the risk-spreading mechanism of residential earthquake insurance in the local area on the basis of the Measures 2017.58

50 51 52 53 54 55 56 57 58

Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19. Ibid., art.20.

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19.6 The Model Insurance Clauses for Urban and Rural Residents’ Housing Earthquake Catastrophe Insurance The Model Insurance Clauses for Urban and Rural Residents’ Housing Earthquake Catastrophe Insurance formulated by the Insurance Association of China in 2016 are being used by all member companies of CECIP. In this section, we consider the Model Insurance Clauses in detail. 19.6.1 Insurance subject matter The insurance contract consists of insurance clauses, insurance proposal form, insurance policy, insurance certificates, and approval documents. Any agreement concerning this insurance contract shall be in written form.59 The insurance subject matters in this insurance contract are the residential housing and indoor ancillary facilities at the address stated in the insurance policy, excluding interior decoration, indoor property, and ancillary buildings. Indoor auxiliary facilities refer to the heating, sanitation, water supply, gas pipeline, and power supply facilities fixed inside the house. Ancillary buildings refer to the walls, courtyard doors, garages, storage sheds or storage rooms, swimming pools, courts, fountains, ponds, and livestock rooms that are attached to the exterior of the house or independent of the house.60 The address of the insurance subject of the insurance policy shall be filled out in accordance with the relevant legal and valid certificates of the state’s immovable property rights and the relevant latitude and longitude.61 The following properties are not within the scope of the insurance subject matters:62 (1) Houses requisitioned or occupied by relevant government departments; (2) Houses dedicated to industrial and commercial production and business activities; (3) House under construction; (4) Illegal buildings, dangerous buildings, temporary houses; (5) Houses in an emergency and dangerous state; (6) Houses with reed mats, straw, linoleum, wheat straw, reeds, bamboo poles, canvas, plastic cloth, cardboard, and so on, as the external wall structure. 19.6.2 Insurance liabilities During the insurance period, where the insured subject matter of this contract incurs direct losses to the damage level as stipulated in art. 26 of this contract due to the following causes, the insurer shall be liable for indemnifying the losses in accordance with this insurance contract:63 59 The Model Insurance Clauses for Urban and Rural Residents’ Housing Earthquake Catastrophe Insurance 2016, art.1. 60 Ibid., art.2. 61 Ibid., art.3. 62 Ibid., art.4 63 Ibid., art.5.

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Destructive earthquakes (earthquakes issued by the National Earthquake Administration with a magnitude greater than M4.7 (inclusive) and with a maximum seismic intensity of Ⅵ and above) vibrations and the resulting tsunami, fire, volcanic eruption, explosion, ground subsidence, ground fissure, flooding caused by mudslides, landslides, dammed lakes, and dam breaks. The loss to the insurance subject due to one or more earthquakes (aftershocks) within 168 consecutive hours shall be regarded as a single accident. 19.6.3 Exemptions from liability The insurer is not liable for compensation for losses and expenses caused by the following:64 (1) The policyholder, the insured and their family members, family employees, or temporary residents intentionally cause damage or collapse of the house; (2) Nuclear radiation, nuclear explosion, nuclear pollution, and other radioactive pollution; (3) Administrative acts or judicial acts. The insurer is not liable for compensation for the following losses and expenses:65 (1) Any indirect losses caused by the insurance accidents suffered by the insurance subject; (2) Self-destruction caused by the defect or improper use of the insurance subject; (3) The self-loss caused by the deterioration, mildew, moisture, insect bites, natural abrasion, natural wear, spontaneous combustion, and baking of the insurance subject; (4) According to the damage grade determined in art. 25 of this insurance contract, the damage grade of the house is Grade I (basically intact) or Grade II (minor damage). 19.6.4 The insured amount and insurance premium The insured amount shall be determined through consultation between the parties to the contract (ten thousand yuan as the minimum unit), and stated in the insurance contract. The minimum shall not be less than the following amount: (1) Urban housing, ¥50,000 yuan; and (2) Rural housing, ¥20,000 yuan. Where the proposer applies to the insurer for urban and rural residents’ housing earthquake catastrophe insurance to cover the same insurance subject, the cumulative maximum insured amount cannot exceed one million yuan and the excess of one million yuan is invalid:66 Annual insurance premium = insured amount × annual base rate × regional adjustment factor × building structure adjustment factor.67 Unless otherwise stipulated in the contract, the insurance period of this insurance contract is one year, subject to the start and end time stated in the insurance policy.68

64 65 66 67 68

Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10.

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19.6.5 Insurer’s obligations After the conclusion of this insurance contract, the insurer shall issue an insurance policy or other insurance certificate to the insured in a timely manner.69 If the insurer believes that the proof and information related to the claim provided by the insured is incomplete according to the provisions of the insurance contract, it shall notify the proposer and the insured in a timely manner and ask them to provide supplementary information.70 After receiving claims from the insured, the insurer shall determine in a timely manner whether there is an insurance liability and notify the insured of the determination result. For losses covered by the insurance contract, the insurer shall pay the indemnity to the insured within ten days after reaching an agreement with the insured.71 According to art.48 of the Law of the People’s Republic of China on Earthquake Preparedness and Disaster Mitigation,72 in areas declared to be in an earthquake emergency period, from the date of declaration to the date when the relevant department makes a decision to revoke the earthquake emergency period, if the proposer applies for renewal of the insurance policy, the insurer shall effect the renewal.73 An insurer shall not increase insurance premiums or terminate an insurance contract within the time and area specified in art.14 as mentioned earlier.74 When an insurance accident occurs, members of the CECIP follow the principle of “event triggering, centralized deployment, focus on timeliness, and operational compliance”, organize claims service from the top to the bottom of the CECIP, and at the same time, accept claim reports from the insured.75 19.6.6 The obligation of the proposer and the insured The proposer shall perform the obligation of truthful disclosure, truthfully answer the insurer’s inquiries about the subject matter of the insurance or of the insured, and fill out the insurance proposal form truthfully.76 The proposer shall not apply to different insurers for insurance against earthquake catastrophe insurance for urban and rural residential houses for the same insurance subject matter.77

69 Ibid., art.11. 70 Ibid., art.12. 71 Ibid., art.13. 72 Article 48 provides that after the forecasts on an earthquake are issued, the people’s governments of the relevant provinces, autonomous regions, and municipalities directly under the Central Government may declare that the relevant area has entered the emergency period of earthquakes; the relevant local people’s governments shall organize the relevant departments to do emergency response according to the earthquake emergency plan preparation for earthquake prevention and earthquake relief. 73 The Model Insurance Clauses for Urban and Rural Residents’ Housing Earthquake Catastrophe Insurance 2016, art.14. 74 Ibid., art.15. 75 Ibid., art.16. 76 Ibid., art.17. 77 Ibid., art.18.

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Unless otherwise agreed by both parties to the contract, the proposer shall pay the insurance premium at the time when the insurance contract is concluded.78 The insured shall abide by the relevant national laws, regulations, and provisions on fire protection and safety, strengthen management, take reasonable preventive measures to avoid or reduce the occurrence of insurance accidents, and maintain the safety of the insurance subject.79 During the insurance period, if the ownership of the subject matter insured is transferred to another person, the insured or the transferee shall have the duty to notify the insurer in writing within 90 days (inclusive) of the transfer of ownership and go through the procedure of terminating the insurance contract or changing of the insured under the same insurance contract.80 In the event of occurrence of the insurance accident, the insured shall make effort to take necessary and reasonable measures to prevent or mitigate losses while ensuring the personal safety.81 If the loss is within the scope of insurance liability and should be compensated by the relevant responsible party, the insured shall exercise or reserve the right to request compensation from the responsible party. When the insurer exercises the right of subrogation to request compensation from the relevant responsible party, the insured shall provide the insurer with the necessary documents and the relevant information known to him or her.82 When requesting compensation, the insured shall provide the insurer with the claim application form completed by the insured or his or her representative and other materials relevant to the claim.83 19.6.7 Claims handling and settlement When the insurance subject is damaged due to earthquake, the insurer or a claim professional with the consent of the insurer shall, in accordance with the “National Standard for Building (Structure) Earthquake Destruction Grades GB / T 243352009”, determine the loss. The claims shall be settled according to the grade of the damage.84 For losses within the scope of insurance liability under this contract, the insurer shall determine the losses according to the following standard according to the grade of the damage determined in art. 25: (1) When the damage grade of the insurance subject is level III (medium damage), the loss shall be determined according to 50% of the insured amount; (2) When the damage grade of the insurance subject is level IV (serious damage) and level V (destruction), the loss shall be determined according to 100% of the insured amount.85 78 79 80 81 82 83 84 85

Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26.

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When a loss occurs within the scope of insurance liability, the insurer shall calculate the compensation within the insured amount according to the loss determined in accordance with art.26 of this insurance contract.86 When an insurance accident occurs, if there is double insurance for urban and rural residents’ earthquake catastrophe insurance, each insurer shall be liable to pay the insurance monies according to the ratio of its insured amount to the total insured sum. The sum of the maximum amount to be paid shall not exceed the upper limit of the insured amount as stipulated in art.8 of this insurance contract (i.e. the maximum limit is one million yuan).87 Where partial loss of the subject matter insured occurs after the insurer performs the obligation of compensation, the insured amount of this insurance contract shall be reduced correspondingly according to the insurer’s compensation amount from the date of the loss, and the insurer shall not refund the insurance premium corresponding to the reduced amount. If the proposer requests to recover the original insured amount, the insurance premium calculated on a daily basis from the recovery date requested by the insured to the expiration date of the insurance period shall be paid separately at the originally agreed insurance rate, and the insurer shall issue an endorsement note.88 Except for the circumstances stipulated in art.28 of this insurance contract, where an insurance event occurs to the insurance subject matter, if there are other insurance contracts that shall be liable for compensation at the same time, the insurer shall pay the insurance monies first in accordance with the insured amount of this insurance contract.89 19.6.8 Dispute resolution and applicable law The dispute resolution method of this insurance contract shall be agreed by the parties in this insurance contract to choose one of the following two methods: (1) Disputes arising from the performance of this insurance contract shall be resolved through consultation between the parties. If the negotiation fails, the arbitration committee stated in the insurance policy shall resolve the dispute by arbitration; (2) Disputes arising from the performance of this insurance contract shall be resolved through negotiation between the parties. If the negotiation fails, the people’s court stated in the insurance policy shall resolve the dispute according to law.90 All disputes related to this insurance contract and the performance of this insurance contract shall be governed by the laws of the People’s Republic of China (excluding the laws of Hong Kong SAR, Macao SAR, and Taiwan region).91

86 87 88 89 90 91

Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid., art.32.

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19.6.9 Other matters During the insurance period, the insurer shall not increase insurance premiums or cancel this contract due to changes in the earthquake risk of the insurance subject matter.92 After the insurance liability begins, if the proposer requests to cancel the insurance contract, the insurance contract shall be cancelled from the date of notification to the insurer. The insurer shall retain the premium paid for the period from the date of the starting of the insurance liability to the date of cancellation. The insurance premium is calculated on a daily basis and the remaining insurance premium is refunded to the proposer.93 If the subject matter insured suffers a total loss, the insurer shall perform the obligation of compensation for the loss and the contract is terminated after performing the compensation obligation. If the loss does not belong to the insurance liability, the insurance contract shall be terminated, and the insurer shall retain the premium paid for the period from the date of the starting of the insurance liability to the date of termination. The insurance premium is calculated on a daily basis and the remaining insurance premium is refunded to the proposer.94 The Model Insurance Clauses also provide interpretations of terms in the contract which are not mentioned here. 19.7 Earthquake insurance practice in Sichuan Province Having considered the regulations on earthquake insurance and the Model Insurance Clauses of earthquake insurance for households, we now take a look at a practical example of earthquake insurance in Sichuan Province, which is one of the earthquake-prone provinces in China. 19.7.1 The earthquake insurance practice at provincial level Sichuan province takes two steps for the establishment of an earthquake insurance system. The first step is to carry out a pilot programme at certain cities, and the second step is to implement the system in the whole province. On 28 April 2015, the General Office of the Sichuan Provincial Government published the Notice on Issuing the Work Plan for the Pilot Programme of Earthquake Insurance for Urban and Rural Residents in Sichuan Province 2015.95 The Notice requires establishing the Sichuan Earthquake Insurance Fund and a multilayered risk sharing mechanism. The pilot programme was then carried out at four cities and prefectures (Leshan, Mianyang, Ganzi, and Yibin). In 2016, at the four cities and prefectures, earthquake insurance covered 758,500 urban and rural households with insured amount of ¥19.78 billion yuan. Among the total 5.287

92 93 94 95

Ibid., art.33. Ibid., art.34. Ibid., art.35. Sichuan Government Office No. 84 [2015].

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million households in four cities and prefectures, 14.4% of the total households were insured.96 After the successful completion of the pilot programme, on 15 May 2017, the General Office of the Sichuan Provincial Government published the Notice on Issuing the Work Plan for the Earthquake Catastrophe Insurance for Urban and Rural Residents in Sichuan Province 2017.97 Since then, the earthquake insurance system has been carried out in the whole province. From 1 July 2017 to 30 June 2018, the Sichuan earthquake catastrophe insurance accumulatively insured 1.643 million households with a total insured amount of ¥42.2 billion yuan and premium income of ¥71.03 million yuan. The total underwriting coverage of 15 cities and prefectures in the province reached 9.1%.98 Through the efforts over the years, the earthquake catastrophe insurance system in Sichuan has been established. The earthquake insurance system is an innovative system designed with five layers of risk assumption, that is, the layer of the insured, the layer of direct insurance, the layer of reinsurance, the layer of earthquake insurance fund, and the layer of government emergency plan.99 (1) The first layer. The insured himself or herself shall bear part of the deductible loss. (2) The second and third layers. The province’s annual total insurance compensation is not more than ¥800 million yuan or eight times the premium received in the year (whichever is higher); the direct insurance companies and the reinsurance companies shall bear the insurance compensation in the following proportions: where the province’s annual total insurance compensation is not more than ¥800 million yuan, the direct insurance companies shall bear the part of the province’s annual total insurance compensation of no more than ¥480 million yuan, and the reinsurance companies shall bear the part of the province’s annual total insurance compensation of more than ¥480 million yuan but not more than ¥800 million yuan. Alternatively, where the province’s annual total insurance compensation is eight times the premium received in the year, the direct insurance companies shall bear the part of the province’s annual total insurance compensation of not more than 4.8 times the actual premium received in the year, and the reinsurance companies shall bear the part of 4.8 to eight times of the actual premium received in the year. (3) The fourth layer. Where the province’s annual total insurance compensation is higher than ¥800 million yuan or eight times the premiums received in

96 Sichuan Earthquake Administration, 20 November 2018 (see accessed on 16 October 2020). 97 Sichuan Government Office No. 97 [2017]; Sichuan Government website (see accessed on 16 October 2020). 98 Sichuan Earthquake Administration, 20 November 2018 (see accessed on 16 October 2020). 99 Notice on Issuing the Work Plan for the Earthquake Catastrophe Insurance for Urban and Rural Residents in Sichuan Province 2017, s.2(2).

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the year (whichever is higher), the earthquake insurance reserve fund shall be used for making compensation. If the province’s annual total insurance compensation exceeds the sum of the compensation limits of direct insurance companies and reinsurance companies and the balance of the earthquake insurance reserve fund after being reviewed by the leading group and reported to the provincial government for approval, the compensation ratio call-back mechanism will be started, and proportional compensation will be made according to the ratio of the total capacity of solvency to the total insurance loss. (4) The fifth layer. The last safety net is the government emergency plan. After the earthquake, the government will implement rescue in accordance with the Regulations on Natural Disaster Relief.100 This multilayered risk sharing mechanism established by the Sichuan catastrophe insurance scheme is the first catastrophe insurance scheme under the multilayered risk sharing mechanism in China. It is the first province in the country to realize the advanced approach of introducing commercial insurance in the government’s earthquake disaster reduction plan. After the scale of the earthquake insurance system in the province is further expanded, the respective responsibilities of each layer will be adjusted in due course.101 The governmental subsidization to the earthquake insurance system can be seen later. 19.7.2 The earthquake insurance practice at the level of cities and counties In 2015, Yichuan City became the first batch of earthquake catastrophe insurance pilot areas in Sichuan Province. In September 2017, the Office of the People’s Government of Yibin City officially issued the Notice on Issuing the Implementation Plan for Earthquake Catastrophe Insurance for Urban and Rural Residents in Yibin City. The City adheres to the principles of “government guidance, market operation, voluntary participation, financial support, and protection of people’s livelihood” and comprehensively carries out insurance for earthquake catastrophes throughout the city. The Implementation Plan stipulates that first, about 30% of urban and rural houses should be insured in the first year, and this participation rate should be gradually increased. The houses of old people in rural areas, urban and rural lowincome people, and impoverished or disabled persons should all be insured. Second, for urban residential houses, the insured amount is ¥50,000 yuan per household, and the premium is ¥27 yuan; for rural residential houses, the insured amount is ¥20,000 yuan per household, and the premium is ¥38 yuan. Third, ordinary urban and rural residents bear 40% of the premium cost, and the rest is subsidized by 100 The State Council Order No. 577 [2010] (see accessed on 16 October 2020). 101 Notice on Issuing the Work Plan for the Earthquake Catastrophe Insurance for Urban and Rural Residents in Sichuan Province 2017, s.2(2).

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the provincial, municipal, and county finance in the ratio of 3: 1.5: 1.5. For old people in rural areas, urban and rural low-income people, and impoverished or disabled persons, the premium cost is fully borne by the government finance, and the three levels of finance of provinces, cities, and counties are allocated according to the ratio of 5: 2.5: 2.5.102 The Implementation Plan issued by the Yibin municipal government also stipulates that insured residents can refer to the market value of the house and negotiate with the insurance company to determine the insured amount. The insurance premiums beyond the basic insured amount shall be borne by the insured himself or herself. The cumulative maximum insured amount for the same insurance subject matter shall not exceed one million yuan, and the excess over one million yuan shall be invalid. The maximum insured amount varies on the basis of the construction of the houses. The maximum insured amount can be one million yuan for the house with steel-concrete structure, ¥100,000 yuan for brick and wood structure, and ¥60,000 yuan for other structures (such as adobe).103 On 17 June 2019, a 6.0 on the Richter Scale magnitude earthquake occurred in Changning County, Yibin City, Sichuan Province. Fortunately, Yibin City was well prepared for the earthquake disaster. According to the data released by the Sichuan Banking and Insurance Regulatory Bureau on 18 September 2019, Yibin City insured a total of 115,684 households for earthquake catastrophe, with the total insured amount of ¥2.94 billion yuan, of which 13,600 households were insured in Changning County with the insured amount of ¥360 million yuan. If the house was damaged in the earthquake and satisfied the conditions for the claims, the maximum insurance compensation was ¥20,000 to ¥50,000 yuan per household.104 19.7.3 Improvement of earthquake insurance system in the future Since the start of the earthquake catastrophe insurance programme in Sichuan province, it has provided strong catastrophe risk protection for grassroots people in 15 cities and prefectures in the province. However, the catastrophe insurance work still has problems, such as uneven distribution at cities and prefectures, uneven work progress at districts and counties, lack of enthusiasm of some grassroots governments, and difficulty in underwriting special preferential groups in some areas. These problems have to some extent restricted the in-depth advancement of the earthquake disaster insurance for urban and rural households.105 In order to further promote the earthquake insurance system, further work needs to be done in two respects.106

102 The CBIRC, Sichuan Bureau, 29 September 2019. 103 The CCTV News, 18 June 2019 (see accessed on 16 October 2020). 104 Songhui Han, “Yibin earthquake housing damage is compensated, nearly 120,000 households are protected with insured amount of more than ¥2.9 billion yuan”, Shanghai Security News, 18 June 2019 (see accessed on 16 October 2020). 105 Sichuan Earthquake Administration, 20 November 2018 (see accessed on 16 October 2020). 106 Ibid.

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First, it is necessary to strengthen the policy support (subsidization) and policy promotion to grassroots governments. Sichuan earthquake disaster-prone areas are all economically undeveloped areas. Residents in these areas have limited income levels, weak purchasing power, and thus need more financial support for the catastrophe insurance system. Practice has shown that in all areas where catastrophe insurance is well developed, the grassroots government plays an important role in it. It is necessary to further strengthen the policy promotion of the grassroots government and rely on the strong support of local governments at all levels to improve the efficiency of public resource input to the system. Second, attention must be paid to social publicity. The key to improving the stability of the catastrophe insurance system is to expand underwriting coverage. At present, the coverage of catastrophe insurance in grassroots areas is not high enough. In addition to relying on the support of grassroots governments, it is also closely related to long-term unremitting social publicity. Only through extensive social publicity can social forces to participate in catastrophe insurance be mobilized to enhance the extent of commercial insurance participation in disaster prevention, mitigation, and relief. 19.8 Earthquake insurance systems in other countries 19.8.1 New Zealand Earthquake Commission Earthquakes occur frequently in New Zealand, as the country is situated in the collision zone between the Indo-Australian and Pacific tectonic plates, part of the Pacific Basin Ring of Fire, where many earthquakes and volcanoes occur. New Zealand’s nickname as the “Shaky Isles” is well deserved, with the monitoring organization, Geonet, recording more than 15,000 earthquakes per year, although only about 150 of those are usually felt.107 New Zealand operates a government-managed pool, the Earthquake Commission (EQC). Coverage for damage to land and buildings caused by earthquakes is provided under a statutory scheme, but only for residential buildings insured privately against fire. The Earthquake and War Damage Act 1944, which developed from the scheme of compulsory insurance for war damage introduced in New Zealand in 1941 (based upon the UK’s War Damage Act 1941), laid the foundation for the present scheme. The governing legislation is now the Earthquake Commission Act 1993 (1993 Act),108 supplemented by the Earthquake Commission Regulations

107 Robert Merkin, “The Christchurch Earthquakes Insurance and Reinsurance Issues” (2012) Canterbury Law Review, 18, 119–154. 108 The Earthquakes Commissions Act 1993 (see accessed on 16 October 2020). The functions of the Commission are – (a) to administer the insurance against natural disaster damage provided under this Act: (b) to collect premiums payable for the insurance provided under this Act: (c) to administer the Fund and, so far as is reasonably practicable, protect its value, including by the investment of money held in the Fund: (d) to obtain reinsurance in respect of the whole or part of the insurance provided under this Act:

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1993 (1993 Regulations).109 The 1993 Act removed war damage from the list of compulsory perils but extended the scheme to other natural disasters, namely, earthquake, natural landslip, volcanic eruption, hydrothermal activity, tsunami, storm or flood; in the case of residential land only, storm or flood and any fire consequential upon another natural disaster.110 A person obtaining fire insurance on residential buildings is “deemed” to be covered by EQC.There is no contractual relationship between the insured and the EQC, which means that the arrangement is not a contract of insurance as such but rather a statutory arrangement, so that the protective measures in respect of insurance contracts contained in the Insurance Law Reform Act 1977 (for example, against forfeiture in the event of a late claim) have no application. The “deemed” insurance applies to two different forms of loss.111 The first is against natural disaster damage to the buildings themselves, for their replacement value.112 The sum recoverable is based on the terms of the fire policy and is the lesser of any specified replacement sum; if there is no replacement sum specified, the sum insured, although that sum may not be less than NZ$1,000 per square metre; or in the case of a building with more than one dwelling, NZ$100,000 for each dwelling disclosed to the insurers prior to the making of the contract. A per-dwelling excess of NZ$200 has to be borne for all damage occurring within any one 48-hour period (7 days in the case of fire).113 The second is against damage to residential land, consisting of the total of the value of that portion of the site which exceeds the minimum allowable size at the date of the damage plus, bridges, culverts, and retaining walls which are necessary for the support of the building,114 subject to a per dwelling excess of NZ$500 or 10% of the value of the land, capped at NZ$5000. The deemed insured sums are low and are based on 1994 values, the effect of inflation being that the cover is something around 50% in real terms of the 1994 figure. The insured will typically take out their own insurance on buildings and contents, although not the land itself. Typically, therefore, the value of the land, or at least a small part of it, is covered by the EQC, and the cost of repairing the buildings is taken up by the EQC, with any balance above NZ$100,000 falling to private insurers.115 Under s.22 of the 1993 Act, taking out the EQC insurance cover against natural disaster damage is voluntary. On application made by any person having an

(e) (f)

to facilitate research and education about matters relevant to natural disaster damage, methods of reducing or preventing natural disaster damage, and the insurance provided under this Act: such other functions as may be conferred on it by – (i) this Act or any other Act; or (ii) the Minister, in accordance with section 112 of the Crown Entities Act 2004.

109 The Earthquake Commission Regulations 1993. 110 The Earthquake Commission Act 1993. 111 Personal property used to be insured under s.20 of the 1993 Act, but s.20 was repealed on 1 July 2019, by s.9 of the Earthquake Commission Amendment Act 2019 (2019 No 1). 112 1993 Act, s.18. 113 1993 Act, sch 3, para 1; 1993 Regulations, reg 4. 114 1993 Act, s.19. 115 Robert Merkin, “the Christchurch Earthquakes Insurance and Reinsurance Issues” (2012) Canterbury Law Review, 18, 119–154.

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insurable interest in any residential building or residential land, the Commission may enter into a contract to insure that building or land under this Act against natural disaster damage for such period and to such amount (not exceeding the amount which would apply if the property were insured under section 18 or 19) and upon or subject to such conditions as the Commission thinks fit. Payment for the insurance cover is in the form of a compulsory levy on the premium payable under the fire policy.116 The levy is no more than an arbitrary representation of the cost of earthquake cover premium, presently 20 cents for every NZ$100 insured.117 The levy is received by fire insurers as a debt from the insured, and they operate for this purpose as “volunteer” tax collectors, being required to pay over the premium to the EQC within two months from the end of the month of receipt.118 The proceeds of the levy are held in the Natural Disaster Fund. Claims may be made by any deemed insured with an insurable interest against the Fund in respect of any actual or imminent physical loss or damage to residential property occurring as the direct result of a natural disaster or of measures taken by public authorities to mitigate the consequences of a natural disaster. The EQC may, at its discretion, settle a claim up to the limit of indemnity by payment, replacement or reinstatement,119 and it must do so as soon as reasonably practicable and in any event within a year after the amount of damage has been determined.120 If necessary, buildings can be relocated on the same or even a different site.121 The New Zealand 1993 Act provides an example of how catastrophe insurance may be provided to consumers who would otherwise be left either uninsured or exposed to an unaffordable premium. The success of the scheme depended largely on the market penetration of household fire insurance. At the time of the enactment of legislation, 97% of households in New Zealand were insured under policies covering firm damage.122 In China, however, the insurance penetration rate for household insurance is very low. It was estimated to be about 1%. Thus, the EQC model, tying natural catastrophe coverage to existing comprehensive household insurance policies, would not suit the actual situation in China. 19.8.2 Compulsory earthquake insurance in Turkey Earthquake is one of the most frequently occurring catastrophic risks in Turkey. Around 70% of Turkey’s population and 75% of its industrial facilities are exposed to large-scale earthquakes. Earthquake insurance penetration was relatively low in Turkey (at around 3% of residential buildings), as households traditionally relied on the government to finance the reconstruction of private property after major natural disasters. This presented massive challenges to government budgets. In the 116 1993 Act, s.23. 117 1993 Regulation, reg.3. 118 1993 Act, s.24. 119 Ibid., sch.3, para.9. 120 Ibid., s.29. 121 1993 Regulations, reg.10. 122 Johanna Hjalmarsson and Mateusz Bek, Chapter 9 Legislative and Regulatory Methodology and Approaches: Developing Catastrophe Insurance in China. In: Insurance Law in China, Editors Johanna Hjalmarsson and Dingjing Huang (Informa Law from Routledge, 2015) pp. 191–206.

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aftermath of the Marmara earthquake in 1999, the government decided to develop a property catastrophe risk insurance mechanism to reduce its fiscal exposure to natural disasters arising from government-funded reconstruction of private property. In 2000, the Turkish government established the Turkish Catastrophe Insurance Pool (TCIP), which operates a Compulsory Earthquake Insurance (CEI) system for every registered homeowner. The mission of the TCIP is to raise the awareness of the public about earthquakes and the damage they will cause to buildings and to provide earthquake insurance for the residences meeting the requirements for the TCIP insurance.123 The main objectives of the TCIP are to: (1) Ensure that all property taxpaying dwellings have affordable earthquake insurance coverage; (2) Reduce citizens’ dependence on the government to fund the reconstruction of private property after a devastating earthquake; (3) Reduce government’s fiscal exposure to earthquakes by transferring excess catastrophe risk to the international reinsurance markets; and (4) Encourage physical risk mitigation and safer construction practices. The TCIP provides CEI for owners of private dwellings built legally on registered land. Premium rates are actuarially sound, not subsidized, and vary with construction type and property location. Annual premium is around US$62 per homeowner on average. Covered risks include earthquakes and fire following earthquakes. Deductible is about 2%. Residential buildings that fall within municipal boundaries are covered. The maximum coverage is approximately US$92,000 per policy (as of 1 January 2009). The catastrophe risk financing strategy of the TCIP relies on both risk retention and reinsurance. The TCIP retains the first US$80 million of losses through its reserves (initially complemented by a US$100 million World Bank contingent loan facility) and transfers excess losses to the international reinsurance markets. The Turkish Government covers losses that would exceed the overall claims-paying capacity of the TCIP, which is currently sufficient to withstand a 1-in-350-year earthquake. Economies of scale are obtained through countrywide pooling of the risk, which results in more affordable premium rates.124 The purpose of the CEI provided by the TCIP is to reinstate the insured property to the condition before the disaster. The CEI indemnifies the insured promptly for the damage caused by earthquake to their dwelling by using the funds in the Pool without resorting to public funds. The objective of the CEI is to insure all insurable dwellings against earthquakes. In order to attain this objective, there is a need for various control and support mechanisms due to the fact that the awareness of the public about the benefits of the insurance is not as high as desired. Because of this, the CEI is required for carrying out of certain transactions such as subscription to public utilities, sale and purchase of dwellings, and so on. Besides such compulsions, the Pool is working toward raising the awareness of the public 123 Turkish Catastrophe Insurance Pool – Compulsory Earthquake Insurance Annual Report 2008 (see accessed on 16 October 2020). 124 Turkish Catastrophe Insurance Pool: Providing Affordable Earthquake Risk Insurance, GFDRR, January 2011 (see accessed on 16 October 2020).

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about the need for earthquake insurance through advertisements and promotional activities, Provincial Briefings, and pre- and post-earthquake interactions with the social counterparts.125 The number of earthquake policies sold increased six times from 600,000 in 1999 (the year before the TCIP’s establishment) to 3.5 million in 2010. The TCIP enables around 30 insurers to sell stand-alone earthquake insurance policies. This policy helps the insurers to develop their capacity in catastrophe insurance and significantly increases the availability and affordability of earthquake insurance in Turkey. The TCIP provides insurance coverage to 23% of dwellings countrywide and about 40% in particularly disaster-prone areas.126 19.9 Conclusion China is developing an earthquake insurance system as the first step in the establishment of a catastrophe insurance system. The earthquake insurance system operates on the principles of “government promotion, market operation, and people’s livelihood security”. The major regulatory document at present is the Implementation Plan for Establishing the Catastrophe Insurance System for Urban and Rural Residential Housing in Earthquakes 2016.The Regulation on Earthquake Catastrophe Insurance will be enacted in the near future. The insurance subject matters are urban and rural residential housing and indoor ancillary facilities, excluding interior decoration, indoor property, and ancillary buildings. Destructive earthquakes and secondary disasters caused thereby such as tsunami, fire, explosion, land subsidence, debris flow, and landslide are the primary insurance coverage. At the present stage, the basic insured amount for urban residential housing per household is ¥50,000 yuan and for rural residential housing per household ¥20,000 yuan. Each household may negotiate with the insurance company in determining the insured amount as required by reference to the market value of its housing. The premium may be subsidized by local government. As an example, in Yibin City (Sichuan Province), the ordinary urban and rural residents bear 40% of the premium cost for the basic insured amount, and the rest is subsidized by the provincial, municipal, and county finance in the ratio of 3: 1.5: 1.5. For old people in rural areas, urban and rural low-income people, impoverished or disabled persons, the premium cost is fully borne by the government finance, and the three levels of finance of provinces, cities, and counties are allocated according to the ratio of 5: 2.5: 2.5. The CECIP, consisting of 40 property insurers and five reinsurers, plays the major role in the earthquake insurance system. It develops standardized earthquake catastrophe insurance products, establishes the uniform underwriting and claim settlement service standards to jointly respond to earthquake disasters, and accumulates and 125 Turkish Catastrophe Insurance Pool – Compulsory Earthquake Insurance Annual Report 2008. 126 Turkish Catastrophe Insurance Pool: Providing Affordable Earthquake Risk Insurance, GFDRR, January 2011.

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manages disaster information in a centralized manner.127 A standard form of insurance contract formulated by IAC is currently used by all members of the CECIP. Losses to urban and rural residential housing caused by earthquakes are assumed in five layers. The policyholder assumes the first layer of losses in a small sum by means of retention. The direct insurer assumes the second layer of losses corresponding to the retained premiums. The reinsurer bears the third layer of losses corresponding to the ceded-in premiums.The special reserves for earthquake catastrophe insurance are used as the fourth layer of losses. Where the losses exceed the quota of the four layers, the government financial support provides emergency funds, and catastrophe bonds may also be arranged to assume the fifth layer of losses. Special reserves for earthquake catastrophe insurance are set aside specifically for enhancing the risk-withstanding capacity and responding to major disasters in the operation process of the earthquake catastrophe insurance system. The special reserves are set aside at a prescribed proportion of premium income, subject to independent accounts and accumulation year by year on a rollover basis and managed by special authorities. The withdrawal, accumulation, and use of the special reserves for earthquake catastrophe insurance are governed by the Measures for the Administration of the Special Reserve Fund for Urban and Rural Residents’ Earthquake Catastrophe Insurance 2017. The earthquake insurance system is progressing well. For example, in Sichuan province, it has provided strong catastrophe risk protection for grassroots people in 15 (out of 18) cities and prefectures in the province, but there are problems to be addressed, such as uneven distribution at cities and prefectures, uneven work progress at districts and counties, lack of enthusiasm of some grassroots governments, and difficulty in underwriting special preferential groups in some areas. These problems have to some extent limited further development of the earthquake insurance system. In order to further promote the earthquake insurance system, further work needs to be done in two aspects. First, it is necessary to further raise the awareness of the public about the earthquake insurance system and to increase the enthusiasm of the public in participating in the system. The key to improving the stability and success of the catastrophe insurance system is to expand the penetration of the insurance. Second, it is necessary to further strengthen the policy support (subsidization) and policy promotion to grassroots governments.

127 Ibid., s.3(3)(1).

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CHAPTER 20

Motor vehicle insurance

20.1 Introduction In 2019, the total number of motor vehicles insured reached 260 million in China, and premium income was US$818.9 billion, accounting for 63% of property insurance premiums.1 Motor vehicle insurance in China is categorized into two basic classes: compulsory motor vehicle third-party liability insurance and non-compulsory commercial insurance. According to the Road Traffic Safety Law of China, a scheme of compulsory motor vehicle third-party liability insurance (hereinafter, compulsory motor vehicle insurance) is applied nationwide in China.2 The owners or managers of the motor vehicles driven on the roads within China are obliged to purchase compulsory motor vehicle insurance policies under which the insured and the drivers permitted by the insured to use the vehicle are covered against liability to pay damages for death or personal injury or property loss to the third-party victims caused by or arising from the use of the vehicle.3 Commercial motor vehicle insurance is non-compulsory. Because the insured amount under compulsory motor vehicle insurance is currently only ¥200,000 yuan for each road accident,4 which is often insufficient to cover the loss caused by personal injuries or death and property damages when an accident occurs, people often purchase commercial motor vehicle insurance on top of the amount covered under compulsory insurance. Commercial insurance can be divided to insurance of primary risks and insurance of ancillary risks. Primary risks insurance covers mainly three types of risks: the loss of or damage to the vehicle, the motor vehicle third-party liability (on top of the compulsory motor vehicle insurance), and the liability for persons on board the vehicle. Another class of insurance is ancillary risks insurance, which covers a variety of ancillary risks such as broken

1 See the website of the CBIRC accessed on 16 October 2020. 2 The Road Traffic Safety Law of the People’s Republic of China was adopted at the 5th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on 28 October, 2003, came into force on 1 May 2004, and was amended on 22 April 2011, art.17. 3 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance, art.2 of the Regulation. 4 The Notice of the CBIRC on issuing the Guiding Opinions on the Implementation of Comprehensive Reform of Motor Vehicle Insurance, which was released on 2 September and became effective on 19 September 2020, s.4. (see accessed on 16 October 2020).

DOI: 10.4324/9781351122863-20

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glass, vehicle body scratches, spontaneous fire, engine damage by water entering it, cargo liability coverage, and so on. As a complement to the scheme of compulsory motor vehicle insurance, China has established a scheme of social relief fund for road traffic accidents in order to provide assistance to the road accident victims in the situation where the driver responsible for an accident is uninsured or flees away after the accident. The thirdparty victims cannot claim against any insurers in such a case but can seek assistance from the Road Traffic Accident Social Relief Funds. In this chapter, we consider relevant rules of law and regulation governing motor vehicle insurance with a particular emphasis on compulsory motor vehicle insurance. 20.2 Legal framework for motor vehicle insurance The Road Traffic Safety Law provides that the state applies a compulsory motor vehicle third-party liability insurance scheme.5 Article 76 of the Road Traffic Safety Law sets forth rules in respect of the matter of making compensation for loss or damage caused by traffic accidents. It provides: Where a motor vehicle causes personal injury or death or property losses in a traffic accident,6 the insurance company shall pay indemnity within the policy limit of the compulsory motor vehicle third party liability insurance.The part in excess of the liability limit shall be indemnified according to the following provisions; (1) Where a traffic accident occurs between motor vehicles, the party at fault shall bear the liabilities; if both parties are at fault, they shall each bear their share of the liabilities according to the proportion of their respective fault; (2) Where a traffic accident occurs between a motor vehicle and a non-motor vehicle driver or a pedestrian, if the non-motor vehicle driver or the pedestrian has no fault, the party of motor vehicle shall bear the liabilities; however, if there is evidence to prove that the non-motor vehicle driver or the pedestrian has fault, the party of the motor vehicle’s liabilities can be reduced according to the extent of the fault; if the party of motor vehicle has no fault, it shall bear no more than ten percent of the liability. Where the losses of the traffic accident are caused by intentional collision by the non-motor vehicle driver or the pedestrian, the party of the motor vehicle shall bear no liabilities.

The most important point in art.76 is that under compulsory motor vehicle insurance, no matter whether or not the driver of a motor vehicle is at fault, as long as the vehicle is involved in a traffic accident which caused personal injury, death, or property damage to a third-party victim, the insurer of the vehicle is liable to pay indemnity to the victim within the policy limit of the compulsory motor vehicle third-party liability insurance, except for the situation where the losses of the traffic accident are caused by intentional collision by a non-motor vehicle driver or a pedestrian. In accordance with the Road Traffic Safety Law and the Insurance Law, for the purpose of ensuring that the victims in motor vehicle traffic accidents may be 5 The Road Traffic Safety Law, art.17. 6 A “traffic accident” means an incident in which a vehicle causes, when running on a road, personal injury or death or property losses due to an error or unexpected incident; see art.119(5) of the Road Traffic Safety Law.

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compensated and promoting road traffic safety, specific measures for the scheme of compulsory motor vehicle insurance are formulated by the State Council and contained in the Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance (hereinafter, the Compulsory Motor Vehicle Traffic Accident Liability Insurance Regulation) 2006.7 This Regulation was amended for the first time on 30 March 2012,8 for the second time on 17 December 2012,9 and for the third time on 6 February 2016. It is the major legislation governing the scheme of compulsory motor vehicle insurance in China. The Regulation consists of 47 article in five chapters: chapter 1 concerns general provision; chapter 2 deals with purchase of compulsory insurance; chapter 3 is related to claims; chapter 4 is concerned with penalties in the case of contravention of the provisions of the Regulation; and chapter 5 provides definitions of the terms in the Regulation. These provisions will be discussed in detail in this chapter. Motor vehicle insurance is very closely related to tort. Chapter 5 of the Tort Law of the Civil Code,10 consisting of ten articles from art.1208–art.1217 in respect of tortious liability for motor vehicle traffic accidents. In accordance with art.1208 of the Tort Law of the Civil Code, where a motor vehicle traffic accident causes any harm, the compensatory liability shall be assumed according to the relevant provisions of the Road Traffic Safety Law.11 The Tort Law also provides remedies for some special circumstances, such as where the accident is caused by a stolen vehicle12 or where the driver of a motor vehicle flees away after a traffic accident.13 These articles will be considered later. Another important source of law in relation to compensation for damages in traffic accidents is the Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damages in Road Traffic Accidents (hereinafter, the Interpretation on Compensation for Damages).14 This Interpretation was formulated in accordance with the Tort Law of the Civil Code, the Contract Law of the Civil Code, the Road

7 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance was adopted at the No. 127 executive meeting of the State Council on 1 March 2006 and came into force on 1 July 2006. 8 Article 5 of the 2006 version of the Regulation only permitted the Chinese-funded insurance company to engage in compulsory motor vehicle liability insurance. Art.5 of the first amendment of the Regulation (30 March 2012) allows any insurance companies to undertake such business upon the approval by the CIRC. 9 A new article (art.43) was added into the second amendment of the Regulation (17 December 2012). It concerns the insurance liability between a trailer and the tractor. The trailer is not required to be covered under a compulsory motor vehicle policy. Where road accidents cause losses to a third party, the insurance on the tractor shall be liable for the loss. 10 The Civil Code of the People’s Republic of China (hereinafter, the Civil Code) was adopted at the third meeting of the 13th National People’s Congress on 28 May 2020 and came into force on 1 January 2021 (see accessed on 16 October 2020). 11 The most relevant provisions are included in art.76 of the Road Traffic Safety Law. 12 The Tort Law of the Civil Code, art.1215. 13 Ibid., art.1216. 14 The Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damage in Road Traffic Accidents was adopted at the 1556th session of the Judicial Committee of the Supreme People’s Court on 17 September 2012 and came into force on 21 December 2012.

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Traffic Safety Law, the Insurance Law, the Civil Procedure Law, other relevant laws, and by taking judicial practice into consideration. This Interpretation consists of 29 articles in four parts. The relevant articles will be referred to where necessary. It is, however, necessary and convenient to see the definition of the terms of “personal injury or death” and “property losses” in a road accident in the Interpretation on Compensation for Damages. According to art.14 of the Interpretation, the term of “personal injury or death” as mentioned in art.76 of the Road Traffic Safety Law means the damages caused by the infringement of the victim’s right to life and right to health as well as other personal rights and benefits caused by motor vehicle traffic accidents, including those as provided for in art.1179 and 1183 of the Tort Law of the Civil Code. The term of “property losses” as mentioned in art.76 of the Road Traffic Safety Law means the losses caused by the infringement of the victim’s rights and benefits to the property by motor vehicle traffic accidents. Article 1179 of the Tort Law of the Civil Code provides: Where a tort causes any personal injury to another person, the tortfeasor shall compensate the victim for the reasonable costs and expenses for treatment and rehabilitation, such as medical treatment expenses, nursing fees and travel expenses, as well as the lost wages. If the victim suffers any disability, the tortfeasor shall also pay the costs of disability assistance equipment for the living of the victim and the disability indemnity. If it causes the death of the victim, the tortfeasor shall also pay the funeral service fees and the death compensation.

Article 1183(1) of the Tort Law of the Civil Code is concerned with infliction of mental distress, which provides that where any harm caused by a tort to a personal right or interest of another person inflicts serious mental distress on the victim of the tort, the victim of the tort may require compensation for the infliction of mental distress. Article 15 of the Interpretation on Compensation for Damages sets forth a list of “property losses” for which the injured party can make a claim and the people’s court will uphold the claim; (1) The costs for repairing the damaged vehicles, loss of items carried in or upon the vehicle, and rescue costs for the vehicles; (2) The costs for purchasing a similar vehicle with equivalent value to the damaged vehicle in the case that the damaged vehicle is a total loss or beyond repair; (3) The reasonable outage loss of income due to inability to engage in the corresponding operating activities for the vehicles which are lawfully used for the business of cargo or passenger transport. And (4) The reasonable costs for renting a replacement vehicle for normal day-to-day travel in the case that the vehicle for private use cannot be used. 20.3 Compulsory motor vehicle insurers The Compulsory Motor Vehicle Insurance Regulation provides rules for compulsory motor vehicle insurers in articles 5–10 of the Regulation. The insurance companies which are qualified to undertake the business of compulsory motor vehicle insurance must be approved by the CBIRC. The CBIRC is empowered to request insurance companies to undertake the business of compulsory motor vehicle insurance in order to ensure the implementation of the statutory 1192

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scheme of compulsory motor vehicle insurance, and obliged to notify the general public of the insurance companies which are qualified to carry out the compulsory motor vehicle insurance business. No entity or individual except insurance companies may engage in the compulsory motor vehicle insurance business.15 Compulsory motor vehicle insurance shall adopt uniform insurance clauses and base premium rates. The CBIRC shall approve premium rates under the principle of “no profit and no loss in general” in the compulsory motor vehicle insurance business. In the process of approving premium rates, the CBIRC may retain relevant professional institutions to conduct assessment and hold public hearings to solicit public opinion.16 An insurance company shall manage its compulsory motor vehicle insurance business separately from other insurance business and conduct accounting separately. The CBIRC shall annually review the compulsory motor vehicle insurance business of the insurance companies and disclose the results to the public. The CBIRC may require or allow insurance companies to adjust premium rates according to the profit or loss in general of the compulsory motor vehicle insurance business of insurance companies. The CBIRC shall hold a public hearing for relatively significant adjustment of premium rates.17 Where an insured motor vehicle is not involved in any road traffic safety illegal act or any road traffic accident, the insurance company shall reduce its premium rate in the following year. If, in the following years, the insured motor vehicle is still not involved in any road traffic safety illegal act or any road traffic accident, the insurance company shall continue to reduce its premium rate until the minimum standard. Where an insured motor vehicle is involved in any road traffic safety illegal act or any road traffic accident, the insurance company shall raise its premium rate in the following year. If the insured motor vehicle is involved in multiple road traffic safety illegal acts or road traffic accidents or is involved in any major road traffic accident, the insurance company shall significantly raise its premium rate. If the insured has no fault in road traffic accidents, the premium rate shall not be raised. The standards for reducing or raising premium rates shall be determined by the CBIRC in conjunction with the public security department of the State Council.18 The CBIRC, the public security department of the State Council, the agriculture department of the State Council, and other relevant departments shall gradually establish an information sharing system of compulsory auto liability insurance, road traffic safety illegal acts, and road traffic accidents.19 An insurance proposer shall choose an insurance company engaging in the compulsory motor vehicle insurance business when taking out the insurance, and the insurance company chosen shall not refuse to underwrite or delay underwriting

15 The Regulation on Compulsory Motor Vehicle Traffic Accident Liability Insurance (2016 amendment), art.5. 16 Ibid., art.6. 17 Ibid., art.7. 18 Ibid., art.8. 19 Ibid., art.9.

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the insurance. The CBIRC shall disclose to the public the insurance companies that engage in the compulsory auto liability insurance business.20 If a qualified insurance company refuses an intending insured’s application for or delays in effecting a compulsory motor vehicle insurance policy, or illegally rescinds the contract, the insured who has paid compensation to the third-party victim can request the insurance company to assume the corresponding liability within the limits of coverage under the compulsory motor policy, and the people’s courts shall uphold such a request.21 In addition, where a qualified insurance company refuses to underwrite or delays in underwriting compulsory motor vehicle insurance, the insurer will incur a fine, a restriction on the scope of its business, and even a revocation of its business license.22 20.4 Persons who are required to take compulsory motor vehicle insurance Article 2 of the Compulsory Motor Vehicle Traffic Accident Liability Insurance Regulation requires the owners or managers of the motor vehicles driven on the roads within China to effect compulsory motor vehicle traffic accident liability insurance in accordance with the Road Traffic Safety Law.23 The consequences of failure to comply with the obligation to insure under art.2 of the Regulation are potentially threefold. First, according to art.19 of the Interpretation on Compensation for Damages, where a motor vehicle which is not covered by a compulsory motor vehicle insurance policy is involved in a traffic accident, the injured party claims against the person who is obliged to purchase a compulsory policy to make compensation within the scope of compulsory coverage, shall be upheld by the people’s court. Where the person who is obliged to insure the vehicle and the driver (the tortfeasor) is not the same person, the injured party can sue against both the person and the driver for a joint liability for the accident, and the people’s court shall uphold such a lawsuit.24 Secondly, the road traffic administration of the public security organs will detain the vehicle, request the owner or the manager of the vehicle to effect a compulsory motor vehicle insurance, and impose a fine of the amount equivalent to two times the premium to be paid for the minimum limit of coverage.25 The vehicle detained will be returned to the owner or manager of the vehicle as soon as a compulsory policy is effected.26 Thirdly, in accordance with art.4 of the Compulsory Motor Vehicle Insurance Regulation, the administrative

20 Ibid., art.10. 21 The Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of Law in the Trial of Cases on Compensation for Damage in Road Traffic Accidents was adopted at the 1556th session of the Judicial Committee of the Supreme People’s Court on September 17, 2012, and came into force on December 21, 2012. See art.20 of this Interpretation. 22 The Compulsory Motor Vehicle Insurance Regulation, art.38. 23 Ibid., art.2. It must be noted that the Road Traffic Safety Law uses the term “compulsory motor vehicle third-party liability insurance”, while the Regulation uses the term “compulsory motor vehicle traffic accident liability insurance”. In fact, they refer to the same scheme of compulsory motor insurance. 24 The Interpretation on Compensation for Damages, art.19. 25 The Compulsory Motor Vehicle Insurance Regulation, art.39. 26 Ibid.

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department of motor vehicles will not register those motor vehicles if they are found to be without compulsory motor vehicle insurance, and the motor vehicle safety technical inspection institution shall not make inspection on those vehicles. Failure to insure is a breach of statutory duty,27 and anyone who suffers loss as a result can sue in tort for damages. The importance of this is not with respect to the negligent driver, who would be liable in negligence anyway, but with respect to the owner or the manager of the uninsured vehicle who permitted the driver to use the vehicle. As mentioned earlier, art.19 of the Interpretation on Compensation for Damages makes the person who has failed to purchase a compulsory policy for his or her motor vehicle liable to make compensation to the victim within the scope of compulsory coverage. Under the situation where a road accident occurs and causes injury or death of the victim by several vehicles, of which some are insured under compulsory motor policies, and some are not, art.21(3) of the Interpretation on Compensation for Damages provides rules to deal with the situation: The victim can claim against the insurers to make compensation within the scope of coverage under the policies, and the people’s court shall uphold such a claim. The insurers which have paid compensation accordingly are entitled to recoup the amount of money which exceeds their respective shares of liability from the owners or the tortfeasors of the uninsured vehicle, and the people’s court shall uphold such actions. 20.5 The scope of the insured persons Article 42 of the Compulsory Motor Vehicle Insurance Regulation defines the term “the insured persons” as the insured and the lawful drivers permitted by the insured.28 The term “lawful driver” may mean: (1) the driver must have passed a driving test and possess a valid driving license. In the case of a learner driver, he or she must be accompanied by the driving instructor when driving the vehicle; (2) The driver must get permission from the owner or the manager of the vehicle to drive the vehicle; and (3) the driver must not use the vehicle for an illegal purpose. Whether or not the insurer permits another to use a vehicle is a question of fact. The word “permit” denotes an express or implied license to use a vehicle. In the situation where the insured permits a person to drive the vehicle and this person in turn gives permission to a third person to drive the vehicle, a question may arise as to whether this third person is deemed to be permitted by the insured. The answer to the question depends on the facts of the case.29 In the case that the insured expressly permits a person to use the vehicle and also authorizes the person to give permission to any other persons, these other persons can be deemed to be permitted by the insured. If the insured permits a person to use the vehicle but makes it clear that the person cannot let other persons use the vehicle, these

27 The Road Traffic Safety Law, art.17; and the Compulsory Motor Vehicle Insurance Regulation, art.2. 28 The Compulsory Motor Vehicle Insurance Regulation, art.42(2). 29 See F.C. Ding, Motor Vehicle Traffic Accidents Tortious Liability Compulsory Insurance Scheme (Press of China University of Public Security, 2007) p. 138.

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other persons cannot be deemed to be permitted by the insured. If the insured permits a person to use the vehicle at his or her disposal and control but does not expressly permit or prohibit the person to give permission to other persons to use the vehicle, the other persons may be taken as being permitted by the insured.30 There is no dispute as to the point that where a person is permitted to use the insured vehicle, the insurer should be liable for indemnify the victim’s loss or injury caused by the person in driving the vehicle. However, what would happen if an accident is caused by a person who has not got permission to drive the vehicle? Article 2 of the Interpretation on Compensation for Damages answers this question, in providing that where a driver drives another person’s motor vehicle without permission, and causes any damage in a traffic accident, if the relevant party requests the driver of the motor vehicle to be held liable for making compensation according to the provisions of art.1209 of the Tort Law of the Civil Code, the people’s court shall uphold such a request. If the owner or manager of the motor vehicle is at fault, he or she shall assume corresponding liability for compensation, except under the circumstances as provided for in art.1215 of the Tort Law of the Civil Code.31 Article 1209 of the Tort Law of the Civil Code provides that where the owner and the user of a motor vehicle are not the same person due to the relationship of a lease, a borrowing, or other reason, and the liability of a traffic accident is attributed to the motor vehicle, the insurance company shall make compensation within the liability limit of the compulsory motor vehicle insurance. The user of the motor vehicle shall make up any deficit of the compensation, and if the owner of the motor vehicle is at fault as to the harm, he or she shall assume the corresponding compensatory liability. It is clear that the owner of the vehicle permits another person to use the insured vehicle if the owner lets the vehicle to the person by a lease or the person borrows the vehicle from the owner. But it is unclear what the term “other reason” means. It seems that the “other reason” would mean, by virtue of art.2 of the Interpretation on Compensation for Damages, the situation where a driver drives another person’s vehicle without permission. By this analysis, it can be said that where a person drives an insured vehicle without the insured’s permission and causes a road accident, the insurer is still liable to make compensation under the compulsory motor policy. By virtue of art.42 of the Compulsory Motor Vehicle Insurance Regulation, art.1209 of the Tort Law of the Civil Code, and art.2 of the Interpretation on Compensation for Damages, the insured persons would include the insured, the lawful drivers permitted by the insured, and the drivers without permission of the insured. 30 Ibid. 31 Article 1215 of the Tort Law of the Civil Code provides: Where traffic accidents involving motor vehicles that have been taken by theft, robbery, or seizure occur and cause harm, the thief, robber, or person who seized the motor vehicle bears responsibility for compensation. Where the thief, robber, or person who seized the vehicle is not the same as the person operating the motor vehicle, and a traffic accident occurs causing harm that is with the responsibility of the motor vehicle party, the thief, robber, or person who seized the motor vehicle bears joint responsibility with the vehicles’ operator.Where the insurer has paid salvage costs within scope of mandatory motor vehicle insurance liability, they have the right to seek indemnification from the persons responsible for the accident.

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Even if the accident is caused by the insured vehicle driven by an unlawful driver, with or without the permission of the insured, such as those who have no valid driving license, drive when intoxicated by alcohol, drive a stolen vehicle, or deliberately cause the accident to occur, the insurer is liable, by art.1215 of the Tort Law of the Civil Code,32 art.22 of the Compulsory Motor Vehicle Insurance Regulation,33 and art.19 of the Interpretation on Compensation for Damages,34 to advance rescue costs for personal injury within the limit of coverage under the compulsory motor policy but is entitled to recoup this money from the unlawful driver. To expand the scope of the insured persons so as to afford coverage to any lawful driver driving the insured vehicle with or without the consent of the insured, it is suggested that art.42 of the Compulsory Motor Vehicle Insurance Regulation should be amended to re-define “insured persons” as those who are the insured and other lawful drivers (with or without permission from the insured) driving the vehicle covered under a compulsory motor policy. 20.6 The limits of the amount covered under a compulsory motor vehicle insurance policy The compulsory motor vehicle insurance applies uniform liability limits of the amount covered nationwide in China,35 which are set up by the CBIRC in conjunction with the public security department, health department, and the agricultural department of the State Council.36 The limits are different for liabilities with fault of the driver of the insured vehicle and for those with no fault of the driver. From 1 February 2008 to 19 September 2020, in the situation where the driver has fault in the accident, the maximum amount of coverage for liabilities was ¥122,000 for each traffic accident under a compulsory motor policy and divided into three parts: part one being ¥110,000 for liability in respect of death, injury,

32 Ibid. 33 Article 22 of the Compulsory Motor Vehicle Insurance Regulation provides: Under any of the following circumstances, the insurance company shall advance rescue costs within the limit of cover under the compulsory motor vehicle liability insurance and has the right to recoup the money from the tortfeasor: (1) the driver had no valid driving license or was intoxicated by alcohol; (2) the accident was caused by a stolen motor vehicle; and (3) the driver intentionally caused the traffic accident to occur. Under any of the circumstances listed here the insurance company is not liable for victim’s property loss caused by the traffic accident.

34 Article 19 of the Interpretation on Compensation for Damages stipulates: Under any of the circumstances as follows, the injured party requests the insurance company to make compensation within the limit of cover under the compulsory motor vehicle liability insurance, the people’s court shall uphold such a request: (1) the driver has not obtained a qualification for driving or the driving is not for that type of vehicle; (2) the driver drives the vehicle after being drunk or taking drugs and causes a traffic accident; and (3) the driver intentionally causes the traffic accident to occur.Where the insurance company claims the right of subrogation within the scope of payment against the tortfeasor, the people’s court shall uphold such a claim. The limitation period for the subrogation starts from the date when the insurance company has made compensation payment.

35 The Compulsory Motor Vehicle Insurance Regulation, art.23. 36 Ibid.

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or disability of the victim (or victims); part two being ¥10,000 for liability in respect of medical expenses; and part three being ¥2,000 for liability in respect of property damages.37 In the event that the driver has no fault in the accident, the maximum amount of coverage for liabilities was ¥12,100, with part one being ¥11,000, part two ¥1,000, and part three ¥100. The amount earmarked for one part cannot be used for another part. The compulsory motor vehicle insurance not only requires the civil liability of the owner of the vehicle to a third party to be covered by insurance but also affects, to a certain extent, the nature of the liability, in the sense that the liability is no longer strictly based on fault. Even if the driver has no fault at all for the road accident, the insured (and the insurer) is, nevertheless, liable to the thirdparty victim to the extent of the no-fault limits of coverage under the compulsory motor vehicle policy. In past years, the maximum amount of coverage was too low, and having recognized this low limit, the CBIRC has recently issued the Guiding Opinions on the Implementation of Comprehensive Reform of Motor Vehicle Insurance on 2 September 2020,38 in which the limit of the amount of coverage for compulsory motor vehicle insurance is increased from ¥122,000 yuan to ¥200,000 yuan, of which the death and disability compensation limit is increased from ¥110,000 yuan to ¥180,000 yuan, the medical expenses compensation limit from ¥10,000 yuan to ¥18,000 yuan, and the property damage compensation limit remains unchanged at ¥2,000 yuan. The non-liability compensation limit is adjusted in the same proportion. The death and disability compensation limit is increased from ¥11,000 yuan to ¥18,000 yuan, the medical expenses compensation limit from ¥1,000 yuan to ¥1,800 yuan, and the property damage compensation limit remains unchanged at ¥100 yuan.39 20.7 The scope of the third-party victims A compulsory motor vehicle policy is for the protection of the third-party victims. Articles 3 and 21 of the Compulsory Motor Vehicle Insurance Regulation define the scope of the third-party victims as those persons other than the insured persons and persons on board the insured motor vehicles. Under a compulsory motor vehicle insurance policy, the insurer is to be liable to indemnify the third-party victims within the scope of compulsory coverage for their bodily injuries, death, and property damages arising from the road traffic accidents involving the insured motor vehicles.40 It must be noted that according to art.21 of the Compulsory Motor Vehicle Insurance Regulation, the insurer is not liable to indemnify a thirdparty victim for any loss arising from the road accident intentionally caused by the third-party victim. 37 The limits were set by the CIRC and became effective from 1 February 2008. 38 It came into force on 19 September 2020 (see accessed on 16 October 2020). 39 The Guiding Opinions on the Implementation of Comprehensive Reform of Motor Vehicle Insurance, s.4. 40 The Compulsory Motor Vehicle Insurance Regulation, art.21.

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In accordance with articles 3 and 21 of the Compulsory Motor Vehicle Insurance Regulation, clause 5 of the standard Compulsory Motor Vehicle Traffic Accident Liability Insurance Policy, which was formulated by the Insurance Association of China (IAC) and approved by the CIRC in 2006, stipulates that the victims mentioned in the contract of a compulsory motor vehicle insurance policy means those persons who suffer bodily injury, death, or property damages in an accident involving the insured motor vehicle. Those persons do not include the insured persons and the persons on board the insured vehicle.41 Insurance companies offer a commercial (non-compulsory) third-party liability coverage for persons on the insured vehicles,42 which will be considered later. According to art.17 of the Interpretation on Compensation for Damage, the insured can be treated as a victim in the situation where the driver who is permitted to drive the insured vehicle injured the insured. The insured’s lawsuit for indemnity against the insurer within the scope of coverage under the compulsory motor vehicle policy shall be upheld by people’s courts, except where the insured was a person on board the insured vehicle. There have been lots of disputes as to the determination of whether a victim is a person on board the insured vehicle. If he or she is such a person, he or she is not to be treated as a third party and thus is not covered under the compulsory motor vehicle policy. Some High People Courts (HPC) have developed rules in respect of determination of whether a victim can be treated as a person on board the insured vehicle. For example, the HPC of Shandong Province provides that at the moment when a passenger of a motor vehicle is off the vehicle and injured on the road by the vehicle, the passenger cannot be treated as a person on board the insured vehicle but a third-party victim. The insurer is then liable to make compensation to the person under the compulsory motor vehicle policy, except as provided otherwise in the policy.43 When a passenger of a motor vehicle is thrown out of the vehicle at the time of the accident and gives rise to injury or death of the passenger, and the insured or the victim claims for indemnity payment under the compulsory motor policy, the people’s court shall not uphold such a claim, except as provided otherwise in the policy.44 However, when a passenger of a motor vehicle is thrown out of the vehicle at the time of the accident and collided with the vehicle, resulting in injury or death of the person, the insurer is then liable to make compensation under the compulsory motor vehicle policy, except as provided otherwise in the policy.45 The HPC of Shanghai takes a similar view as to the determination of whether a victim party can be treated as a person on board the insured vehicle.46 Accord41 Ibid. 42 See the Comprehensive Commercial Motor Vehicle Insurance Clauses of the Ping An Insurance Company of China (2014 version) (see accessed on 16 October 2020). 43 The Guidance of Shandong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (the Guidance of the HPC of Guangdong Province 2011), art.26. 44 Ibid. 45 Ibid. 46 The Memorandum of the Seminar Concerning Difficult Issues in Road Traffic Accident Disputes by the First Civil Court of the High People’s Court of Shanghai, 31 December 2011 (see accessed on 16 October 2020). 47 Ibid., para. 11. 48 The Compulsory Motor Vehicle Insurance Regulation, art.3. 49 Ibid., art.11. 50 For example, see the Proposal Form for Motor Vehicle Insurance of Ping An Insurance Company ( accessed on 16 October 2020).

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The consequence for the insured’s failure to comply with the duty of disclosure is that the insurer is entitled to rescind the contract pursuant to art.14 of the Regulation.51 But prior to the rescission of the contract, the insurer is obliged to notify the insured in writing. If the insured fulfils the obligation of disclosure within five days from the date of receiving of the notice, the insurer shall not rescind the contract.52 As compared with the insurer’s right of rescission of the contract in other branches of insurance, an additional limitation in respect of rescission of the contract is imposed on the insurers in compulsory motor vehicle insurance – serving a notice of rescission to the insured. The insured is thus given an opportunity to disclose material information to the insurer within five days. This seems to offer a better position to the insured than that as provided for in art.16(2) of the Insurance Law for other lines of insurance, that is, the insurer is entitled to rescind the contract where the insured fails intentionally or by gross negligence to fulfil the obligation of truthful disclosure of material facts which sufficiently influence the insurer’s decision on whether to accept the insurance or raise the premium rate.53 However, the Regulation does not relate the insurer’s right of rescission to the insured’s state of mind in failing to perform the duty of disclosure intentionally or by gross negligence.54 In practice, some compulsory motor vehicle policies explicitly stipulate that the insurer is entitled to rescind the contract where the insured intentionally fails to comply with the duty of disclosure. In the Compulsory Motor Vehicle Road Traffic Liability Policy of Ping An Insurance Company, clause 25 states: [W]here the proposer or the insured intentionally fails to fulfil the obligation of truthful disclosure, the insurance company shall have the right to rescind the contract, and shall not be liable for paying insurance moneys in respect of the insured event occurred before the rescission of the contract and does not refund the premium paid.

There is no such clause in the Compulsory Motor Vehicle Road Traffic Liability Policy of the PICC. It must be noted that there is a serious deficiency of the Compulsory Motor Vehicle Insurance Regulation in respect of the consequence of the insured’s failure in complying with the duty of disclosure. On the one hand, by virtue of art.10 of the Regulation, an insured is entitled to choose an insurer that has the qualification of undertaking the business of compulsory motor vehicle insurance when purchasing the insurance.The insurer chosen by the insured is not allowed to refuse underwriting or 51 Article 14 of the Compulsory Motor Vehicle Insurance Regulation provides: An insurance company shall not rescind the compulsory motor vehicle traffic accident liability insurance contract, except where the proposer fails to comply with the duty of disclosure of material facts.Where the proposer fails to fulfill the obligation of truthful disclosure of material facts, the insurance company shall notify the proposer in writing prior to the rescission of the contract, the proposer shall fulfil the obligation of truthful disclosure within 5 days from the date of receiving of the notice; the insurance company shall not rescind the contract where the proposer has performed the obligation of truthful disclosure within that period.

52 Ibid. 53 Insurance Law, art.16(2). 54 The Compulsory Motor Vehicle Insurance Regulation, art.14.

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to delay in underwriting the insurance.55 This means that the insurers must not refuse any application for compulsory motor vehicle insurance, even if the insured withholds any material information. So the test of materiality that the insurer would not have entered into the contract had the insurer known the undisclosed fact should not be applicable to compulsory motor vehicle insurance. Instead, the test for compulsory motor vehicle insurance should be that the insurer would still have entered into the contract but on a different premium rate had the insurer known the undisclosed fact. In other words, the non-disclosure of material facts should only affect the premium to be charged and not the insurer decision on whether to enter into the contract. In fact, in the Compulsory Motor Vehicle Road Traffic Liability Policy of the PICC, clause 12 states that “where the undisclosed fact affects the calculation of premium, the insurer can re-calculate the premium.” On the other hand, art.14 of the Regulation vests in the insurer the right to rescind the contract in the case of the insured’s failure in compliance with the duty of disclosure. So art.14 is inconsistent with art.10 of the Regulation. It is suggested that an insurer should not be entitled to rescind the contract in the case of a non-disclosure of material facts but can charge a higher premium corresponding to the undisclosed material facts. Accordingly, art.14 of the Regulation would be amended to the effect that the insurer should not be permitted to rescind the contract where the insured fails to disclosure material facts but should be permitted to charge a higher premium. This would bring the rule in line with the nature of compulsory motor vehicle insurance – to protect the victim of the road accident in the situation where the tortfeasor insured is financially unable to indemnify the victim. Article 14 of the Regulation does not provide any rule as to the loss which occurred before the insurer rescinds the contract by reason of the insured’s failure in complying with the duty of disclosure. However, as a general rule for pre-rescission loss, the insurer must assume liability under the compulsory motor policy before rescinding the contract.56 In practice, some insurers may refuse to indemnify the insured for pre-rescission loss. For instance, in the Compulsory Motor Vehicle Road Traffic Liability Policy of Ping An Insurance Company, clause 25 states that: {W]here the proposer or the insured intentionally fails to fulfil the obligation of truthful disclosure, the insurance company shall have the right to rescind the contract, and shall not be liable for paying insurance moneys in respect of the insured event occurred before the rescission of the contract and does not refund the premium paid. 55 Article 10 of the Regulation provides: An insured is entitled to choose an insurance company that has the qualification of undertaking the business of compulsory motor vehicle traffic accident liability insurance when purchasing the insurance. The insurance company chosen by the insured is prohibited to refuse underwriting or to delay in underwriting the insurance.

The CIRC should notify the general public of the insurance companies which are qualified to carry out the business of compulsory motor vehicle traffic accident liability insurance. 56 Article 17 of the Compulsory Motor Vehicle Insurance Regulation provides: “Before a compulsory motor vehicle traffic accident liability contract is rescinded, the insurer shall assume the liability covered in accordance with the contract”.

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This is the approach as provided in art.16(4) of the Insurance Law.57 As mentioned earlier, the insurer should not be allowed to rescind the contract by reason of intentional non-disclosure of material facts. It should then be liable for paying insurance moneys in respect of the insured loss but be entitled to raise the premium which would have been charged had the insurer known the undisclosed material facts. 20.9 The insurer’s pre-contractual duty to explain the content of the contract According to art.17 of the Insurance Law, when concluding an insurance contract, the insurers are obliged to explain the content of the contract to the insured, make notes on exemption clauses to draw the insured’s attention to the clauses, and make clear explanation of the exemption clauses, which otherwise will not be effective. Although the Regulation does not mention the insurers’ duty of explanation of the content of the contract, art.17 of the Insurance Law should apply to compulsory motor vehicle insurance contracts also. The IAC formulated eight guiding rules in respect of the insurers’ duty of explanation of insurance clauses to the insureds for its members to follow:58 First, the insurer shall explain to the insured the clauses in the policy, including risks covered, exemptions, the insured’s duties, the insurer’s duties, claims handling, and so on.The insurer shall pay particular attention to clearly explaining the exemption clauses. The insurer shall provide the insured with a copy of the insurance clauses before concluding the contract. Second, the insurer shall clearly explain to the insured the maximum amounts of compensation covered for injury, disability, or death (¥180,000); for medical costs (¥18,000); or for property damage (¥2,000). Third, the insurer shall clearly explain to the insured that the insurer shall determine the medical expenses according to clinical practice guidelines for treating persons injured in traffic accidents and the national basic medical insurance standards formulated by the Health Department of the State Council. Fourth, the insurer shall clearly explain to the insured that that insurance company adopts a system of premium rate floating in accordance with the Interim Measures of Premium Rate Floating for Compulsory Motor Vehicle Traffic Accident Liability Insurance.59 Fifth, the insurer shall inform the insured that he or she needs to purchase only one compulsory policy for each motor vehicle, and the insured will only recover from one policy even if he or she has effected more than one policy for the same 57 Article 16(4) provides: [W]here a proposer fails to fulfil the obligation of truthful disclosure intentionally, the insurer shall not be liable for making indemnity payments or paying insurance benefits in respect of the insured event occurred before the rescission of the contract and does not refund the premium paid.

58 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance (Zhong Bao Xie Fa No. 216 [2009]) (see accessed on 16 October 2020). 59 Bao Jian Fa No. 52 [2007] (see accessed on 16 October 2020).

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vehicle.60 Usually a reminder is printed at the beginning of the standard contract of compulsory motor vehicle insurance that “only one compulsory motor policy is needed for each vehicle; please do not effect more than one policy”.61 Sixth, the insurer shall remind the insured to stick the symbol of compulsory insurance on the top right corner of the windscreen or have the drivers of the vehicle take with him or her the symbol if the vehicles does not have a windscreen. Seventh, the insurer shall inform the insured about how to make an inquiry as to his or her record of traffic accidents or occasions of violation of traffic safety laws. Finally, the insurer shall remind the insured of his or her duty to truthfully disclose material facts when concluding the contract.62 20.10 The contents of a compulsory motor vehicle insurance contract According to art.6 of the Compulsory Motor Vehicle Insurance Regulation, the compulsory motor vehicle insurance applies uniform insurance clauses which were formulated by the IAC in accordance with the Regulation and approved by the CIRC. All the insurance companies use the standard clauses, although some companies may change the wording slightly. The standard clauses for compulsory motor vehicle insurance consist of 27 clauses, including the general provisions (clauses 1–3), definitions (clauses 4–7), liability covered (clause 8), advance of rescue costs and recovery from the tortfeasor (clause 9), exemptions (clause 10), insurance period (clause 11), obligations of the insured (clauses 12–17), claims (clauses 18–21), amendment and rescission of the contract (clauses 22–24), and supplementary clauses (clauses 25–27). 20.10.1 Liability covered The insurer undertakes to indemnify the insured or the third-party victims in respect of the amount which the insured may become legally liable to pay for the victim’s bodily injury, death, or property losses caused by a traffic accident in the course of the use of the insured motor vehicle. The insurer will pay the insurance money in accordance with the contract for each accident within the following limits: (1) death, injury, or disability compensation limit of ¥180,000; (2) medical expenses compensation limit of ¥18,000; (3) property loss compensation limit of ¥2,000. Where the insured has no fault for the accident, the insurer will pay for death, injury, or disability compensation within the limit of ¥18,000, medical

60 In China, the doctrine of double insurance and contribution is not applicable to compulsory motor vehicle traffic accident liability insurance. In the event that the insured effects more than one policies, only the one with the earliest starting time of the insurance period is effective. Other policies are not effective. (see Practical Procedures in Underwriting and Claim-handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, chapter 1 practical procedure in underwriting, section 1(1)(4), and section 5(2)(6) (Zhong Bao Xie Fa No.216 [2009]). 61 For example, see the Compulsory Motor Vehicle Traffic Accidents Insurance Policy of the PICC on the website of the PICC ( accessed on 6 August 2020). 62 Ibid.

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expenses compensation within the limit of ¥1,800, and property loss compensation within the limit of ¥100. The amount earmarked for death, injury, and disability compensation is for funeral service expenses, death compensation, the cost of travel to attend the funeral sustained by the relatives of the victim, disability compensation, disability aids, nursing care, rehabilitation costs, transportation costs, living expenses for the dependents of the deceased victim, accommodation, lost income, and solatium in accordance with a court’s decision or mediation. The amount of medical expenses is earmarked for medical expenses, hospital expenses, hospital food subsidies, necessary and reasonable costs of follow-up treatment, and cosmetic surgery costs. 20.10.2 Advance of rescue costs and recovery from the tortfeasor In accordance with art.22 of the Compulsory Motor Vehicle Insurance Regulation, clause 9 of the standard clauses deals with the matter in respect of advance of rescue costs. The insurance company is obliged to advance rescue costs for the injured victim who is in need of rescue within the limit of the amount earmarked for medical expenses and has the right to recoup the amount paid from the tortfeasor under these situations: (1) the driver did not acquire a driver’s qualification; (2) the driver was drunk; (3) the accident involved the insured vehicle, which was stolen; or (4) the insured deliberately caused the traffic accident. The insurer is not liable for any other losses and expenses under these circumstances. Article 22 of the Regulation and clause 9 of the standard clauses use the word “advance” (dian fu), which means that the insurer is not obliged to pay the rescue costs but obliged to pay first on behalf of the tortfeasor and then recoup the money paid from the tortfeasor. The SPC takes the view that where the injured party requests the insurance company to pay compensation within the limits of the compulsory motor policy, under any of the following situations, the people’s court shall uphold such a request: (1) The driver did not acquire a driver’s qualification or did not have an appropriate driving license for driving the vehicle; (2) The driver drove after being drunk or taking state-controlled psychotropic drugs or narcotics, and the traffic accident occurred; and (3) The driver deliberately caused the traffic accident. Where the insurance company claims recovery of the amount paid from the tortfeasor, the people’s court shall uphold the claim.63 20.10.3 Exemptions The insurer is not liable to pay compensation or advance rescue costs under the following circumstances: (1) the loss by the traffic accident caused intentionally by the victim;64 (2) the loss of the insured’s property and the property on the insured vehicle; (3) the indirect loss arising from the accident involving the insured 63 The Interpretation on Compensation for Damages, art.18. 64 This is as provided for in art.21 of the Regulation.

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vehicle, such as the interruption of the business, suspension of the use of the vehicle, suspension of supplies of electricity, water, gas, communications, or Internet network; the loss of data; the loss caused by the voltage change; the loss by devaluation of the property after being repaired or due to the change of market price; and any other indirect loss; and (4) arbitration or litigation costs and other related expenses arising from the traffic accident.65 20.10.4 The obligations of the insured The insured is obliged to disclose material information to the insurer at the time of the contract.66 When concluding the contract, the insured shall not make additional requests regarding other matters, except for the insurance clauses and premium rates.67 At the time of renewal of the policy, the insured shall provide a copy of the previous year’s insurance policy.68 During the insurance period, if the degree of the risk increases due to the modification or the change of the use of the vehicle or other change, the insured shall promptly notify the insurer and seek approval from the insurer. Otherwise, the insurer has the right to recalculate the premium.69 Where the insured motor vehicle has a traffic accident, the insured shall take reasonable and necessary steps in a timely manner to protect and rescue and promptly notify the insurer of the occurrence of the accident.70 When the insured event occurs, the insured shall actively assist the insurer in the process of site survey and accident investigation. If arbitration or litigation in relation to the insurance claim is to happen, the insured shall notify the insurer in writing in a timely manner.71 20.10.5 Claims Where the motor vehicle has a traffic accident, the insured shall make a claim for insurance money72 and supply the insurer with the following documents: (1) the compulsory motor vehicle insurance policy; (2) the completed claim application form by the insured; (3) the valid identification of the insured and victim and the motor vehicle road license and the driver’s driving license; (4) the proof of accident issued by the road traffic administration department of the public security bureau or the relevant legal instruments and other documents issued by the people’s court or other institutions; (5) where the insured and the injured party settle the matter in relation to the accident by negotiation and agreement according to the relevant law and regulation, the insured shall supply to the insurer the settlement agreement in accordance with the provisions in the Procedural Requirements in Dealing with Traffic

65 According to art.66 of the Insurance Law, the insurer is allowed to contract out from its statutory liability to bear the costs of litigation or arbitration incurred by the insured. 66 The standard clauses, clause 12. 67 Ibid., clause 13. 68 Ibid., clause 14. 69 Ibid., clause 15. 70 Ibid., clause 16 71 Ibid., clause 17. 72 The Compulsory Motor Vehicle Insurance Regulation, art.28.

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Accidents;73 (6) the proof of the extent of property damage sustained by the victim or the proof of the extent of disability of the victim, the relevant medical proof, and a list of losses and receipts for expenses; (7) other relevant evidence and documents in relation to the nature and cause of the accident, and the extent of the loss.74 When an insured event occurs, the insurer shall determine the amount of payment within the limit for death, injury, or disability of the victim under the compulsory motor policy, in accordance with the standard and the scope of compensation as provided for by relevant laws and regulations, contractual agreements, and the guidelines of clinical practice for injured persons by traffic accidents and the national basic medical treatment insurance standards which are established by the health authorities under the State Council.75 In the case that the insured event has caused bodily injury or death of the victim, and the insured has promised to pay or has paid, without the written consent of the insurer, an amount of compensation, the insurer is entitled to redetermine the amount of payment within the limit of coverage under the compulsory policy. Where the property damaged by the accident is in need of repair, the insured shall determine and negotiate with the insurer in respect of the items to be repaired or replaced and the costs. Otherwise, the insurer is entitled to redetermine such costs within the limit of coverage under the compulsory policy.76 Some matters in relation to claims are not covered in the standard clauses of the compulsory motor vehicle policy. According to clause 27 of the standard clauses, any matters which are not provided for in the contract shall be dealt with by the Compulsory Motor Vehicle Insurance Regulation. It is convenient to consider the relevant provisions of the Regulation here. First, the insured or the victim has the duty to notify the insurer of the occurrence of the insured event. Article 27 of the Compulsory Motor Vehicle Insurance Regulation provides: When an insured motor vehicle has a road accident, the insured or the victim shall notify the insurance company. The insurance company shall reply immediately, informing the insured or the victim the detailed procedure for making compensation and other relevant matters.

Second, the insurer is required to inform the insured of what proofs and documents are needed for the claim. Article 28 of the Compulsory Motor Vehicle Insurance Regulation provides: Where an insured motor vehicle has a traffic accident, it is for the insured to make a claim to the insurance company for insurance money. The insurance company shall, within one day of receiving the application of the claim, inform the insured in writing of the relevant proofs and documents in relation to the claim to be supplied to the insurance company.

73 The Procedural Requirements in Dealing with Traffic Accidents was enacted by China Public Security Ministry on 11 July 2008 and became effective on 1 January 2009. 74 The standard clauses, clause 18. 75 Ibid., clause 19. 76 Ibid., clause 20.

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The IAC formulated rules in respect of time limits in paying the insurance moneys for the following circumstances:77 (1) for the case which involves property loss of no more than ¥2,000, if all the required documents have been received, the insurer will pay the insurance money on the same day it received the documents; (2) for the case which involves death or bodily injury with the amount to be paid of no more than ¥10,000, if all the required documents have been received, the insurer will pay the insurance money within three days of receiving the documents; (3) for the case which involves death or bodily injury with the amount to be paid of no more than ¥50,000, if all the required documents have been received, the insurer will pay the insurance money within five days of receiving the documents; and (4) for other cases for which the insurer is liable under the compulsory policy, if all the required documents have been received, the insurer will pay the insurance money within seven days of receiving the insured’s application of claim. Third, the insurer is required to handle claim promptly. Article 29 of the Compulsory Motor Vehicle Insurance Regulation stipulates: Within five days after receiving the insured’s proofs and documents, the insurance company shall determine whether or not the loss is covered by the policy and notify the insured of its decision. If the loss is not covered, the reason must be explained in writing. If the loss is covered the insurance company shall pay the insurance money within ten days after reaching a payment agreement with the insured.

Fourth, according to art.32 of the Compulsory Motor Vehicle Insurance Regulation, the insurance company may pay the insurance money to the insured or directly to the victim. However, where the insurance company is required to advance or pay rescue costs in the case of rescuing the injured victim, it must advance or pay the rescue costs to the relevant medical institution upon receiving the notice from the traffic administration department of the public security bureau.78 20.10.6 The transfer and rescission of the contract During the insurance period, where the ownership of the insured vehicle has changed, the insured shall promptly notify the insurer of the change and go through the procedure for transfer of the compulsory motor contract to the new owner of the vehicle.79 The insured may demand a rescission of the compulsory motor contract in the following three situations:80 (1) the registration of the insured motor vehicle has 77 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance (Zhong Bao Xie Fa No.216 [2009]). 78 The traffic administration department of the public security bureau has the duty to notify the insurance company to advance or pay the rescue costs to the hospital for medical treatment of the injured thirdparty victim or to notify the Road Traffic Accidents Social Relief Fund to advance rescue costs, according to art.90 of the Regulation for Implementing the Road Traffic Safety Law of the People’s Republic of China, which was enacted by the State Council on 28 April 2004 and came into force on 1 May 2004. 79 The standard clauses, clause 22. 80 According to art.16 of the Compulsory Motor Vehicle Insurance Regulation, the insured is not allowed to rescind the compulsory motor insurance contract except for in three situations: (1) the registration of the insured motor vehicle has been legally written off; (2) the use of the insured motor vehicle

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been legally written off; (2) the use of insured motor vehicle has been suspended; or (3) the insured motor vehicle has been confirmed missing by the public security organs. After the rescission of the contract, the insured shall promptly return to the insurer the insurance policy and the compulsory motor vehicle insurance symbol. If the insured cannot return the symbol, he or she should explain the situation to the insurer and acquire the insurer’s consent.81 In the case that the insured has purchased two or more compulsory policies for the same vehicle, the insured has right to rescind the contracts other than the earliest one effected, and the insurer shall refund the full premium to the insured for the rescinded contracts.82 By virtue of art.14 of the Regulation, the insurance company is prohibited from rescinding a compulsory motor vehicle traffic accident liability insurance contract except where the insured failed to comply with the duty of disclosure of material facts. In the event that the compulsory motor contract has been rescinded, the remaining premium calculated on a daily basis for the period from the date of rescission to the end of the one-year insurance period shall be returned to the insured.83 An insurance company which rescinds a contract on compulsory motor vehicle liability insurance shall retract the insurance policy and insurance mark and notify in writing the administration department of motor vehicles.84 Any other matters which are not provided for in the contract shall be dealt with by the Compulsory Motor Vehicle Insurance Regulation.85 20.11 The third-party rights against the insurers The purpose of compulsory motor vehicle insurance is not merely to protect the financial interests of the insured but is more to protect the interests of those to whom the insured may incur liability. In the event that a third party is injured in a traffic accident by the insured vehicle, he or she may bring an action against the insured, and if he or she is successful, the damages will in effect be payable by the insurer within the limit of coverage under the compulsory policy. Sometimes, however, the insured himself or herself is killed in the accident or disappeared after the accident, or he or she is unable to pay and goes bankrupt, and the question arises as to whether the third-party victim has any rights against the insurers for compensation in these circumstances. In this section, we consider the laws and regulations as to the third parties’ rights against insurers.

has been suspended; or (3) the insured motor vehicle has been confirmed missing by the public security organs. 81 The standard clauses, clause 23. 82 The Practical Procedures in Underwriting and Claim-Handling for Compulsory Motor Vehicle Traffic Accident Liability Insurance, chapter 1 practical procedure in underwriting, section 5(2)(6). 83 The standard clauses, clause 24. 84 The compulsory Insurance Regulation, art.15. 85 The standard clauses, clause 27.

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20.11.1 Article 62 of the Insurance Law Article 65(2) of the Insurance Law provides: Where the insured of liability insurance causes loss or damage to a third party, and the indemnity liability of the insured to the third party is ascertained, upon a request by the insured, the insurer shall make indemnity payment to the third party directly. Where the insured neglects in making a request, the third party shall have the right to claim indemnity payment directly from the insurer for the portion it is entitled to.

This article vests in a third party the right against the insurer for indemnity payment, but subject to two conditions. The first condition is that the insured’s liability to the third party has been established and quantified. The second one is that the insured neglects in requesting the insurer to pay the insurance money directly to the third party. Under art.65(2) of the Insurance Law, for a third party to claim from the insurer directly for indemnity payment, the insured must have neglected to request that the insurer pay the insurance money to the third party upon his or her liability to the third party being ascertained. The Chinese words daiyu have the meaning of “neglect”, “delay”, and “being reluctant and lazy in doing things”. If the insured knows that he or she has the obligation of requesting the insurer to indemnify the third party directly, and he or she is capable of performing the obligation but fails to do so within a reasonable period of time from the date when the insured’s liability to the third party has been ascertained, it can be said that the insured is daiyu in requesting the insurer to pay the insurance proceeds to the third party. The fourth judicial interpretation by the SPC on the application of the Insurance Law (hereinafter, the SPC Interpretation IV 2018)86 sets out judicial rules on liability insurance and third parties’ rights.87 Article 15 of the SPC Interpretation IV 2018 stipulates that where the insured fails to fulfil the indemnity liability after the insured’s liability for indemnity to the third party has been determined, if the insured has still not requested the insurer to pay indemnity directly to the third party at the time when the third party has already filed a lawsuit against the insurer as the defendant or the insurer and the insured as co-defendants, it can be deemed that the insured has neglected in making a request as prescribed in art.65(2) of the Insurance Law. In essence, art.15 of the SPC Interpretation IV 2018 confers upon a third party the right to sue the insurer for indemnity payment at any time after the insured’s liability to the third party has been ascertained and the insured himself or herself has failed to indemnify the third party or to request that the insurer pay the third party directly. This article does not define the word daiyu from the time perspective, namely, within a fixed or a reasonable time. If the insured has failed to pay or request his or her insurer to pay the third party, then it should be deemed that he or she has neglected in performing his or her duty, and the third party can sue the insurer directly. By art.15, the SPC interprets the meaning of “the insured

86 It came into force on 1 September 2018. 87 The SPC Interpretation IV 2018, articles 14–20.

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neglects in making a request” from the perspective of litigation by the third party. Once the third party has sued the insurer or both the insurer and the insured, it can be said that the insured has neglected in making a request to the insurer. To put it another way, to determine whether or not the insured has been negligent depends on whether the third party has brought a legal action against the insurer rather than on whether the insured has delayed making a request to the insurer to pay the third party within a reasonable period of time upon the insured’s liability to the third party being established. Consequently, the precondition of “the insured neglects in making a request” for the insured’s right of direct action to arise is made meaningless, as the third party has already sued the insurer, and it is no longer necessary to determine whether or not the insured has neglected to make a request for the insurer to pay the third party. It is submitted that art.15 of the SPC Interpretation IV is problematic. On the one hand, it does not provide a reasonable period of time within which the insured should perform his or her duty of requesting that the insurer pay the third party; on the other, it may result in an increase in the amount of litigation; some victims may directly sue the insurer once the insured’s liability has been ascertained. In the context of dispute resolution, litigation is neither the aim nor the norm. It should be avoided wherever possible. Court proceedings to resolve disputes should be used only as a last resort and after using other more appropriate means when these are available. A legal rule which brings about an increase of litigation cannot be regarded as a good rule. In order to avoid or reduce disputes as to the interpretation of the meaning of “the insured neglects in making a request”, it is necessary to set out a time limit within which the insured should request that the insurer pay the third party. It is suggested that one month may be appropriate. Within one month from the date when the insured’s liability to the third party has been ascertained,88 the insured must request that the insurer pay the insurance proceeds directly to the third party; otherwise the insured can be deemed to have neglected to make a request, and the third party can then claim from the insurer directly. If the insurer rejects the claim unreasonably, the third party can then sue the insurer. 20.11.2 The Compulsory Motor Vehicle Insurance Regulation Article 76 of the Road Traffic Safety Law imposes strict liability on a compulsory liability insurer: “[W]here a motor vehicle causes personal injury or death or property loss in a traffic accident, the insurance company shall pay indemnity within the policy limit of the compulsory motor vehicle third party liability insurance”. Article 76 does not, however, explicitly confer upon a third-party victim the right of direct action against the insurer. 88 New York adopts this 30-day approach; see New York Insurance Law (2013), §3420(a)(2) and (b) (1). A liability policy must contain a provision that in case judgment against the insured in an action brought to recover damages for injury or loss shall remain unsatisfied at the expiration of thirty days from the serving of notice of entry of judgment upon the insured and upon the insurer, then an action may be maintained by the third party against the insurer under the terms of the policy for the amount of such judgment.

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Article 28 of the Compulsory Motor Vehicle Insurance Regulation provides that where an insured motor vehicle is involved in a road traffic accident, a claim for indemnity shall be submitted to the insurer by the insured. It is clear that it is the insured, and not a third party, who can make a claim to the insurer. Article 31 of the Compulsory Motor Vehicle Insurance Regulation affords the insurer an option to pay indemnity either to the insured or directly to the victim third parties. It can be said that neither the Road Traffic Safety Law nor the Compulsory Motor Vehicle Insurance Regulation confers upon a third-party victim the right of direct action against the insurer. 20.11.3 Procedural rights of third parties against insurers Procedural rights of third parties against the compulsory motor vehicle insurers are provided by the SPC in its Interpretation on Compensation for Damage. By art.25 of the Interpretation, when trying a case on compensation for damage in a road traffic accident, a people’s court shall take the insurer underwriting the compulsory motor vehicle insurance as a co-defendant unless the insurer has already made compensation within the liability limit of the compulsory motor vehicle insurance and the party concerned raises no objection.89 According to art.25, the court automatically lists the compulsory motor insurer as co-defendant in proceedings brought by the victim against the insured. The dispute can be settled by the court with the insurer as a co-defendant, and the third party does not need to take a separate action against the compulsory motor vehicle insurer. If a road accident causes personal injury to a third party, then the third party is entitled, by art.18 of the SPC Interpretation on Compensation for Damage, to claim directly from the compulsory motor vehicle insurer for compensation for personal injury (not for property damage) within the liability limit of the insurance policy under the following circumstances: (1) the driver fails to obtain the qualification for driving or fails to obtain the corresponding qualification for driving (certain types of vehicles); (2) the driver drives a motor vehicle under the influence of alcohol, psychotropic drugs, or narcotics controlled by the state and has a traffic accident; or (3) the driver intentionally brings about a traffic accident. The insurer has the right of recourse against the wrongdoer insured for the amount of its actual payment to the injured third party.90 It is clear that only under these three special circumstances is the victim third party allowed to claim from the insurer under a compulsory motor vehicle insurance policy for the compensation for personal injury. These rules are designed to ensure that the misconduct of the insured does not prejudice the victim’s right to recover the insurance monies earmarked for him or her under the insurance policy. Article 22 of the Compulsory Motor Vehicle Insurance Regulation also provides similar protection to the victims for personal injury under the aforesaid three

89 The SPC Interpretation on Compensation for Damages 2012, art.25. 90 Ibid., art.18.

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circumstances. All compulsory motor vehicle insurance policies contain similar clauses.91 If a motor vehicle is insured by both compulsory motor vehicle insurance and non-compulsory third-party commercial motor vehicle insurance,92 art.16 of the SPC Interpretation on Compensation for Damages provides rules governing the insurers’ liabilities under the two types of insurance and the third party’s right against the insured and the insurers. By art.16, the third party may bring a lawsuit against both the insured and the insurers as co-defendants, and the court shall determine the liability for compensation in its order: (1) compensation shall be made first under the compulsory insurance policy; (2) the deficiency shall be compensated under the third-party commercial insurance policy; and (3) if the compensation is still not met under the two insurance policies, the remaining part shall be met by the insured himself or herself.93 To allow a third party to sue both the insured and the insurers in a single set of proceedings, the court may determine the insured’s liability to the third party and the insurers’ liabilities to the insured under the insurance policies together. The advantage for allowing the third party to sue the insured and the insurers together is that a road accident dispute and insurance indemnity can be resolved in a single set of proceedings, thus saving time and legal resources. The disadvantage is that the court’s judgment as to imposition or scale of liability of the insured to the third-party victim may be influenced by the knowledge that the defendant insured possesses liability insurance.94 As a matter of fact, in most cases, the liability insurance policy limit is de facto caps on tort damages.95 In short, for compulsory motor vehicle insurance, the court automatically joins the insurer as a co-defendant into the proceedings brought by a third-party victim against the insured.96 A third party can claim directly from the insurer for personal injury under the three special circumstances.97 Where the insured vehicle is covered under both compulsory motor vehicle insurance and non-compulsory commercial motor vehicle insurance, the third party is entitled to sue both the insured and the insurer. These rules provide a third party with good protection under compulsory motor vehicle insurance. However, no rules are provided in respect of the third party’s right of direct action against the insurers in the event of the insolvency, death, or disappearance of the insured. Similar problems can also be found in art.65 of the Insurance Law.

91 For example, see clauses 9 and 10 of the Policy of Compulsory Motor Vehicle Traffic Accident Liability Insurance of Pingan Insurance Company of China. 92 A third-party commercial motor insurance is non-compulsory. Because the maximum sum covered under the compulsory motor vehicle insurer is only ¥122,000 for each traffic accident, usually an insured also purchases third-party commercial motor insurance to cover additional amounts on top of the sum covered under the compulsory motor vehicle insurance. 93 The SPC Interpretation on Compensation for Damages 2012, art.16. 94 See Rob Merkin, “Tort, Insurance and Ideology: Further Thoughts”, (2012) The Modern Law Review, 75(3), 301–323. 95 See Tom Baker, “Liability Insurance as Tort Regulation: Six Ways that Liability Insurance Shapes Tort Law in Action”, (2005) Connecticut Insurance Law Journal, 12(1), 1–15. 96 The SPC Interpretation on Compensation for Damages 2012, art.25 97 Ibid., art.18.

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20.11.4 The problem and solution in respect of the third parties’ rights The Insurance Law does not provide any rules regarding the third parties’ rights of direct action against the insurer where the insured becomes insolvent, dies, or disappears, which can cause unfair consequences for the injured third party. First, where the insured company has been dissolved and struck off the list of registration soon after the incident giving rise to the insured’s liability, it thus cannot be sued by the third party in order to establish the insured’s liability to the third party. But art.65(2) of the Insurance Law requires that the existence and amount of the insured’s liability to the third party must be established before the insured can request that the insurer pay insurance money to the third party. Second, if the insured’s liability has been established and subsequently the insured company is dissolved and struck off the list of registration, no one will be there to request the insurer to pay the third party.98 In this case, the failure on the part of the insured company to make a request to the insurer to pay the third party is due to the dissolution of the insured company and not due to the insured’s neglect in requesting the insurer to pay the third party; thus art.65(2) of the Insurance Law is not applicable to this situation. A similar dilemma can also be faced by a third party where the individual insured has died or disappeared after the occurrence of the incident giving rise to the insured’s liability, and so no one is there to be sued to establish the insured’s liability to the third party. If the insured’s liability to the third party has been established, but soon afterward the insured has died or disappeared, no one is there to request that the insurer pay indemnity to the third party.99 Because of the death or disappearance of the insured, no one is there to pay the indemnity to the third party. The third party is left without any redress. In the aforesaid circumstances, the third party cannot get indemnified from the insured because of the insolvency or dissolution of the insured company, or death or disappearance of an individual insured, nor from the insurer because the insured’s liability to the third party has not been determined. Because of the requirement that the insurer shall not make indemnity payment to the insured under a liability policy before the insured has discharged his or her liability to the third party by virtue of art.65(3) of the Insurance Law, the insurer can reject the claim from the administrator of the liquidated insured company or from a family member of the deceased or of the disappeared insured on the ground that the insured has not yet paid indemnity to the third-party victim, so the insurer’s duty to pay the insured does not arise. To resolve the problem, it is suggested that a new rule be introduced into art.65 of the Insurance Law to the effect that the insured’s rights against the insurer under the insurance contract in respect of his or her liability should be transferred to the third party to whom the liability is or was incurred; such a transfer of rights arises once the insured becomes dissolved, deceased, or disappears. The third party may

98 If the insured’s liability has been established before the insured company is dissolved, it can request its insurer to pay the third party directly. 99 The Insurance Law, art.65(2).

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then bring proceedings to enforce the rights against the insurer without having first to establish the insured’s liability. This can effectively overcome the difficulty of art.65(2) of the Insurance Law, which requires that the insured’s liability to the third party must be established before the third party can have the rights against the insurers. However, the third party can only enforce those rights transferred to him or her where the insured’s liability to the third party has later been established. These recommendations would give the third party an effective protection in the special situation where the insured becomes dissolved, deceased, or disappears. In the event that the insured’s liability to the third party has been established by a valid judgment, arbitration award, or an agreement between the insured and the third party, but soon afterward, the insured is dissolved, deceased, or disappears before making a request for the insurer to pay the third party, it is suggested that the established liability should be enforced against the insurers. The requirement in art.65(2) of the Insurance Law that the insured must request the insurer to pay the insurance monies to the third party should not be applicable in this situation because the insured is non-existent to make such a request. 20.12 The Road Traffic Accident Social Relief Funds Where the driver responsible for an accident involving a third party is uninsured or cannot be traced, the third party cannot claim against any insurers, but he or she may seek assistance from the Road Traffic Accident Social Relief Funds (hereinafter, the SRF). The SRF is regulated by four legislations: the Road Traffic Safety Law, the Tort Low of the Civil Code, the Compulsory Motor Vehicle Insurance Regulation, and the Measures for the Management of Social Relief Funds for Road Traffic Accidents (For Trial Implementation) (Order of the Ministry of Finance, CIRC, Ministry of Public Security, Ministry of Health, and Ministry of Agriculture No.56 [2009]) (hereinafter, the SRF Measures).100 The SRF is a new scheme established in accordance with art.17 of the Road Traffic Safety Law. It is complementary to the scheme of the compulsory motor vehicle insurance.The purpose of establishing SRF is to ensure that a road accident victim who cannot be compensated by the compulsory motor vehicle insurance can be assisted by the SRF so as to receive medical treatment in a timely manner. Article 17 of the Road Traffic Safety Law states: “The State applies a scheme of compulsory motor vehicle third party liability insurance, and establishes social relief fund for road traffic accidents. The specific measures shall be formulated by the State Council.” Accordingly, the State Council formulated the specific measures for the SRF in articles 24–26 of the Regulation, with art.24 setting out the function of the SRF, art.25 listing the financial resources of the SRF, and art.26 relating to administration of the SRF.

100 The SRF Measures were enacted on 10 September 2009 and came into force on 1 January 2010) (see accessed on 16 October 2020).

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20.12.1 The function of the SRF The function of the SRF is described in four legislations. Under the Road Traffic Safety Law, art.75 states: Where the vehicle causing the traffic accident has bought the compulsory third party liability insurance, the insurance company shall pay the rescue expenses within the scope of the liability limit; where the rescue expenses exceed the liability limit, or the vehicle causing the traffic accident has not bought the compulsory third party liability insurance or flees away from the scene after causing the traffic accident, part or all of the rescue expenses shall be paid in advance from the social relief fund for road traffic accidents, and the institution managing the social relief fund for road traffic accidents shall be entitled to recoup such expenses from the party liable for the traffic accident.

Under the Tort Law of the Civil Code, where the driver of a motor vehicle flees after a motor vehicle traffic accident occurs, if the motor vehicle is covered by the compulsory motor vehicle insurance, the insurance company shall make compensation within the liability limit of the compulsory motor vehicle insurance; if the motor vehicle cannot be identified or is not covered by the compulsory insurance, and the expenses for the death of or personal injury to the victim, such as rescue and funeral fees, need to be paid, the advances shall be made out of the social relief fund for road traffic accidents. After advances are made out of the social relief fund for road traffic accidents, the governing body of the fund shall be entitled to be reimbursed by the person liable for the traffic accident.101 The State Council sets forth similar but more detailed provisions in art.24 of the Regulation in respect of the function of the SRF. It states: The State shall establish a social relief fund for road traffic accidents. Under any of the following circumstances, the funeral service expenses and part or all of the rescue costs for personal injury or death of the victims of road traffic accidents shall be paid in advance by the social relief fund, and the institution managing the fund shall be entitled to recoup such expenses from the party liable for the traffic accident: (1) the rescue costs exceed the limit of the compulsory motor vehicle traffic accident liability insurance; (2) the motor vehicle involved in the accident is not insured under the compulsory motor vehicle traffic accident liability insurance; and (3) the motor vehicle involved in the accident flees away after the accident.

Article 12 of the SFR Measures provides a similar rule to art.24 of the Regulation. 20.12.2 The raising of the SRF Article 25 of the Regulation lists the sources where the fund of SRF comes from, including: (1) a certain percentage of the insurance premium from the compulsory motor vehicle insurance;102 (2) the penalty fines from the owner or the manager 101 The Tort Law of the Civil Code, art.1216. 102 About 1% of the premium will go to the SRF (see accessed on 16 October 2020)

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of the motor vehicle for failing to insure the vehicle for compulsory motor vehicle insurance;103 (3) the money recovered by the institution managing the fund from the party responsible for the accident;104 (4) the yields from the social relief fund, such as bank interest and investment yields; and (5) other sources. The detailed rules for raising SRF are provided in articles 6–11 of the SRF Measures. Article 6 of the SRF Measures specifies the sources of SRF, including (1) a certain proportion of the money taken from the premiums of the compulsory motor vehicle insurance; (2) fiscal subsidies allocated by local governments according to the amount of business tax paid by insurance companies for engaging in the business of compulsory motor vehicle insurance; (3) pecuniary penalties paid by owners and managers of motor vehicles who fail to buy the compulsory motor vehicle insurance; (4) the yields from SRF; (5) money paid by liable persons in road traffic accidents caused by motor vehicles after the fund management institution has demanded recourse against them; (6) social donations; and (7) other funds. Prior to 1 March each year, the Ministry of Finance shall, jointly with CBIRC, in light of the incomes and expenses of the SRF of the immediately previous year and under the principle of balancing the incomes and expenses, determine a range of rates to be taken from the income from the compulsory motor vehicle insurance premiums for the SRF for the current year. A provincial people’s government shall, within the range of rates, determine the concrete rate for its own jurisdiction.105 An insurance company engaging in the compulsory motor vehicle insurance business shall, within ten working days after the end of each quarter, take the money out of the compulsory motor vehicle insurance premiums and transfer its full amount to the provincial exclusive aid fund account.106 A provincial public finance department shall, within ten working days after the end of each quarter, allocate fiscal subsidies to the local provincial SRF on the basis of the budget of the current year and in light of the amount of business tax for the compulsory motor vehicle insurance business paid by insurance companies and incomes and expenses of the SRF for the immediately previous quarter.107 A public finance department shall, on the basis of the budget of the current year and within ten working days after the end of each quarter, allocate to the exclusive SRF account the full amount of pecuniary penalties paid by owners and managers of motor vehicles who fail to buy the compulsory motor vehicle insurance.108 The financial relationship in respect of the provincial SRF or those at the lower levels shall be separately prescribed by the provincial governments.109

103 According to art.39 of the Regulation, the fine is two times the premium which should have been paid for the compulsory motor insurance for the vehicle. 104 By virtue of art.24 of the Regulation, the institution managing the social relief fund is entitled to recover from the tortfeasor the amount advanced by the SRF for rescue costs of the victim. 105 The SRF Measures, art.7. 106 Ibid., art.8. 107 Ibid., art.9. 108 Ibid., art.10. 109 Ibid., art.11.

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20.12.3 Administration of the SRF Art.26 of the Regulation provides that the specific administrative measures for the SRF shall be formulated and implemented by the financial department of the State Council in conjunction with the CIRC, Ministry of Public Security, Ministry of Health, and Ministry of Agriculture. In accordance with this provision, the SRF Measures were enacted which provide detailed rules for the administration of the SRF. The SRF Measures consists of 40 articles in six chapters: the general provisions (articles 1–5), the raising of the fund (articles 6–11), the use of the fund (articles 12–19), the management of the fund (articles.20–30), the legal liabilities (articles 31–34), and the supplementary provisions (articles 35–40).The most relevant parts of the SRF Measures are the use of the fund and the management of the fund, which are considered now. 20.12.4 Procedure of advancing fund The SRF is usually used for the rescue costs of the first 72 hours of the medical treatment. Under special situation where the rescue costs are still needed for medical treatment after 72 hours, the medical institution must explain the reason in writing to the institution managing the SRF.110 Where any of the three situations as mentioned in art.24 of the Regulation occurs, and SRF is needed for part or all of the rescue costs, the traffic administration department of the public security shall inform the institution managing the SRF in writing within three working days from the time of the medical treatment.111 Where the medical treatment for the injured victim has been completed, the medical institution may make an application, together with the evidence and proofs of the rescue costs, to the institution managing the SRF for advancing rescue costs.112 Upon receiving the notice for advancing rescue costs from the traffic administration department of the public security or the application from medical institution, the institution managing the SRF must examine the following matters within five working days: (1) whether the application is for the situations as provided for in art.24 of the Regulation; (2) whether the rescue costs are correct and reasonable; and (3) other matters which the institution managing the SRF deems necessary to examine. If the application has satisfied the requirements, the institution managing the SRF will advance the money to the account of the medical institution.113 In the case that fund is needed for the funeral of the victim, the family member or relatives of the victim shall make an application in writing with relevant documents to the institution managing the SRF.114 Upon receiving the application and the relevant documents, where the application has satisfied the requirements, the institution managing the SRF shall advance the funeral cost within three working 110 111 112 113 114

Ibid., art.12. Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.17.

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days and also inform the traffic administration department of the public security of such an advance of the funeral costs.115 When a SRF management institution examines the applications for advance payment for the rescue expenses and funeral expenses, it may verify the relevant information with the traffic administrative division of the public security organs, medical institutions, insurance companies, and other relevant entities, and they shall be cooperative.116 20.12.5 The management of the SRF The SRF shall be subject to uniform policies, local collection, level-to-level management, and division of work and responsibilities. The Ministry of Finance shall, jointly with the relevant departments, formulate relevant policies on the SRF and guide and supervise the raising, use, and management of the SRF of all provinces, autonomous regions, and municipalities directly under the Central Government (hereinafter, the provincial SRF). A provincial government shall establish an SRF. The SRF administrative department and the SRF management levels lower than the provincial level shall be decided by the provincial government.117 A local public finance department shall be responsible for guiding and supervising the raising, use, and management of the SRF at the same level. A local insurance regulatory authority shall be responsible for supervising and inspecting whether the insurance companies have paid the full amount of SRF to the SRF management institution under relevant provisions in a timely manner. The traffic administrative division of a local public security organ shall be responsible for notifying the SRF management institution that it should pay the rescue expenses in advance for the victims in road traffic accidents. The mechanization administrative division of the local agricultural department shall be responsible for assisting the SRF management institution in seeking recourse against the liable persons in road traffic accidents caused by agricultural machines. A local health administrative department shall be responsible for supervising whether the medical institutions in a timely manner rescue victims in road traffic accidents under the Guide to the Clinical Diagnosis and Treatment of Persons Injured in Road Traffic Accidents and whether they apply for advance payments for rescue expenses out of the SRF according to law.118 An SRF administrative department shall determine the SRF management institution according to law and supervise and inspect its raising, use, and management of the SRF.119 An SRF management institution shall perform the following functions: (1) to raise aid fund according to law; (2) to accept and examine the advance payment applications and make advance payments according to law; (3) to demand recourse

115 116 117 118 119

Ibid., art.18 Ibid., art.19. Ibid., art.3. Ibid., art.4. Ibid., art.5.

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for the advance payments; and (4) to fulfil other functions regarding the management of the SRF.120 An SRF management institution shall disclose to the general public its telephone number, address, contact person, and other information.121 The expense of an SRF management institution, including the personnel expenses, administration expenses, recourse expenses, commission expenses, and so on, shall, under relevant provisions, be paid within an annual budget by the public finance department at the same level and shall not be disbursed out of the SRF.122 An SRF management institution shall open an exclusive SRF account under relevant provisions of the state on the management of bank accounts. The SRF shall be subject to the independent accounting and the exclusive account management and shall be used for the prescribed purposes.123 After the SRF management institution makes advance payments for the rescue expenses and funeral expenses under these Measures, it shall demand recourse against the liable person in the road traffic accident caused by a motor vehicle. If an advance payment is made out of the SRF for the funeral expenses or part of or total rescue expenses under the circumstance as described in article 12(3) of these Measures, the traffic administrative division of the public security organ handling the road traffic accident shall in a timely manner notify the aid fund management institution after this case has been handled. The relevant entities and the victim or his or her inheritors shall be obliged to assist the SRF management institution in demanding the recourse.124 An SRF management institution shall submit the financial report of the immediately previous quarter to the aid fund administrative department at the same level within 15 working days after the end of each quarter and submit to the aid fund administrative department the work report and financial report for the immediately previous year prior to 1 February each year.125 An SRF management institution shall faithfully report the matters relevant to the SRF and shall not make any false record.126 An SRF management institution shall report to the public finance department at the same level the information about the raising, use, and management of the SRF and accept its supervision and inspection according to law.127 An SRF management institution shall be audited or liquidated according to law at the time of its modification or termination.128 An SRF administrative department shall exercise the following functions:129 (1) to formulate concrete administrative measures for the SRF within its own jurisdiction; (2) to determine the SRF management institution according to law; (3) to 120 121 122 123 124 125 126 127 128 129

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26. Ibid., art.27. Ibid., art.28. Ibid., art.29.

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supervise and inspect the raising of SRF, advance payment, and recourse and to regularly make announcements; (4) to authorize an accounting firm to audit the annual financial report on the SRF and make an announcement; and (5) to deal with and punish the SRF management institution and its staff members that commit illegal conduct. A provincial SRF administrative department shall, prior to 1 March each year, report to the Ministry of Finance and the CBIRC the information about the raising of the SRF, advance payments, and recourse for the immediately previous year within its jurisdiction.130 20.13 Non-compulsory commercial motor vehicle insurance Compulsory motor vehicle insurance has been considered earlier. This section considers commercial motor vehicle insurance, which is non-compulsory, including motor vehicle damage insurance, motor vehicle third-party liability insurance, persons on board the motor vehicle liability insurance, theft of the whole vehicle insurance, and other types of coverage. For the regulation of commercial motor vehicle insurance, the rules for property insurance are applicable. In addition, the CIRC/CBIRC has formulated six pieces of regulations specifically for commercial motor vehicle insurance: (1) The Notice of the CIRC on Strengthening the Administration of the Clauses and Premium Rates for Commercial Motor Vehicle Insurance, which was issued and implemented on 23 February 2012.131 (2) Opinions of the CIRC on Deepening the Reform of the Administrative System of Commercial Motor Vehicle Insurance Clauses and Rates, which was issued and implemented on 3 February 2015.132 (3) Notice of the CIRC on Issuing the Work Plan for Deepening the Pilot System Reform of the Administration of the Commercial Motor Vehicle Insurance Clauses and Premium Rates, which was issued and implemented on 20 March 2015.133 (4) Notice of the CIRC on Issues concerning Promoting Nationwide the Pilot Reform of the Administration System for Commercial Motor Vehicle Insurance Clauses and Premium Rates, which was issued and implemented on 27 June 2016.134 (5) Notice of the CIRC on Issues concerning Adjusting and Managing Premium Rates for Commercial Motor Vehicle Insurance, which was issued and implemented on 8 June 2017.135

130 131 132 133 134 135

Ibid., art.30. Bao Jian Fa No. 16 [2012]. Bao Jian Fa No. 18 [2015]. Bao Jian Chan Xian No. 24 [2015]. Bao Jian Chan Xian No. 113 [2016]. Bao Jian Chan Xian No. 145 [2017].

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(6) Notice of the General Office of the CBIRC on Regulatory Requirements for Commercial Motor Vehicle Insurance Rates, which was issued and implemented on 29 June 2018.136 (7) The Notice of the CBIRC on Issuing the Guiding Opinions on the Implementation of Comprehensive Reform of Motor Vehicle Insurance which was issued on 2 September 2020 and implemented on 19 September 2020. These seven pieces of regulations have been considered in chapter 9 (Regulation of Insurance Business) of this book. We will not consider them again in this section.We will instead consider the Model Clauses of the Comprehensive Commercial Motor Vehicle Insurance formulated by the IAC in 2020 (hereinafter, the Model Clauses 2020).137 The insurance companies follow the Model Clauses to formulate their own clauses. Some insurance companies have adopted the Model Clauses as their own clauses. For example, the Comprehensive Commercial Motor Vehicle Insurance Clauses of the Ping An Insurance Company previously adopted the Model Clauses 2014 in a wholesale manner. The Model Clauses 2020 includes primary risks and ancillary risks. The primary risks include (1) motor vehicle damage coverage; (2) motor vehicle third-party liability coverage; and (3) motor vehicle liability coverage for persons on board the vehicle. Ancillary risks cannot be covered independently.138 The three types of coverage just mentioned are considered now. 20.13.1 Damage to the motor vehicles A typical coverage in commercial motor vehicle insurance is the first-party coverage for damages to the motor vehicles. In the Model Clause 2020, chapter 1 is concerned with the insurance of damages to motor vehicles. It sets out stipulations in respect of the risks covered, the risks excluded, the deductible ratios and excess, the amount covered, and claims handling and settlement. Some of these aspects are considered now. (a) The risks covered During the insured period, the insurer shall be liable for indemnifying the insured, in accordance with the terms of the policy, for direct losses to the insured vehicle which are caused by natural risks and accidental risks and which do not fall within the exemptions, in the course of using the insured vehicle by the insured or driver permitted by the insured.139 During the insurance period, the insurer shall be liable to indemnify the insured, in accordance with the terms of the policy, for the direct losses suffered by the insured motor vehicle which do not fall within the scope of the exemptions specified in the policy and which are caused by theft, robbery, or seizure, where the 136 Yin Bao Jian Ban Fa No. 57 [2018]. 137 For the Model Clause 2020, see accessed on 15 October 2020. Before the publication of the 2020 version, the 2014 version of the Model Clauses was used by insurers. 138 The Model Clauses 2020, clause 1. 139 Ibid., clause 6.

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insured motor vehicle was stolen, robbed, or seized and has not been found after 60 days from the date when the local public security authority initiated criminal investigation.140 Following the occurrence of an insured event, the necessary and reasonable expenses incurred by the insured or the driver for preventing or mitigating loss of or damage to the insured vehicle shall be borne by the insurer. The amount of such expenses shall be calculated separately from the indemnity for the loss of or damage to the insured vehicle, and the maximum amount shall not exceed the sum insured.141 (b) The exemptions The policy usually sets out a number of exemptions. Clauses 9–11 of the Model Clauses 2020 list the circumstances under which the insurer is not liable, or the causes of the insured events for which the insurer is not liable, or certain property loss or expenses for which the insurer is not liable. Within the scope of the risks covered, the insurer is not liable to indemnify the insured for any losses and expenses sustained by the insured vehicle by any reason whatsoever under the following circumstances:142 (1) after the occurrence of the accident, the insured or the driver intentionally destroys or fabricates the accident site or destroys evidence; (2) the driver has any of the following circumstances: (i) after occurrence of the accident, the driver flees away from the accident site; (ii) the driver is intoxicated by alcohol, affected by prohibited drugs, or used state-controlled psychotropic drugs or narcotics; (iii) no driving license, or the driving license being lawfully detained, suspended, revoked, or cancelled; (iv) drives the vehicle which is not in conformity with the driving license. (3) the insured vehicle has any of the following circumstances: (i) when the accident occurs, the road license or the registration plate of the vehicle is cancelled; (ii) during the period of the vehicle being detained, seized, or confiscated; (iii) racing, testing, or during the period of repairing, maintenance, or modification in the operational commercial premises (such as a garage); or (iv) due to the intentional act or gross negligence of the insured or the driver, the insured vehicle is used for criminal conduct. The insurer is not liable to indemnify the insured for any losses and expenses sustained by the insured vehicle caused by the following reasons:143 (1) war, military conflicts, terrorist activities, riot, pollution, nuclear reaction, or nuclear radiation; (2) in violation of the relevant provisions relating to safe loading; (3) where the insured vehicle is modified or transferred to another person or the use of the vehicle is changed, the insured fails to notify the insurer in 140 141 142 143

Ibid., clause 7. Ibid., clause 8. Ibid., clause 9. Ibid., clause 10.

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a timely manner, and the risk of the vehicle is materially increased due to the modification, the transfer, or the change of its use, and occurrence of the event is caused by the materially increased risk. (4) the insured or the driver intentionally causes the insured event to occur. The insurer is not liable to indemnify the following losses and expenses:144 (1) the loss by devaluation of the property after being repaired or due to the change of market price; (2) natural wear and tear, rust, corrosion, failure, or defect of the vehicle; (3) where the insured or the driver knows the occurrence of an insured event, he or she shall notify the insurer thereof in a timely manner. If the notice is not sent in a timely manner intentionally or due to gross negligence, and as a result, the nature, cause, and extent of loss of the insured event are hard to be ascertained, the insurer shall not be liable for making indemnity payment in respect of the portion that cannot be ascertained, but with the exception that the insurer has known in time or should have known in time the occurrence of the insured event through other channels;145 (4) the loss which cannot be ascertained due to the breach of clause 15 of this contract which states that where the insured vehicle is damaged due to an insured accident, before the repair, the insured shall join the insurer to inspect the vehicle and determine the garage, the parts to be repaired, the way, and the expenses for repairing. If it is difficult to determine, the two parties shall entrust a qualified third party to carry out the loss adjusting. (5) wheel damage alone, body scratches without obvious traces of collision, or the loss of newly installed equipment; or (6) any parts or equipment loss arising from the theft of the vehicle, except for the theft of the whole vehicle. (c) The excess Where the excess was determined by the insured and the insurer when concluding the contract, the insurer may increase the excess for each accident in accordance with the policy terms at the time of calculation of the amount to be paid.146 (d) The calculation of the amount to be paid under the policy147 For the total loss of the vehicle, the amount to be paid is calculated by the following equation: the amount to be paid = the amount insured – the amount obtained by the insured from the third party – the excess. Where the insured vehicle sustains a partial loss, the amount to be paid is calculated on the basis of the repair cost within the limit of the amount covered under

144 145 146 147

Ibid., clause 11. The Insurance Law, art.21. The Model Clauses 2020, clause 12. Ibid., clause 18.

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the policy by the following equation: the amount to be paid = the actual cost for repair – the amount obtained by the insured from the third party – the excess. Where there are uninsured properties among all properties rescued, the expenditure incurred for the rescue operation shall be apportioned according to the ratio of the actual value of the rescued insured properties to the total value of all rescued properties. 20.13.2 The motor vehicle third-party liability The compulsory motor vehicle insurance covers only a limited amount of liability, with a total insured amount of ¥200,000 yuan, which is divided into three parts, with each part being earmarked solely for that part of the loss. In the case of the death of the victim, this amount is far less than that needed for adequate compensation. In order to increase the amount of coverage, some insureds may purchase commercial motor vehicle third-party liability insurance on top of the compulsory motor vehicle liability insurance. (a) The liability covered In the course of using the insured motor vehicle by the insured or the drivers permitted by the insured, if an accident occurs and results in the death, personal injury, or direct property damage of a third-party victim, the insurer shall, in accordance with the terms of the contract, make insurance payment for the part of the insured’s legal liability to compensate the third-party victim, which exceeds the limits under any part of the compulsory motor policy.148 In other words, the insurance company undertaking the compulsory insurance shall first make payment within the limits of coverage under the compulsory policy, and the insurance company undertaking the commercial third-party liability insurance shall pay for the part which exceeds the limits of the compulsory policy. The insurer shall bear the liability of payment according to the percentage of the insured’s fault for the accident. In the case that the insured’s liability is determined by litigation or arbitration, the insurer shall pay the amount as determined by the court’s judgment or arbitration award. Where the insured’s liability is determined by negotiation of the parties involved or by the road traffic administration department of the public security, the insurer shall take liability of payment at three levels of 70%, 50%, and 30% of the total liability, corresponding to the principal, the equal, and the secondary responsibility of the insured vehicle for the accident.149 For example, if it was determined by the agreement that the insured should take the principal responsibility for the accident, then the insurer is liable to pay 70% of the determined loss. (b) The exemptions In the Model Clauses 2020, clauses 22–24 list the circumstances under which the insurer is not liable, or the causes of the insured events for which the insurer is 148 Ibid., clause 20. 149 Ibid., clause 21.

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not liable, or the death or injury of certain persons or certain property loss or expenses for which the insurer is not liable. The insurer is not liable to pay compensation for death, bodily injury, property loss, or other costs under the following circumstances:150 (1) after the occurrence of the accident the insured or the driver intentionally destroys or fabricates the accident site or destroys evidence; (2) the driver has any of the following circumstances: (i) after occurrence of the accident, the driver flees away from the accident site; (ii) the driver is intoxicated by alcohol, affected by prohibited drugs, or used state-controlled psychotropic drugs or narcotics; (iii) no driving license, or the driving license being lawfully detained, suspended, revoked, or cancelled; (iv) drives the vehicle which is not in conformity with the driving license; (v) the driver is not permitted to drive the vehicle by the insured. (3) the insured vehicle has any of the following circumstances: (i) when the accident occurs, the road license or the registration plate of the vehicle is cancelled; (ii) during the period of the vehicle being detained, seized, or confiscated; (iii) racing, testing, or during the period of repairing, maintenance, or modification in the operational commercial premises (such as a garage); or (iv) during the period of the vehicle being stolen, robbed, or seized and its whereabouts are unknown. The insurer is not liable to indemnify the insured for any losses and expenses sustained by the insured vehicle caused by the following reasons:151 (1) war, military conflicts, terrorist activities, riot, pollution, nuclear reaction, or nuclear radiation; (2) the third party, the insured, or the driver intentionally causes the occurrence of the insured event or criminal conduct; the third party and the insured or other person maliciously cause injury or damage. (3) where the insured vehicle is modified or transferred to another person or the use of the vehicle is changed, the insured fails to notify the insurer in a timely manner, and the risk of the vehicle is materially increased due to the modification, the transfer, or the change of its use, and occurrence of the event is caused by the materially increased risk. The insurer is not liable for indemnifying for the following personal death or injury, or property damages and expenses:152 (1) the indirect loss arising from the accident which involves the insured vehicle, such as the interruption of the business; suspension of the use of the vehicle; suspension of supplies of electricity, water, gas, communications, or Internet network; the loss of data; the loss caused by the voltage change; and other indirect loss;

150 Ibid., clause 22. 151 Ibid., clause 23. 152 Ibid., clause 24.

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(2) the depreciation of a third party’s property caused by market price changes and the loss by depreciation of the vehicle after being repaired; (3) the damages or loss of the property on the insured vehicle, or the damages or loss of the property owned or used or under the control of the insured and his or her family members, or the drivers permitted by the insured and his or her family members; (4) the death or bodily injury of the insured, or the drivers permitted by the insured, or the persons on board the insured vehicle; (5) parking fee, custodial fees, fine of detention of the vehicle, fines, penalties, or punitive reparations; (6) medical expenses which exceed the standards according to the clinical practice guidelines for treatment of patients injured by road traffic accidents and the standards of the national basic medical insurance for a similar type of treatment; (7) solicitor fee, arbitration, or litigation costs without obtaining the insurer’s written consent; (8) where the proposer, the insured or the driver knows the occurrence of an insured event, if he or she fails intentionally or due to gross negligence to notify the insurer thereof in a timely manner, and as a result, the nature, cause, and extent of loss of the insured event are hard to be ascertained, the insurer shall not be liable for making indemnity payment in respect of the portion that cannot be ascertained, but with the exception that the insurer has known in time or should have known in time the occurrence of the insured event through other channels; (9) in the case of the insured’s breach of clause 28, the loss that cannot be determined due to the breach; (10) the infliction of mental distress; and (11) the losses and expenses that should be compensated by compulsory motor vehicle insurance. When an accident occurs, if the insured motor vehicle is not covered by compulsory third-party liability insurer or the compulsory insurance is no longer valid, the insurer is not liable for losses and expenses under the compulsory policy. In comparison with the compulsory insurance, the commercial third-party liability insurance has a lot more exemptions. (c) The liability limit The liability for each accident is determined by negotiation between the insured and the insurer when concluding the contract.153 The principal vehicle and the trailer are deemed as the same vehicle when they are linked and used together. Upon the occurrence of the insured event, the insurer for the principal vehicle and the insurer for the trailer shall be liable to pay the amount within their respective liability limits according to the ratio of the liability limits of the third-party liability coverage stipulated in the insurance 153 Ibid., clause 25.

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policies. However, the total payment shall not exceed the liability limit of the principal vehicle.154 (d) Making compensation The insurer may directly indemnify a third party for loss or damage caused by the insured or the driver permitted to drive by the insured.155 Where the insured or the permitted driver causes loss or damage to a third party and the indemnity liability of the insured to the third party is ascertained, upon a request by the insured, the insurer shall make indemnity payment to the third party directly. Where the insured neglects to make a request, the third party shall have the right to claim indemnity payment directly from the insurer for the portion it is entitled to. Where the insured or the permitted driver causes loss or damage to a third party, and the insured does not indemnify the third party, the insurer shall not make indemnity payment to the insured. After the occurrence of the insured event, the insurer shall bear the responsibility to indemnify within the scope of the risks covered.The insurer and the insured shall discuss and determine the way of making compensation. Where the third party’s property is damaged due to an insured accident, before the repair, the insured shall join the insurer to inspect the vehicle and determine the garage, the parts to be repaired, the way, and the expenses for repairing. If it is difficult to determine, the two parties shall entrust a qualified third party to carry out the loss adjusting.156 20.13.3 The liability for persons on board the insured vehicles (a) The liability covered During the insurance period, in the course of using the insured motor vehicle by the insured or the drivers permitted by the insured, if an accident occurs and results in the death or personal injury of persons on board the insured vehicle which is not within the scope of the exceptions, the insurer shall, in accordance with the terms of contract, make indemnity to the persons on board the insured vehicle.157 The insurer shall bear the liability of payment according to the percentage of fault on the part of the insured vehicle for the accident. In the case that the insured’s liability is determined by litigation or arbitration, the insurer shall pay the amount as determined by the court’s judgment or arbitration award. Where the insured’s liability is determined by negotiation of the parties involved or by the road traffic administration department of the public security, the insurer shall take liability of payment at three levels of 70%, 50%, and 30% of the total liability, corresponding to the principal, the equal, and the secondary responsibility of the insured vehicle for the accident.158 For example, if it was determined by the agreement that the 154 155 156 157 158

Ibid., clause 26. Ibid., clause 27. This clause is the same as art.65 of the Insurance Law. Ibid., clause 28. Ibid., clause 31. Ibid., clause 32.

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insured should take the principal responsibility for the accident, then the insurer is liable to pay 70% of the determined loss. (b) The exemptions In the Model Clauses 2020, clauses 33–35 list the circumstances under which the insurer is not liable, or the causes of the insured events for which the insurer is not liable, or the death or injury of certain persons or certain property loss or expenses for which the insurer is not liable. The insurer is not liable to pay compensation for death or bodily injury under the following circumstances:159 (1) after the occurrence of the accident the insured or the driver intentionally destroys or fabricates the accident site or destroys evidence; (2) the driver has any of the following circumstances: (i) after occurrence of the accident, the driver flees away from the accident site; (ii) the driver is intoxicated by alcohol, affected by prohibited drugs, or used state-controlled psychotropic drugs or narcotics; (iii) no driving license, or the driving license being lawfully detained, suspended, revoked, or cancelled; (iv) drives the vehicle which is not in conformity with the driving license; (v) the driver is not permitted to drive the vehicle by the insured. (3) the insured vehicle has any of the following circumstances: (i) when the accident occurs, the road license or the registration plate of the vehicle is cancelled; (ii) during the period of the vehicle being detained, seized, or confiscated; (iii) racing, testing, or during the period of repairing, maintenance, or modification in the operational commercial premises (such as a garage); or (iv) during the period of the vehicle being stolen, robbed, or seized and its whereabouts are unknown. The insurer is not liable to indemnify for death or bodily injury caused by the following reasons:160 (1) war, military conflicts, terrorist activities, riot, pollution, nuclear reaction, or nuclear radiation; (2) where the insured vehicle is modified or transferred to another person or the use of the vehicle is changed, the insured fails to notify the insurer in a timely manner, and the risk of the vehicle is materially increased due to the modification, the transfer or the change of its use, and occurrence of the event is caused by the materially increased risk. (3) the proposer, the insured, or the driver intentionally causes the occurrence of the insured event. The insurer is not liable for indemnifying for the following personal death or injury, or property damages and expenses:161

159 Ibid., clause 33. 160 Ibid., clause 34. 161 Ibid., clause 35.

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(1) personal death or injury caused by an intentional act by persons on board the insured vehicle (other than the insured and the driver); (2) personal injury or deaths caused by illness, giving birth to a child, selfmutilation, fighting, suicide, or criminal conduct in the vehicle; (3) fines, penalties, or punitive reparations; (4) medical expenses which exceed the standards according to the clinical practice guidelines for treatment of patients injured by road traffic accidents and the standards of the national basic medical insurance for the similar type of treatment; (5) solicitor’s fee, arbitration, or litigation costs without obtaining the insurer’s written consent; (6) where the proposer, the insured, or the driver knows the occurrence of an insured event, if he or she fails intentionally or due to gross negligence to notify the insurer thereof in a timely manner, and as a result, the nature, cause, and extent of loss of the insured event are hard to be ascertained, the insurer shall not be liable for making indemnity payment in respect of the portion that cannot be ascertained, but with the exception that the insurer has known in time or should have known in time the occurrence of the insured event through other channels; (7) the infliction of mental distress; and (8) the losses and expenses that should be compensated by compulsory motor vehicle insurance. (c) The liability limit The limit of liability of the driver per accident and the limit of liability per passenger per accident is determined by negotiation between the insured and the insurer when concluding the contract. The number of passenger seats is determined according to the approved load of passengers by the motor vehicle (except for the driver).162 20.13.5 Ancillary coverage In addition to insurance coverage for the primary risks as mentioned earlier, insurance companies also offer coverage for a variety of ancillary (or additional) risks. The relationship between the primary coverage and the ancillary coverage is that the legal effect of an ancillary clause takes precedence over a main insurance clause. For matters not covered by ancillary clauses, the main insurance clauses shall prevail. Except as otherwise agreed in the ancillary insurance clauses, the liability exemption and the obligations of both parties in the main insurance also apply to the ancillary insurance. If the main insurance liability is terminated, the corresponding ancillary insurance liability shall terminate at the same time.163 There are a number of ancillary (additional) coverages in the Model Clauses 2020, including the following covers:

162 Ibid., clause 36. 163 Ibid., ancillary risks.

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(1) ancillary absolute deductible special clause; (2) ancillary coverage for separate loss of wheels; (3) additional insurance for newly added equipment loss which covers the risk for the loss of any newly installed equipment in the insured vehicle; (4) additional insurance for vehicle body scratches which covers the risk of the body of the vehicle being scratched by someone or something, but no clear sign of collision body scratch damage insurance; (5) additional insurance of repair period cost compensation, by which when the insured vehicle is damaged and is being repaired in a garage, the insurer will indemnify the insured for the cost of travel or income loss for the period of suspension of the use of the vehicle by the coverage for loss compensation during the period of the vehicle being repaired; (6) additional insurance for engine damage by water which covers the risk of water entering the engine and causing damage to the engine; (7) additional cargo liability insurance under which, if the insured vehicle has an accident and caused direct damage to the cargo carried on the vehicle, the insurer is liable to pay the loss; (8) additional liability insurance for mental damage relief payments; (9) additional medical expenses liability insurance outside basic medical insurance; (10) additional motor vehicle value-added service special terms. 20.14 Conclusion Having considered the compulsory motor vehicle insurance, the commercial motor vehicle insurance and the SRF, it is appropriate to make some suggestion and recommendations in a numbers of aspects: (1) It is suggested that the scope of the person covered under a compulsory policy should be expanded to include all those persons who are the insured and other lawful drivers (with or without permission from the insured) driving the vehicle covered under a compulsory motor policy. (2) The compulsory motor vehicle insurance adopts a capped maximum amount of coverage. The initial limits of coverage enacted by the CIRC in 2006 were ¥60,000 for liability with fault of the driver of the insured vehicle and ¥12,000 for liability with no fault of the driver.164 These limits were increased to ¥122,000 for liability with fault of the driver and ¥12,100 for liability with no fault of the driver on 1 February 2008. These limits increased again, to ¥200,000 yuan for liability with fault of the driver and ¥18,000 for liability with no fault of the driver, on 19 September 2020. The cap of ¥200,000 yuan is still low and may need further increase. (3) It is suggested that the scope of the third party should be expanded. The current position is that the persons on board the vehicle are arbitrarily 164 The liability limits of the amount covered under motor vehicle traffic accident liability insurance was set up by the CIRC on 19 June 2006.

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(4)

(5)

(6)

(7) (8)

excluded from the scope of the third party under a compulsory motor policy.165 It is suggested that persons other than the “insured persons” (the insured and the lawfully drivers) should be treated as the third parties under the scheme of compulsory motor vehicle insurance. It is suggested that an insurer should be prohibited from rescinding the contract in the case of a material non-disclosure but can charge a higher premium corresponding to the undisclosed facts. Accordingly, art.14 of the Compulsory Motor Vehicle Insurance Regulation would be amended to the effect that the insurer should not be permitted to rescind the contract where the insured fails to disclosure material facts but to charge a higher premium corresponding to the undisclosed facts. It is suggested that the third-party victims should be vested in the right to bring action against the insurers directly for compensation under the compulsory motor vehicle policies, and the insurers should be barred from using certain conditions restricting coverage to defend against the third party’s claim. However, the insurers may defend against the third party’s claim by invoking the reasons or circumstances which the insured may use to reject or alleviate his or her liability to the third party. The current law and regulation in China do not provide any rules in relation to the restriction on the insurer’s defence against the insured’s claim in respect of his or her liability to a third party. It is suggested that the insurer should be prohibited from invoking certain conditions restricting coverage as defence against the insured’s claim in respect of his or her liability to a third party under a motor vehicle third-party liability policy. The rules as to the SRF are far from complete. The SRF scheme is in need of improvement in many aspects in order to render it practically useful. The first-party insurance for damages to motor vehicles covers only damages or losses of the vehicles but not the injury or death of the driver of the insured vehicle. It is suggested that the scope of coverage for this type of insurance could be expanded to include the injury or death of the driver of the insured vehicle.

165 The Compulsory Motor Vehicle Insurance Regulation, articles 3 and 22.

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CHAPTER 21

Regulation of Internet insurance

21.1 Introduction Internet insurance business means the business under which insurance institutions1 conclude insurance contracts and provide insurance services via self-operated network platforms,2 and third-party network platforms,3 among others, by relying on the Internet, mobile communications, and other technologies.4 Unlike the face-to-face insurance business, Internet insurance runs the whole life cycle of an insurance contract via the Internet, including sales, underwriting, claim settlement, surrender, handling of complaints, and customer service. This necessitates a special set of rules for the regulation of the operation of the Internet business and for the protection of consumers. For example, where an insurance proposer applies for insurance on the Internet, questions arise as to how the proposer can perform his or her pre-contract duty of disclosure of information5 and how the insurer can perform its duty of explanation of the content of insurance policies and clearly explain the exclusion clauses to the proposer.6 Another question is, where a dispute occurs on the matters of insurer’s explanation of exclusion clauses, how the insurer can prove that it has performed the duty. There are also other issues such as information privacy and the security of the Internet platform. It is therefore necessary and important to standardize the conduct of online business and manage the Internet insurance sales activities retrospectively. In this chapter, we will see how Internet insurance is regulated to deal with these issues in China.

1 “Insurance institutions” means insurance companies and specialized insurance intermediary institutions formed with the approval of insurance regulatory authorities and registered in accordance with the law. “Specialized insurance intermediary institutions” means specialized insurance agency companies, insurance brokerage companies and insurance assessment institutions which conduct business operations in the areas not limited to provinces, autonomous regions, and municipalities directly under the Central Government where they are registered. 2 “Self-operated network platforms” means network platforms established by insurance institutions in accordance with the law. 3 “Third-party network platforms” means the network platforms providing auxiliary services of network technical support for insurance consumers and insurance institutions in Internet insurance business activities, excluding self-operated network platforms. 4 The Interim Measures for the Supervision of the Internet Insurance Business (Bao Jian Fa No. 69 [2015]), art.1. 5 The Insurance Law, art.16. 6 Ibid., art.17.

DOI: 10.4324/9781351122863-21

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21.2 The development of Internet insurance in China The Internet has developed very rapidly in China. As of June 2019, China had 854 million netizens, and its Internet penetration had reached 61.2%.7 The rapid development of Internet technology has made it convenient for people to carry out all kinds of business on the Internet platform, among which the Internet insurance business has been developing significantly in China As early as in August 2000, Pacific Insurance Company opened its own nationwide website and became the first insurance network system in China’s insurance industry that penetrated the whole country and connected the world. In the same year, Ping An Insurance Company set up a nationwide Internet website, named as PA18, which is known as a financial supermarket with a full range of products for online insurance, securities, banking, personal financial management, and other businesses. Internet insurance is conducive to allowing customers to compare and choose the products of multiple insurance companies online. The premiums are transparent. The Internet makes insurance easier, and information flows faster. It is conducive to easy settlement of claims. Through the Internet, the costs for the selection of insurance types, the design and sales of insurance plans, and other costs are reduced, which is conducive to improving the operating efficiency of insurance companies. Since 2000, many insurers have set up Internet insurance websites. Insurance premiums achieved from Internet business has increased significantly. In 2018, there were 62 life insurers and 70 property insurers operating an Internet insurance business in China. In 2019, the Internet property insurance business achieved a premium income of ¥83.862 billion yuan, accounting for 6.4% of the total premium income for property insurance (¥1,301.6 billion yuan). The Internet life insurance business achieved a premium income of ¥185.8 billion yuan, accounting for 6.3% of the total premium income for life insurance (¥2,962.8 billion yuan).8 The total premium income for life and property insurance via Internet business increased from ¥3.2 billion yuan in 2011 to ¥269.7 billion yuan in 2019. The percentage of Internet premium in the total premium income increased from 0.22% in 2011 to 6.3% in 2019.9 21.3 Regulation of Internet insurance The operation of the Internet insurance business must be strictly regulated in order to protect the lawful rights and interests of insurance consumers and to promote the sound development of the Internet insurance business. For this purpose, the CIRC enacted the Interim Measures for the Supervision of the Internet Insurance

7 The 44th Statistical Report of Internet Development in China, by China Internet Network Information Centre ( accessed on 16 October 2020). 8 The statistical data are from the CBIRC and the Insurance Association of China. 9 The Insurance Association of China, Annual Report of China’s Insurance Industry Development in 2018 (Economic Science Press, Beijing, China, 2018) 29–30.

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Business on 22 July 2015 (hereinafter, the Measures 2015), which became effective on 1 October 2015.10 The Measures 2015 consist of 30 articles, setting out rules regarding business operation conditions and operation areas, information disclosure, business rules, and supervision and administration. We consider these rules in this chapter. Where the business scope and operation areas of a specialized Internet insurance company is otherwise prescribed by the CBIRC, the relevant provisions shall prevail. The Measures 2015 shall not apply to the reinsurance business.11 The Measures 2015 shall apply, mutatis mutandis, to the administration of insurance institutions’ sale of insurance products by such channels as instant messaging, application software, and social platforms. The network platforms legally established by non-insurance subsidiaries of insurance companies and insurance group (holding) companies shall be administered by reference to third-party network platforms.12 When conducting the Internet insurance business, insurance institutions shall abide by laws, administrative regulations, and the relevant provisions of the Measures 2015 and shall not damage the lawful rights and interests of insurance consumers and the public interest. Insurance institutions shall scientifically evaluate their risk management, control capability, and customer service capability and rationally determine insurance products appropriate for Internet operations and the sales areas thereof. If they cannot guarantee customer service quality or risk management and control, they shall make adjustment in a timely manner. Insurance institutions shall ensure that Internet insurance consumers enjoy insurance services such as insurance purchase and claim settlement that are not less than those from any other business channel and guarantee the safety of insurance transaction information and consumer information.13 Insurance institutions shall manage and take charge of insurance operations of the Internet insurance business, including sales, underwriting, claim settlement, surrender, handling of complaints, and customer service. Whoever engages in the aforesaid insurance business through a third-party network platform shall have obtained the qualification to engage in the insurance business.14 21.3.1 Operation conditions and operation areas The Measures 2015 specify the basic requirements of participating in the Internet insurance business, including the qualifications of entities to participate in the Internet insurance business, operation criteria, geographic scope of the Internet insurance business, self-operated Internet platforms, and third-party Internet platforms. 10 Bao Jian Fa No. 69 [2015]. The former Supervisory Measures on Internet Insurance Business of Insurance Agencies and Brokers (Trial), which had been effective since 1 January 2012, was superseded on 1 October 2015 (see accessed in August 2020). 11 The Interim Measures for the Supervision of the Internet Insurance Business 2015, art.27. 12 Ibid., art.28. 13 Ibid., art.2. 14 Ibid., art.3.

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The head office of an insurance institution shall establish a uniform and centralized business platform and processing flow to conduct centralized operation and uniform management of the Internet insurance business. Except for insurance companies and specialized insurance intermediary institutions, no other institution or individual may engage in the Internet insurance business. The employees of insurance institutions shall not conduct the Internet insurance business in their own name.15 A self-operated network platform through which an insurance institution conducts the Internet insurance business shall meet the following conditions: (1) It has an information management system supporting Internet insurance business operations, realizes the real-time seamless connection with the core business systems of the insurance institution, and ensures effective separation from any other internal application system of the insurance institution so as to avoid the transmission and spread of information safety risks inside and outside the insurance institution; (2) It has a complete Internet information safety management system covering firewall, invasion detection, data encryption, and disaster recovery, among others; (3) It has the license issued by the competent Internet industry department or has completed recordation of the website at the competent Internet industry department, and its place of website access is within the territory of China; (4) It has a special department that manages the Internet insurance business and has the corresponding professionals; (5) It has complete management rules and operating procedures for the Internet insurance business; (6) Internet insurance business salespersons shall comply with the relevant provisions of the CBIRC; (7) Other conditions as required by the CBIRC.16 Where an insurance institution conducts the Internet insurance business through a third-party network platform, the third-party network platform shall meet the following conditions: (1) It has the license issued by the competent Internet industry department or has completed recordation of the website at the competent Internet industry department, and its place of website access is within the territory of China; (2) It has a safe and reliable Internet operation system and information safety management system, and realizes effective separation from any application system of the insurance institution so as to avoid the transmission and spread of information safety risks inside and outside the insurance institution; (3) It is able to provide the personal identity information, contact information, account information, operation track of insurance purchase, and other information on the insurance applicant, the insured, and the beneficiary required for conducting the insurance business to the insurance institution in a complete, accurate, and timely manner; (4) It has not been given any serious administrative punishment by the competent Internet industry department, the administrative department for industry and commerce, or any other government department in the past two years and has not been included by the CBIRC in the list of entities subject to cooperation prohibition in the insurance sector; (5) Other conditions as required by the CBIRC. Where the third-party network platform fails to meet the aforesaid 15 Ibid., art.4. 16 Ibid., art.5.

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conditions, the insurance institution shall not cooperate with it in conducting the Internet insurance business.17 Where an insurance company has the corresponding internal control management capability and is able to satisfy the demand for customer service, it may expand the areas where it conducts Internet insurance business operations of the following insurance products to provinces, autonomous regions, and municipalities directly under the Central Government where it has not formed branch offices: (1) Personal accident injury insurance, term life insurance, and ordinary whole life insurance; (2) Household property insurance, liability insurance, credit insurance, and guarantee insurance in which the insurance applicant or the insured is an individual; (3) Property insurance business in which whole-process services for sales, underwriting, and claim settlement can be realized through the Internet in an independent and complete manner; (4) Other insurance products as prescribed by the CBIRC.18 The CBIRC may, in light of the actual circumstances, adjust the scope of the aforesaid insurance products that may be operated in the provinces, autonomous regions, and municipalities directly under the Central Government where no branch office has been formed and publish them. Where an insurance company has not formed a branch office in a province, autonomous region, or municipality directly under the Central Government where the insurance applicant, the insured, the beneficiary, or the subject matter of insurance is located, the relevant insurance institution shall, at the time of sale, give a specific reminder on possible problems such as inefficient services without timeliness, require the insurance applicant to make a confirmation, and retain the confirmation records. The business scope within which and the operation area where a specialized insurance intermediary institution conducts the Internet insurance business shall be consistent with those of the insurance company that provides the corresponding underwriting services.19 21.3.2 Information disclosure An insurance institution that conducts the Internet insurance business shall not make false statements, unilaterally publicize or exaggerate previous performance, promise benefits or assumption of losses in violation of any regulation, or make any other misleading statements. The insurance institution shall, in a conspicuous position of the relevant network platform for conducting the Internet insurance business, list the insurance products and services and other information in clear and pellucid language. The information that shall be listed includes the following:20 (1) The insurer and seller of insurance products and the list of provinces, autonomous regions, and municipalities directly under the Central Government where the insurer has formed branch offices; (2) The form of concluding an insurance contract, and a specific explanation if electronic insurance policy is adopted; (3) The methods of payment of premiums and the methods for the delivery of and 17 18 19 20

Ibid., art.6. Ibid., art.7. Ibid. Ibid., art.8.

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charging standards for the certificates such as insurance policies, certificates, and premium invoices; (4) The methods of making insurance purchase inquiries, methods of making insurance policy inquiries, and the channels for clients to file complaints; (5) The procedures for insurance purchase, underwriting, claim settlement, preservation, and surrender, and the methods of payment of insurance indemnity, surrender value, and insurance benefits; (6) The measures to guarantee the safety of personal information on the insurance applicant (the insured or the beneficiary), the information on insurance purchase transactions, and trading safety; (7) Other content as required by the CBIRC. The sales page of an Internet insurance product shall cover the following: (1) The name of the insurance product (name of clauses and name for publicity) and document number of official reply, recordation number or number of recordation documents; (2) Insurance clauses and rates (or links to insurance clauses and rates), which shall highlight and state the clauses exempting insurance companies from liabilities and emphasize in an appropriate manner the claim settlement requirements and cooling-off period, expense deduction, surrender loss, cash value of insurance policies, and other major content in the insurance contract; (3) If new-type personal insurance products are sold, information shall be disclosed and benefits shall be shown in accordance with the relevant requirements of the Measures for the Administration of Information Disclosure of New-Type Personal Insurance Products, and “expected rate of return” and other publicity words that describe product benefits shall not be used unilaterally; (4) If the insurance products are participating insurance, investment-linked insurance, universal insurance, or other new-type products, uncertain benefits shall be indicated in boldface not smaller than the font size of the product name; (5) The faithful notification obligation of the insurance applicant and the consequences of violating the obligation; (6) The scope of sales areas of insurance products; (7) Other matters that directly affect consumers’ interest and purchase decisions. The insurance company shall uniformly prepare and authorize the issuance of information on insurance products issued on the network platform and guarantee that the information is legal, true, accurate, and complete.21 An insurance institution that conducts the Internet insurance business shall establish a column for the disclosure of Internet insurance information on its official website. The information that shall be disclosed includes the following:22 (1) The name and address of the website engaging in the Internet insurance business and the scope of business cooperation if it is a third-party network platform; (2) Information on Internet insurance products, including the name of insurance products, insurance clauses and rates (or links), and document number of official reply, recordation number, number of recordation documents or clause number; (3) The name, business premises, and telephone number, among others, of the formed branch office; (4) Customer service and methods for consumers to file complaints; (5) Other content as required by the CBIRC.

21 Ibid. 22 Ibid., art.9.

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Where a specialized insurance intermediary institution conducts the Internet insurance business, it shall also disclose the information published on the business permit and business license issued by the CBIRC or a hyperlink to its business license and the scope and content of authorization of the insurance company.23 21.3.3 Business rules An insurance institution shall notify its partner of the insurance regulatory provisions and the relevant requirements and retain the notification records. The insurance institution shall sign a cooperation agreement with the third-party network platform and specifically agree on the rights and obligations of both parties so as to ensure clear division of work and specific responsibilities. If the lawful rights and interests of insurance consumers or the insurance institution are damaged due to the reason of the third-party network platform, the third-party network platform shall assume the compensation liability.24 A third-party network platform shall, in a conspicuous position, disclose the information on insurance institutions as partners and its recordation information and state that the insurance business is provided by the insurance institutions.25 The third-party network platform shall, within 24 hours as of receipt of an insurance purchase application, provide the information required for underwriting to the insurance institution in a complete and accurate manner, including the name, certificate type, certificate number, contact information, account, and other information of the insurance applicant (the insured and the beneficiary). Except for the circumstances as permitted by laws and regulations, no insurance institution or third-party network platform shall disclose the relevant information to any other institution or individual.26 Where the third-party network platform provides publicity services to the insurance institution, the publicized content shall be examined by the insurance company so as to ensure that the publicized content complies with the relevant regulatory provisions. The insurance company shall assume the corresponding responsibility for the authenticity, accuracy, and regulatory compliance of the publicized content.27 An insurance company shall strengthen the management of Internet insurance products and choose insurance products which are suitable for Internet features to conduct Internet business. The insurance company shall develop new products by applying Internet technologies and data analysis technologies, and so on, and shall not violate social morals, basic insurance principles; and the relevant regulatory provisions.28 The premiums paid by the insurance applicant shall be directly transferred to the special account for premium income of the insurance institution, and the third-party network platform shall not collect premiums on behalf of the insurance institution 23 24 25 26 27 28

Ibid. Ibid., art.10. Ibid., art.11. Ibid. Ibid. Ibid., art.12.

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and transfer the payment to the latter. The special account for premium income includes the special account opened by the insurance institution on a third-party payment platform in accordance with the law.29 Insurance institutions and third-party network platforms that conduct promotional activities in the form of donating insurance or goods and services directly relating to insurance shall comply with the relevant provisions of the CBIRC. They shall not return the paid premiums to insurance applicants in cash or the same type of methods.30 An insurance institution shall completely record and retain the trading information on the Internet insurance business so as to ensure the restoration of the relevant trading flow and details in a complete and accurate manner. The trading information shall at least cover product publicity and sales texts, sales and service logs, and the insurance applicant’s operation track, among others. The third-party network platform shall assist and support the insurance institution in obtaining the aforesaid information in accordance with the law.31 An insurance company shall strengthen the management of services for the Internet insurance business, establish the online service system covering consulting, underwriting, surrender, claim settlement, inquiry and complaint, explore return visits to clients by multiple forms such as short message and instant messaging, simplify service process, and innovate in service methods so as to ensure efficient and convenient customer service. For the insurance products on which the provision of rapid and convenient insurance services to consumers is affected by such factors as on-site verification, survey, and investigation, the insurance institution shall immediately suspend the sale of the relevant insurance products and take effective measures to make rectification. If it fails to resolve the problems after rectification, it shall terminate the sale of the relevant insurance products.32 An insurance institution shall strengthen the safety management of business data and take such technical means as firewall isolation, data backup, and failure recovery so as to ensure that the trading data and information on the Internet insurance business are safe, true, accurate, and complete. The insurance institution shall prevent illegal and criminal activities on Internet insurance such as counterfeit websites and APP application, inspect the reliability of external links on webpages, explore special channels to receive reports by the public, immediately take prevention measures if finding any problem, and report to the CBIRC in a timely manner.33 An insurance institution shall strengthen the management of client information, ensure the authenticity and effectiveness of clients’ information, and ensure the safety and legality of information collection, processing, and use. The insurance institution shall strictly keep confidential and shall not disclose the clients’ information collected in conducting the Internet insurance business, and without the

29 30 31 32 33

Ibid., art.13. Ibid., art.14. Ibid., art.15. Ibid., art.16. Ibid., art.17.

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approval of clients, shall not use clients’ information for any purpose other than the provision of services.34 An insurance company shall prepare the emergency handling plan and appropriately respond to the discontinuity of Internet insurance business operations caused by any emergency, force majeure, or any other reason. Where the Internet insurance business operations of an insurance institution discontinue, the insurance institution shall announce the discontinuity in a conspicuous position of the home page of the self-operated network website or the third-party network website in a timely manner, explain the reason, and state the follow-up handling method.35 An insurance institution shall establish and improve the client identification rules, strengthen the monitoring and reporting of large transactions and suspicious transactions, and strictly comply with the provisions on anti-money laundering.The insurance institution shall require the insurance applicant to use its, his, or her own account to pay premiums, and at the time of surrender, shall return premiums to the original account through which premiums are paid and pay indemnity to the account of the insurance applicant, the insured, or the beneficiary. For the personal insurance business of which the insurance term is one year or more, the insurance institution shall verify the authenticity of the account information of the insurance applicant and ensure that the payer or the payee is the insurance applicant. The insurance institution shall establish and improve anti-fraud rules for the Internet insurance and strengthen the monitoring and reporting of Internet insurance fraud, and the third-party network platform shall assist the insurance institution in conducting anti-fraud monitoring and investigation.36 When an insurance company pays the relevant expenses to a specialized insurance intermediary institution and a third-party network platform, the head office shall conduct uniform settlement and uniform authorization of the transfer of payment. The insurance company shall, according to the expense types and standards agreed upon in a cooperation agreement, pay intermediary expenses to the specialized insurance intermediary institution or pay information technology expenses to the third-party network platform, among others, and shall not directly or indirectly offer any benefit other than that agreed upon in the cooperation agreement.37 The CBIRC and its local offices shall, in accordance with laws, regulations and the relevant regulatory provisions, conduct routine supervision and on-site inspection of Internet insurance business operations of insurance institutions and third-party network platforms, and insurance institutions and third-party network platforms shall provide cooperation.38 The Insurance Association of China (IAC) shall, in accordance with laws, regulations, and the relevant regulatory provisions of the CBIRC, conduct self-disciplinary management of the Internet insurance business. The IAC shall establish on its official website the column for the disclosure of Internet insurance information

34 35 36 37 38

Ibid., art.18. Ibid., art.19. Ibid., art.20. Ibid., art.21. Ibid., art.22.

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and disclose the information on insurance institutions and third-party network platforms as their partners that conduct the Internet insurance business so as to facilitate consultation and supervision by the public. The official website of the CBIRC shall disclose the relevant information at the same time.39 21.3.4 Supervision and administration Where an insurance institution that conducts the Internet insurance business falls under any of the following circumstances, the CBIRC may order it to make rectification, and if the circumstances are serious, shall impose an administrative penalty on it in accordance with the law: (1) It authorizes a branch office to launch the Internet insurance business without approval; (2) It cooperates with a thirdparty network platform in non-compliance with the provisions of the Measures 2015; (3) It loses trading data or discloses client information, which causes any adverse consequence; (4) It fails to disclose information or give a warning in accordance with the Measures 2015 or conducts misleading publicity; (5) It violates the relevant provisions of the Measures 2015 on operation areas and expense payment, among others; (6) It fails to meet the conditions for conducting the Internet insurance business as prescribed in the Measures 2015; (7) Any other conduct in violation of the provisions of the CBIRC.40 Where a third-party network platform that conducts the Internet insurance business falls under any of the following circumstances, the CBIRC may require it to make correction; and if it refuses to make correction, the CBIRC may order the relevant insurance institution to immediately cease cooperation with it, include it in the list of entities subject to cooperation prohibition in the industry, and circulate a notice in the entire industry; (1) It cooperates with an institution or individual in non-compliance with the Measures 2015 in conducting the Internet insurance business; (2) It conducts publicity without the approval of the insurance company, which causes any adverse consequence; (3) It violates the provisions of the Measures 2015 on information disclosure and expense payment, among others; (4) It fails to provide the insurance institution with or assist the insurance institution in legally obtaining the information required for underwriting in accordance with the Measures 2015; (5) It fails to meet the conditions for conducting the Internet insurance business as prescribed by the Measures 2015; (6) It fails to assist the insurance regulatory authority in conducting supervision and inspection; (7) Any other conduct in violation of the provisions of the CBIRC.41 The CBIRC shall make overall arrangements on and be responsible for the supervision of the Internet insurance business, and all local CBIRC offices shall be responsible for the daily monitoring and supervision of the Internet insurance business within their respective jurisdictions and may oversee and inspect the relevant insurance institutions based on the authorization of the CBIRC.42 39 40 41 42

Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26.

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Where an insurance institution or any of its employees violates the Measures 2015, the CBIRC and its local office may order the institution to make rectification within a time limit by taking such measures as holding a regulatory talk and issuing a regulatory letter; if the violator refuses to make rectification or fails to make rectification as required, or commits any violation of law as prescribed in the Insurance Law, or any other law or administrative regulation, the violator shall be punished in accordance with the law.43 21.4 Guarantee insurance business on Internet platform In order to regulate the guarantee insurance business carried out on the Internet platform, the CIRC formulated a specific regulation for this purpose, namely, the Notice of the CIRC on Strengthening the Administration of the Guarantee Insurance Business on Internet Platforms on 19 January 2016.44 The “guarantee insurance business on Internet platforms” means the business under which insurance companies take Internet credit platforms as intermediaries and provide guarantee insurance services for both borrowers (insurance applicants) and lenders (the insured) on such platforms. The insurance companies engaging in the guarantee insurance business on Internet platforms shall aim at protecting the rights and interests of insurance consumers and follow the principles of fairness, equity, honesty, and good faith.45 The insurance companies engaging in the guarantee insurance business on Internet platforms shall comply with the requirements for solvency regulation. They shall, when operating the guarantee insurance business on Internet platforms, fully consider the capital restrictions imposed on such business by the China Risk Oriented Solvency System (Solvency II) so as to ensure that the overall scale of such business matches their capital strength.46 The insurance companies shall strictly select Internet platforms for cooperation. They shall not cooperate with any Internet platform that commits any acts harmful to the national interest and the public interest, such as providing credit enhancement services, setting up a capital pool, or illegally raising funds.The insurance companies shall also specify, in the agreements concluded with the Internet platforms, that the cooperative Internet platforms may not commit the aforesaid prohibited acts.47 The insurance companies shall strictly examine the qualification of insurance applicants. They shall gather information about the insurance applicants’ capital flows, financial condition, credit history record, sources of repayment, solvency, and other information, and in light of their scale of business development and asset

43 Ibid. 44 Bao Jian Chang Xian No. 6 [2016] (see accessed on 16 October 2020). 45 The Notice of the CIRC on Strengthening the Administration of the Guarantee Insurance Business on Internet Platforms 2016, s.1. 46 Ibid., s.2. 47 Ibid., s.3.

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size, choose quality customers with a good credit standing and conduct business in a prudential manner.48 The insurance companies shall specify the information disclosure obligation of their cooperative Internet platforms. The agreements concluded between an insurance company and an Internet platform shall specify that the Internet platform shall not conduct misleading publicity by such means as expanding insurance liabilities. The corresponding insurance clauses (or links) included in the relevant business interfaces on an Internet platform shall be specified, and both lenders and borrowers shall acknowledge that they have learned them so as to ensure that both lenders and borrowers are fully informed of the insurance company cooperating with the Internet platform and the information about the insurance clauses.49 The insurance companies shall strengthen the administration of guarantee insurance products on Internet platforms. For the guarantee insurance clauses applicable to Internet platforms, they shall clarify the types of insurance applicants and the insured, remind them of the exemption of liabilities in insurance clauses in a conspicuous manner, and clarify that they may not damage the rights and interests of insurance applicants and the insured.50 The insurance companies shall establish a strict risk control mechanism. The insurance companies shall adhere to the small-sum and decentralized development mode and respectively set underwriting limits for a single loan and cumulative loans granted the same insured. The insurance companies shall establish and improve the risk review mechanism and review risks by such means as conducting internal independent credit investigation and entrusting third-party risk assessment institutions.51 The insurance companies shall strengthen control of information systems. They shall improve the core business system; realize effective connection of information systems with cooperative Internet platforms and financial institutions; strengthen follow-up monitoring over information released on the Internet platforms such as the capital flows for the business, the risk status, and credit standing of borrowers and other data information.52 The insurance companies shall conduct risk investigation and stress testing of the guarantee insurance business on Internet platforms, and based on the risk investigation and stress testing results, improve emergency response plans and make good preparations for emergency response.53 The insurance companies shall properly handle emergencies, resolve risks in a timely manner, and avoid the occurrence of mass and regional events. At the same time, they shall strengthen the guidance of public opinion and effectively conduct positive publicity.54

48 49 50 51 52 53 54

Ibid., s.4. Ibid., s.5. Ibid., s.6. Ibid., s.7. Ibid., s.8. Ibid., s.9. Ibid., s.10.

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The insurance companies shall strengthen the internal control management system and establish sound risk control rules and standardized operating procedures.55 The insurance companies shall establish a system for quarterly submission of the information about the operation of the guarantee insurance business on Internet platforms and submit the statistical table to the Property and Casualty Insurance Supervision Department of the CBIRC via the information submission column of the electronic document transmission system within 15 calendar days after each quarter. The insurance companies not conducting the guarantee insurance business on Internet platforms shall, according to the aforesaid ways, submit the information to the Property and Casualty Insurance Supervision Department in the form of official documents on a quarterly basis and after conducting such business, submit the statistics table on a quarterly basis.56 21.5 Retrospective management of Internet insurance sales activities In order to standardize and strengthen the retrospective management of Internet insurance sales; protect consumers’ basic rights, such as the right to know, independent choice, and fair transaction rights; and promote the healthy development of Internet insurance business the CBIRC recently issued the Notice on Regulating Retrospective Management of Internet Insurance Sales Activities on 22 June 2020, which came into effect on 1 October 202057 (hereinafter, the Notice 2020). Where insurance institutions carry out Internet insurance sales, if non-Internet insurance sales methods are involved, this Notice 2020 and other regulatory requirements of the CBIRC on retrospective management shall apply.58 This Notice 2020 applies to insurance institutions selling insurance products through self-service terminals set up at fixed locations. If the relevant regulatory requirements on the retrospective management of self-service terminal sales before the implementation of this Notice 2020 are inconsistent with this Notice, this Notice shall prevail.59 The traceability of Internet insurance sales as mentioned in the Notice 2020 means that insurance institutions use sales page management and sales process records to record and save transactions of insurance products sold on self-operated online platforms to make them available for check. The insurance institutions mentioned in the Notice 2020 include insurance companies and insurance intermediaries.60 When an insurance institution sells, on its own online platform, commercial insurance products to proposers who are natural persons, it shall implement the retrospective 55 Ibid., s.11. 56 Ibid., s.12. 57 Yin Bao Jian Fa No.26 [2020] (see accessed on 16 October 2020). 58 The Notice of the CBIRC on Regulating Retrospective Management of Internet Insurance Sales Activities 2020, s.23. 59 Ibid., s.24. 60 Ibid., s.1.

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management of Internet insurance sales, except for personal tax-preferential health insurance and personal tax-deferred pension insurance products.61 The sales pages on the Internet refer to the entire insurance and underwriting process pages set up by the insurance institution on the self-operated online platform, including prompting to enter the insurance process, displaying and explaining insurance terms, performing prompts and clearly explaining obligations, verifying the identity of the insured, and filling in by the proposer online pages for insurance information, self-confirmation and reading of relevant information, submission of insurance applications, and premium payment.62 Insurance institutions shall implement Internet insurance sales by setting up sales pages on self-operated online platforms, and may not set up sales pages on non-self-operated online platforms. Insurance institutions can set up an insurance application link on the non-self-operated online platform, and the applicant can click on the link to enter the sales page of the self-operated online platform. Where the online platform is not self-operated by the insurance institution, no insurance product sales pages shall be allowed to be set up on that online platform.63 “Sales pages management” means that the insurance institution shall save the content information and historical modification information of the sales page and establish a sales pages version management mechanism.64 The first page of the sales pages must be a page with a prompt to enter the insurance application process, and the insurance institution shall separate the sales page from the non-sale page by setting the page with the prompt to enter the insurance application process. The non-sales page shall not contain content such as the applicant’s filling in the insurance information or submitting the insurance application.65 The page with the prompt to enter the insurance application process shall include the prompts that the proposer is about to enter the insurance application process, that the insurance clauses need to be read carefully, and that the operation of the proposer on the sales pages will be recorded. Where the page with the prompt to enter the insurance application process is designed and used by an insurance intermediary, the content of the customer notice shall be added and the name of the insurance intermediary institution and the underwriting insurance company shall be highlighted.66 The sales pages of the insurance institution shall display the insurance clauses or provide a text link to the insurance clauses, explain the content of the contract, and set up a sign that the proposer has independently confirmed that he or she has read the content.67 The insurance institution shall display the contents of the clauses exempting the insurance company from liability in the insurance contract in words, fonts,

61 62 63 64 65 66 67

Ibid., s.2. Ibid., s.3. Ibid., s.4. Ibid., s.5. Ibid., s.6. Ibid., s.7. Ibid., s.8.

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symbols, or other obvious signs sufficient to attract the attention of the proposer and clearly explain them in the form of webpages, audio, or video, and so on.68 When an insurance institution sells the following insurance products, it shall display content that may affect the effectiveness of the insurance policy and may exempt the insurance company from liability as required, including but not limited to:69 (1) When selling new types of life insurance products, the content of the risk warning about the interest uncertainty of the policy shall be added; (2) For the sale of health insurance products, the following contents must be added into the sales pages, the starting time and duration of the probation period for insurance liability, the impact on the rights and interests of the proposer, the designated medical institutions, whether the renewal is guaranteed and the validity period of the renewal, whether it can be automatically renewed, the principle of medical expense compensation, whether the premium rate is adjustable, and so on; (3) For the sale of insurance products with a cooling-off period clause, the content of the cooling-off period clause shall be added. Where an insurance institution sells insurance products with death as a payment condition and the insured is not the proposer, it shall display the content of the insured’s agreement to insure his or her life and confirm the insurance amount as required, except for those insurance products that the parents purchase to insure their minor children.70 The insurance institution shall display the notice of disclosure of health.The health disclosure notice page of the proposer shall include the contents of the health notice of the proposer, the explanation of the consequences of not fulfilling the obligation of truthful disclosure, and so on.The health disclosure notice shall be directly related to the insurance liability, the expression should be easy to understand, the content should be specific, and the scope for each question should be clear.71 The insurance institution shall display the contents of articles 7, 9, 10, 11, and 12 of the Notice 2020 on a separate page and set up a sign showing that the proposer or the insured has independently confirmed that they have read the contents. This Notice 2020 requires the proposer or the insured to independently confirm that the sales pages have been read if the proposer or the insured has not independently confirmed that he or she has read the sales pages. If the proposer or the insured has not independently confirmed reading the sales pages, the insurance institution shall not accept the proposer’s application for insurance and shall not collect premiums.72 Where an insurance institution conducts Internet insurance sales, it shall verify the authenticity of the identity of the proposer, the insured, and the beneficiary in accordance with the management requirements for the real-name system of personal insurance.73 68 Ibid., s.9. Article 17 of the Insurance Law requires the insurer to clearly explain to the proposer the exclusion clauses prior to the conclusion of the contract. 69 Ibid., s.10. 70 Ibid., s.11. 71 Ibid., s.12. 72 Ibid., s.13. 73 Ibid., s.14.

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The insurance institution shall record and save the operation track of the proposer and the insured on the sales pages. The operation track shall include the time when the proposer enters and leaves the sales pages, the sales pages which are visited by the proposer, the content of the forms which the proposer or the insured fill in, and the time when the proposer did the visit and the completion of the form.74 The insurance institution shall record and keep the relevant information explaining the insurance clauses to the proposer through the online service system during the period of insurance application.75 When an insurance institution conducts Internet insurance sales that can be traced back, the collection and use of consumer information shall follow the principles of lawfulness, fairness, and necessity, and the collection of information must not include consumer information that has nothing to do with the products sold.76 The insurance institution is responsible for the archiving and management of the traceable data of Internet insurance sales. The traceable data of Internet insurance sales shall include at least the sales pages, the operation track of the proposer and the insured on the relevant sales pages, and other relevant data showing that the insurance institution has explained insurance clauses, through the online service, to the proposer at the time of the application for the insurance.77 The retention period of retroactive data on Internet insurance sales shall be calculated from the date of termination of the insurance contract. If the insurance period is less than one year, the retrospective data and materials shall be kept for not less than five years, and if the insurance period exceeds one year, the retrospective data and materials shall be kept for not less than ten years. In the event of consumer complaints, legal proceedings, and other disputes, the retrospective data and materials shall be kept for at least three years after the settlement of the dispute.78 The traceable materials of Internet insurance sales activities shall be able to be restored to valid documents for inspection, and the sales pages shall be able to be restored to valid images or videos for inspection.79 When carrying out work relevant to the traceability of Internet insurance sales, insurance institutions shall strictly follow relevant laws and regulations and adopt practical and feasible management measures and technical measures to protect the personal information of insurance proposers, insureds, and beneficiaries.80 Insurance institutions shall establish a comprehensive, systematic, and standardized internal control system for the retrospective management of Internet insurance sales activities; strengthen the construction of internal control systems and the design of internal control procedures; and achieve effective monitoring of all processes and operational links for the retrospective management of sales activities.81 74 75 76 77 78 79 80 81

Ibid., s.15. Ibid., s.16. Ibid., s.17. Ibid., s.18. Ibid., s.19. Ibid., s.20. Ibid., s.21. Ibid., s.22.

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If an insurance institution fails to conduct retrospective management of Internet insurance sales in accordance with the requirements of this Notice 2020, the CBIRC and its local offices shall impose penalties or take regulatory measures against the institution in accordance with relevant laws and regulations.82 In summary, the Notice 2020 is an important piece of regulation as to Internet insurance sales, and it covers mainly the following five aspects. First, the Notice clarifies the definition and scope of retrospective management of internet insurance sales activities. It is made clear that the retrospective management of Internet insurance sales activities means that insurance institutions shall store and save the insurance products sales activities on their self-operated Internet platforms by means of managing sales webpage and recording sales process, so that the sales activities can be traced and checked. The management scope covers commercial insurance products for which the insurance applicants are natural persons. Second, the Notice defines the sales webpage and sales webpage management. The Notice puts forward requirements on the responsible party of sales webpage management, the scope of Internet insurance sales activities, and the risk management of Internet sales activities. It is emphasized that the sales webpage can only be set on the self-operated Internet platforms of insurance institutions and needs to be separated from the non-sales webpages. It is required that important clauses be displayed on separate pages, which should be confirmed by the insurance applicants independently, to protect consumers’ right to be informed. Third, the Notice puts forward requirements on insurance institutions’ management of the Internet sales process, including protecting the insurance applicants’ right of independent choice, clarifying the responsibilities of insurance institutions in real-name verification, refining the standards of sales process records, formulating information collection principles, and so on. Regarding the collection and use of consumers’ personal information, the Notice particularly emphasizes that insurance institutions should follow the principles of legality, legitimacy, and necessity and take effective measures to protect information collected and safeguard consumers’ right of information security. Fourth, the Notice clarifies the internal control of retrospective management. The Notice mainly stipulates the content, storage, security, and related internal control mechanism of traceable materials and requires that insurance institutions set up comprehensive, systematic, and standardized internal control mechanisms. It is particularly emphasized that the traceable materials of Internet insurance sales activities should be recoverable to valid documents for review and examination and that the sales webpages should be recoverable to valid pictures or videos for review and examination so as to facilitate investigation and inspection. Fifth, the Notice sets clear requirements on the management of related business and business provided through self-service terminals as well as related legal responsibilities and time frame for implementation.

82 Ibid., s.25.

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21.6 The Draft of the Measures for the Supervision of the Internet Insurance Business On 28 September 2020, the CBIRC published the Draft of the Measures for the Supervision of the Internet Insurance Business for public consultation. The Draft Measures contains five chapters and 83 articles. The chapters cover the general rules, basic business rules, special business rules, supervision and management, and supplementary rules. The main provisions include: first, the Draft Measures clarifies the essence of the Internet insurance business, the application of the system and the convergence policy. Second, the Draft Measures specifies the operating requirements of the Internet insurance business, strengthens the principles of licensed operation, defines the licensed institution’s self-operated online platform, specifies the operating conditions of the licensed institution, and clarifies the prohibited behaviours of non-licensed institutions. Third, the Draft Measures regulates Internet insurance marketing and publicity and stipulates management requirements and business behaviour standards. Fourth, the Draft Measures standardizes Internet insurance post-sale service and improves consumer experience. Fifth, the Draft Measures takes classified regulation of Internet insurance entities. On the basis of the basic business rules, specific business rules are stipulated for Internet insurance companies, insurance companies, insurance intermediaries, and Internet companies’ insurance agency business respectively. Sixth, the Draft Measures is intended to innovate and improve regulatory policies and institutional measures and make a transition to policy implementation arrangements.83 21.7 Conclusion Internet insurance has been developing rapidly in China.The percentage of Internet premium in the total premium income increased from 0.22% in 2011 to 6.3% in 2019. This percentage will continue to increase with further expansion of the Internet insurance business. The current regulatory rule for Internet insurance is the Interim Measures for the Supervision of the Internet Insurance Business 2015, which has been implemented since 1 Oct 2015. It was initially planned that the Interim Measures were valid for three years. On 20 September 2018, the CBIRC issued an extension notice that the Interim Measures are still effective until new Measures are issued. Currently the CBIRC is preparing a new version of the Measures for the Supervision of the Internet Insurance Business, the first Draft of which was released for public consultation on 13 December 2019, and the second draft was published for public consultation on 28 September 2020.84 83 Media press for the release of the Draft Measures for the Supervision of Internet Insurance Business (see accessed on 16 October 2020). 84 The Draft of the Measures can be seen at the website of the CBIRC ( accessed on 18 October 2020).

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The second Draft of the Measures for the Supervision of the Internet Insurance Business consists of five chapters and 83 articles.85 The chapters cover the general rules, basic business rules, special business rules, supervision and administration, and supplementary rules. The main provisions include: first, the Draft Measures clarifies the essence of the Internet insurance business, the application of the system, and the convergence policy. Second, the Draft Measures specifies the operating requirements of the Internet insurance business, strengthens the principles of licensed operation, defines the licensed institution’s self-operated online platform, specifies the operating conditions of the licensed institution, and clarifies the prohibited behaviours of non-licensed institutions. Third, the Draft Measures regulates Internet insurance marketing and publicity and stipulates management requirements and business behaviour standards. Fourth, the Draft Measures standardizes Internet insurance post-sale service and improves consumer experience. Fifth, the Draft Measures takes classified regulation of Internet insurance entities. On the basis of the basic business rules, special business rules are stipulated for Internet insurance companies, insurance companies, insurance intermediaries, and Internet companies’ insurance agency business. Sixth, the Draft Measures is intended to innovate and improve regulatory policies and institutional measures and make a transition to policy implementation arrangements. The recently published Notice on Regulating Retrospective Management of Internet Insurance Sales Activities 2020 is a very important piece of regulation on Internet insurance; it sets out rules relating to the conduct of the Internet insurance business and therefore will reduce potential disputes as to the issues of insurer’s duty of disclosure and the insurer’s duty of explanation of policy content and clear explanation of exclusion clauses.

85 Ibid.

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CHAPTER 22

Regulation of mutual insurance organizations

22.1 Introduction Mutual insurance as a concept began in England in the late 17th century with the establishment of the first mutual fire insurer in 1696 to cover losses due to fire. A mutual insurance company is collectively owned by its members and acts in the best interest of its members. The sole purpose of a mutual insurance company is to provide insurance coverage for its members and policyholders, and its members are given the right to select management. Mutual insurance companies exist to ensure that the benefits promised to policyholders can be paid over the long term. Because they are not traded on stock exchanges, mutual insurance organizations have no external shareholders and are jointly owned by all policyholders. They can avoid the pressure of reaching shortterm profit targets, their assets and surplus are used for the welfare and protection of the policyholders, and they can develop insurance types that are conducive to the long-term interests of the policyholder. The interests of the insurer and the policyholder are the same, members can participate in management, thereby effectively reducing or avoiding the insurer’s improper operation and the insured’s moral hazard. Members of a mutual insurance company have the right to excess premiums, meaning that if losses and expenses are less than the number of premiums paid into the company, the members would receive either a dividend payment or a reduction in premiums. In general, the goal of the mutual insurance company is to provide its members’ insurance coverage at or near cost, since any dividends paid back to members represent excess premium payments. In China, the development of mutual insurance organizations is currently in its preliminary stage. The domestic market share of mutual insurance accounts for only 0.2% of the total market share.1 This is much lower than the global average market share of mutual and cooperative insurance, which was 26.7% in 2017.2 In some well-developed insurance markets, market share of cooperative and mutual

1 The latest report published by International Cooperative and Mutual Insurance Federation (ICMIF) in February 2019. Globally, over 5,100 mutual insurers collectively wrote US$1.3 trillion in insurance premiums in 2017. (see accessed on 15 October 2020). 2 The ICMIF Report, Global Mutual Market Share 10, February 2019.

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DOI: 10.4324/9781351122863-22

REGULATION OF MUTUAL INSURANCE

insurance can be quite high (for example, 51.8% in France, 47.3 in Germany, 42.2 in Japan, 39.9% in the USA, and 10.6% in the UK).3 China has a huge potential for the development of cooperative and mutual insurance. As the market economy develops and people’s risk prevention needs increase, the desire of various social entities to develop mutual insurance is becoming stronger. The development of Internet technology in particular offers a new opportunity for mutual insurance to develop. The State Council encourages the development of various forms of cooperative and mutual insurance.4 In accordance with the State Council’s objective, in order to enhance the healthy development of mutual insurance organizations and to strengthen the supervision and regulation of these organizations, the Pilot Measures for the Supervision and Administration of Mutual Insurance Organizations were issued on 23 January 2015 (hereinafter, the Pilot Measures) by the China Insurance Regulatory Commission (the CIRC, the former insurance regulatory authority).5 This chapter considers the regulatory rules with regard to the formation, membership, organizational structure, business operation, and supervision of mutual insurance organizations in China. Before considering the regulatory rules, a brief account is necessary of the development and significance of mutual insurance in China; this may help to set the background for the consideration of the Pilot Measures. 22.2 The development and significance of mutual insurance in China At present, there are only six cooperative and mutual insurance organizations in China’s insurance market. The first one, the Heilongjiang Sunlight Agricultural Mutual Insurance Company, was established in January 2005 to explore China’s innovative agricultural insurance system. The company offers more than 100 types of insurance for crops and breeding, liability insurance, motor vehicle insurance, and other agricultural insurance products. There are more than 190 branches in Heilongjiang and Guangdong Provinces. In 2014, the company received ¥2.7 billion yuan in premium income. Agricultural crop land of 75.4 million mu (1 mu = 667 m2) were insured by the company. It achieved ¥405 million yuan in net profit.6 In September 2011, Fulong Rural Insurance Mutual Cooperative in Longshan Town, Cixi, Zhejiang, was established. Three insurance products were then offered: short-term health insurance, accident insurance, and household property insurance. In July 2013, Cixi Longshan Rural Insurance Mutual Assistance Association was 3 Ibid. 4 Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry (the State Council No. 29 [2014]), issued on 10 August 2014 and became effective on the same day (see accessed on 15 October 2020). 5 Bao Jian Fa No. 11 [2015] (see accessed on 16 October 2020). 6 Hongtoa Sun and Haobin Liu, “The Pathway of the Development of Mutual Insurance in China”, China Insurance News, 5 July 2018 (see accessed on 15 October 2020).

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established on the basis of the former Fulong Rural Insurance Mutual Cooperative. The operating funds of ¥200,000 yuan were invested by economic cooperatives of eight villages in Longshan Town. The Association expanded the scope from village level to town level and set up branches in eight villages. A mutual insurance network has been created to engage in short-term health and medical insurance, accidental injury insurance, household property insurance, and agricultural insurance, and other business approved by insurance regulatory authority. It is the first rural mutual insurance association in China.7 Ruian Xingmin Rural Insurance Mutual Cooperative was officially opened for business on 23 October 2015. It was funded and set up by 22 farmers’ cooperatives and two natural persons, with a registered capital of ¥1 million yuan. The business scope covers agricultural products, agricultural product transport, and small household loan guarantee insurance. The number of beneficiary farmers reaches 3,600. After the Pilot Measures 2015 was published, three mutual insurance corporations have been formed. The Public Mutual Insurance Corporation, which was established on 14 February 2017, is China’s first nationwide mutual insurance organization established with the consent of the State Council and the CIRC. It is located in Shenzhen, with the initial operating capital of ¥1 billion yuan. Its main businesses include credit insurance, guarantee insurance, short-term health, and accident insurance. Hero Mutual Property Insurance Corporation is China’s first specialized mutual insurance organization serving the construction and engineering fields. It was opened on 22 June 2017 with its headquarters in Beijing. Its main businesses include liability insurance, credit guarantee insurance, property insurance, engineering insurance, health insurance, and so on. Trust Mutual Life Insurance Company was opened on 5 May 2017. It is registered in Beijing with an initial operating capital of ¥1 billion yuan. It is the first life mutual insurance company in China. Its business scope is general insurance, including life insurance and annuity insurance, health insurance, accident insurance, and reinsurance of these businesses. The premium income from members is not less than 80% of the total premium income. At present, another domestic institution to operate mutual insurance business is prepared to be established. On 29 March 2018, Panda Financial Holdings issued an announcement saying that it planned to use its own funds of ¥14.3 million yuan to participate in the establishment of Hefu Life Mutual Insurance Co. Ltd., and the first phase of the loan funds will account for 14.3% of Hefu Life’s initial operating funds.8 The significance of developing mutual insurance in China embraces a number of aspects. First, mutual insurance organizations have the characteristics of not pursuing shareholders’ profits and low operating costs and can better provide simple, flexible, and cost-effective insurance products and diversified and personalized insurance services to low- and middle-income groups and in high-risk areas. Second, it is 7 Ibid. 8 See Daily Financial News, 30 March 2018 (see accessed on 15 October 2020).

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conducive to enrich the organization of the insurance market and find new growth points for the insurance industry. Developing mutual insurance organizations to make them a reasonable supplement to shareholding insurance companies can break through the limitations of the existing business model of the insurance industry, change the status quo of the relatively simple form of the insurance market in China, improve the competitiveness of insurance products, and promote specialized, differentiated, characteristic, and diversified development of the insurance market. Third, it is of help in establishing a long-term business philosophy and promoting the transformation and upgrading of the insurance industry. Mutual insurance can better develop insurance types that are conducive to the long-term interests of the insured. In the long run, it will have an important impact on China’s insurance product structure and even business models. Fourth, it is conducive to innovating rural grassroots social management methods and improving rural social management efficiency. The development of mutual insurance can build a self-management platform for the majority of farmers through economic benefits, innovate basic social management methods, improve rural social management efficiency, and resolve rural social contradictions and risks. Finally, it is conducive to raise the people’s insurance awareness and improve the image of the insurance industry. Mutual insurance can better highlight the nature of “mutual assistance and mutual aid” in insurance and promote the insurance mutual assistance culture. 22.3 Pilot Measures for the Supervision and Administration of Mutual Insurance Organizations According to art.181 of the Insurance Law, the commercial insurance businesses operated by legally established insurance institutions other than insurance companies is governed by the Insurance Law. The mutual insurance organizations must follow the rules as provided for in the Insurance Law for their business operation. The Pilot Measures 2015 were formulated in accordance with the Insurance Law, the Regulation of Agriculture Insurance 2016,9 and other relevant laws and regulations.10 The detailed rules are considered now. The term “mutual insurance” means the insurance activities whereby entities or individuals with the same kind of risk protection demand become members by entering into a contract and paying insurance premiums to form a mutual fund which assumes liability of compensation for losses incurred from any incident specified in the contract or assumes the liability for paying insurance money when the insured dies, is injured, or is sick, or reaches the age, time limit, or any other condition specified in the contract. The term “mutual insurance organization” means an organization owned by its members and providing insurance service for its members in the form of mutual cooperation on the basis of equality, free will,

9 The State Council Order No. 666 [2016], amended on 6 February 2016. (see accessed on 15 October 2020). 10 The Pilot Measures for the Supervision and Administration of Mutual Insurance Organizations 2015, art.1.

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and democratic management, including general mutual insurance organizations and specialized or regional mutual insurance organizations, among others.11 The China Banking and Insurance Regulatory Commission (the CBIRC, the current banking and insurance regulatory authority) is responsible for overseeing and regulating mutual insurance organizations and mutual insurance activities in a unified way in accordance with laws, regulations, and the authorization of the State Council. The local offices of the CBIRC perform the duty of regulating mutual insurance organizations within the scope of authority granted by the CBIRC.12 When engaged in insurance activities, mutual insurance organizations must abide by laws, regulations, and social morality and shall not engage in business activities not mentioned in their Articles of Association.13 22.3.1 Formation of a mutual insurance organization In order to make mutual insurance a reasonable and necessary supplement to joint-stock insurance, according to the Pilot Measures 2015, the development of mutual insurance is promoted in three directions: the first type is general mutual insurance organizations, which are positioned to operate in a corporatized manner in a large business scale and a large geographical area. The second type is specialized or regional mutual insurance organizations, which are positioned as mutual organizations that carry out specialized mutual insurance business in a specific industry or a specific risk area, or that provide specialized insurance services to residents in specific areas below the prefecture level. The third type is agricultural mutual insurance organizations mainly targeting farmers or specialized rural organizations. According to international experience, the financing of mutual insurance organizations is relatively difficult. In order to promote the development of mutual insurance as a new type of market entity, the Pilot Measures 2015 set relatively lower market access conditions as compared with the conditions for insurance companies. Among them, general mutual insurance organizations need to meet the main establishment conditions such as “having no less than ¥100 million yuan of initial working capital” and “having no less than 500 initial members”. Regional and specialized mutual insurance organizations need to meet the conditions of “no less than ¥10 million initial operating funds” and “no less than 100 initial members”. Agricultural mutual insurance organizations need to satisfy the condition of “no less than ¥1 million initial working capital”. More detailed rules as to the formation of these three types of mutual insurance organizations are shown later. Mutual insurance organizations shall be formed with the approval of the CBIRC and be legally registered with the Administrative Departments for Industry and Commerce.14 A mutual insurance organization must contain the word “mutual” or “mutual aid” in its name.15

11 12 13 14 15

Ibid., art.2. Ibid., art.3. Ibid., art.4. Ibid., art.5. Ibid., art.6.

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To form a general mutual insurance organization, the following conditions shall be met: (1) Having the principal promoters and ordinary promoters that satisfy the requirements set out by these Measures. In particular, the principal promoters shall be responsible for raising the initial working capital, while the ordinary promoters shall promise to purchase insurance to become members after the organization is formed. The number of ordinary promoters shall not be less than 500; (2) Having no less than ¥100 million yuan of initial working capital; (3) Having Articles of Association that comply with laws, regulations and these Measures; (4) Having the directors (council members), supervisors, and senior executives with the professional knowledge and work experience required for their positions; (5) Having a sound organizational structure and effective management rules; (6) Having a place of business that meets the prescribed requirements and other facilities related to the business it operates; (7) Other conditions as set out by the CBIRC.16 To form a specialized or regional mutual insurance organization, the following conditions shall be met: (1) Having the principal promoters and ordinary promoters that satisfy the requirements set out by these Measures, with the number of ordinary promoters not less than 100; (2) Having no less than ¥10 million yuan of initial working capital; (3) On the basis of the membership system and the closure principle, providing specialized services for specific risks or limiting the business area to administrative regions below the prefecture level; (4) Other conditions for the formation of general mutual insurance organizations.17 For agricultural mutual insurance organizations mainly targeting farmers or specialized rural organizations, and other specialized or regional mutual insurance organizations approved by insurance regulatory authorities, the requirements for their formation may be appropriately lowered on the basis of the preceding rules, provided that the initial working capital shall not be less than ¥1 million yuan.18 The initial working capital shall be raised by the primary promoters and may be donations or loans from others but must be paid up in monetary form. Before making up the organization costs, a mutual insurance organization shall not repay for the initial working capital. When the initial working capital is a creditor’s right, after the sum of surplus reserves and undistributed profits reaches the amount of initial working capital, the principal and interest of the initial working capital may be repaid in instalments if voted through by the assembly of members (representatives) and approved by the insurance regulatory authority. When insolvent, the mutual insurance organization shall stop repaying the principal and interest of the initial working capital. The modes of repayment and return for other forms of initial working capital shall be separately specified in the Articles of Association of the mutual insurance organization.19 The primary promoters of mutual insurance organizations shall have a good credit standing and the ability to make capital contributions continuously, and their qualification requirements shall be, mutatis mutandis, governed by the conditions 16 17 18 19

Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10.

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for being principal shareholders as specified by the Insurance Law and the Measures for the Administration of Equities of Insurance Companies 2018,20 except for primary promoters who are individuals.21 The procedure for formation of mutual insurance organizations shall be governed by the general provisions of the CBIRC on the formation of insurance companies.22 The office qualifications of the directors (council members), supervisors, and senior executives of general mutual insurance organizations shall be governed by the Insurance Law and relevant provisions of the CBIRC. The office qualification requirements for the directors (council members), supervisors, and senior executives of specialized or regional mutual insurance organizations may be appropriately lowered in view of the actualities but shall not violate the prohibitive provisions of laws, regulations, and rules.23 22.3.2 Memberships of a mutual insurance organization The members of a mutual insurance organization are entities or individuals that acknowledge and abide by the Articles of Association of the organization and purchase insurance from it.24 The members of a mutual insurance organization shall enjoy the following rights: (1) To attend the assembly of members (representatives) and have the right to vote, the right to elect, the right to be elected, and the right to participate in the democratic management of the organization; (2) To share the surplus according to the Articles of Association or under the resolution of the assembly of members (representatives); (3) To have the right to enjoy the insurance and related services provided by the organization as agreed upon in the relevant contracts; (4) To have the right to criticize, the right to offer suggestions to, and the right to oversee the organization; (5) To have the right to consult the Articles of Association, the minutes of the assembly of members (representatives), the resolutions of the board of directors (council), the resolutions of the board of supervisors, the financial and accounting statements, and the accounting books; (6) Other rights as specified in the Articles of Association.25 The members of a mutual insurance organization shall fulfil the following obligations: (1) Abiding by the Articles of Association of the organization; (2) Executing the resolutions of the assembly of members (representatives) and the board of directors (council); (3) Paying insurance premiums as agreed upon in the insurance contracts and assuming responsibility to the organization within the limit of the 20 The CIRC Order No. 5 [2018], issued on 2 March 2018 and came into force on 10 April 2018 (see

accessed on 15 October 2020). 21 The Pilot Measures for the Supervision and Administration of Mutual Insurance Organizations 2015, art.11. 22 Ibid., art.12. The rules for formation of insurance companies are provided in articles 6–14 of the Provisions on the Administration of Insurance Companies (the CIRC Order No. 3 [2015]). 23 The Pilot Measures for the Supervision and Administration of Mutual Insurance Organizations 2015, art.13. 24 Ibid., art.14. 25 Ibid., art.15.

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amount of insurance premiums, except as otherwise prescribed in the Articles of Association; (4) Refraining from using their members’ rights to harm the interests of the mutual insurance organization or other members; (5) Other obligations as specified in the Articles of Association.26 The rights and obligations of primary promoters may be prescribed in the Articles of Association.27 Under any of the following circumstances, a member’s membership shall terminate automatically: (1) The insurance contract concerned is terminated; (2) Any cause for termination specified in the Articles of Association occurs.28 22.3.3 Organizational structure of a mutual insurance organization A mutual insurance organization shall set up an assembly of members (representatives) to decide major issues about the organization. The assembly of members (representatives) shall be composed of all members (representatives) and shall be the highest authority of the organization and shall, in principle, adopt the “one person, one vote” system. Except as otherwise specified in the Articles of Association, the powers and organizational procedures of the assembly of members (representatives) shall be determined by reference to the provisions of the Company Law on the general meeting of shareholders.29 A voting result or resolution of the assembly of members (representatives) shall be adopted by a majority of the total votes of the members or member representatives present at the meeting. A resolution to amend the Articles of Association, a resolution to combine, divide, or dissolve, or a plan to repay the principal and interest of the initial working capital, to distribute the surplus or to adjust the insured amount shall be adopted if more than 75% of the total members or member representatives vote for the aforesaid resolutions or plan. The Articles of Association of a mutual insurance organization shall include (1) the name and domicile; (2) the principles, scope of business, and business area; (3) the qualifications, rights, and obligations of promoters and ordinary members; (4) the organizational body and its establishment mode, powers, tenure, and rules of procedure; (5) the method for raising the initial working capital, the conditions for using it, and the measures for repayment; (6) the financial management rules and surplus distribution measures; (7) the risk control mechanism to deal with repayment difficulties resulting from major insurance incidents; (8) the procedure for amending the Articles of Association; (9) the causes of dissolution and the measures for liquidation; and (10) other matters as specified in the Articles of Association.30 A mutual insurance organization shall set up a board of directors (council) and a board of supervisors. For a general mutual insurance organization, the board of directors (council) shall have independent directors. Except as otherwise specified 26 Ibid., art.16. 27 Ibid., art.17. 28 Ibid., art.18. 29 Ibid., art.19. 30 Ibid., art.21. The rules for Articles of Association are provided in the Notice of the CIRC on Issuing the Guidelines to the Articles of Association of Insurance Companies (Bao Jian Fa No. 36 [2017]).

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by the Articles of Association, the board of directors (council) and the board of supervisors of a mutual insurance organization shall apply the provisions of the Company Law on the board of directors and the board of supervisors of companies limited by shares.31 To convene a meeting of the assembly of members (representatives) or the board of directors, a mutual insurance organization shall inform the insurance regulatory authority at least seven working days beforehand, and the insurance regulatory authority shall have the right to attend the meeting as a non-voting delegate. A resolution made by the assembly of members (representatives) or the board of directors (council) shall be submitted to the insurance regulatory authority for recordation within seven working days after the meeting.32 A mutual insurance organization may apply to form branch offices. If needed for business development, a mutual insurance organization may, by means of providing initial working capital or reinsurance support, apply to form mutual insurance sub-organizations that operate the same type of business and to manage them in a unified way. The specific conditions and ways for formation shall be separately determined by the CBIRC.33 22.3.4 Business rules The scope of business of a mutual insurance organization shall be determined by the insurance regulatory authority in accordance with the law.34 A mutual insurance organization shall, according to its Articles of Association, strengthen internal management and establish sound internal control rules.35 A mutual insurance organization shall, under the principle of safeguarding the interests of members, assess the insurance liability reserves in accordance with the accounting standards for enterprises and relevant provisions of the CBIRC.36 The insurance clauses and premium rates of mutual insurance organizations shall be governed by relevant provisions of the CBIRC on insurance clauses and premium rates.37 The capital of a mutual insurance organization shall be under full custody. A mutual insurance organization shall, under the premise of ensuring capital safety, use it in accordance with relevant provisions of the CBIRC. In particular, specialized or regional mutual insurance organizations that make investments at their own discretion may use capital only in the following forms: (1) Bank deposits; (2) Treasury 31 The Pilot Measures for the Supervision and Administration of Mutual Insurance Organizations 2015, art.22. 32 Ibid., art.23. 33 Ibid., art.24. 34 Ibid., art.25. 35 Ibid., art.26. 36 Ibid., art.27. 37 Ibid., art.28. There are two pieces of major regulations for regulating the insurance clauses and premium rates for property and personal insurance business respectively, namely, the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Property Insurance Companies (the CIRC Order No. 3 [2010]) and the Measures for the Administration of Insurance Clauses and Insurance Premium Rates of Personal Insurance Companies (the CIRC Order No. 3 [2015]).

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bonds, and other low-risk fixed-income products approved by the CBIRC; (3) Other forms approved by the CBIRC. Specialized or regional mutual insurance organizations that commission specialized investment institutions approved by the CBIRC to make investments shall not be restricted by the aforesaid forms.38 A mutual insurance organization shall operate business in a prudential manner, strictly manage risks, undertake reinsurance business in view of its actualities, and establish an emergency response plan for major risk incidents.39 It shall pay for the insurance security fund as by reference to provisions governing insurance companies, and the specific modes and rates shall be separately determined by the CBIRC.40 It shall conduct accounting in accordance with the accounting standards for enterprises and establish financial management rules suitable for its operating characteristics of mutual restriction.41 It shall establish information disclosure rules suitable for the operating characteristics of mutual insurance organizations, safeguard its members’ lawful rights and interests as insurance consumers and the owners of the mutual insurance organization, and use plain language to disclose information about products, financial management, governance, risk management status, solvency, major affiliated transactions, and major matters to its members on a regular basis.42 A mutual insurance organization shall establish and improve supervision and audit rules and report supervision and audit information to the assembly of members (representatives). A general mutual insurance organization shall hire an external audit agency to conduct an annual audit. Where a senior executive leaves office, an outgoing audit shall be conducted.43 22.3.5 Supervision and administration The insurance regulatory authority shall oversee and regulate mutual insurance organizations on an ongoing and dynamic basis in accordance with the requirements for prudential supervision.44 The insurance regulatory authority shall combine on-site inspection and off-site supervision in the supervision and regulation of mutual insurance organizations.45 The insurance regulatory authority shall oversee and regulate a mutual insurance organization in terms of matters including but not limited to the following: (1) Whether the formation or modification of the organization has been approved or reported to the insurance regulatory authority; (2) Whether the office qualifications of directors (council members), supervisors, and senior executives have been confirmed in accordance with the law; (3) Whether the initial working capital and

38 The Pilot Measures for the Supervision and Administration of Mutual Insurance Organizations 2015, art.29. 39 Ibid., art.30. 40 Ibid., art.31. 41 Ibid., art.32. 42 Ibid., art.33. 43 Ibid., art.34. 44 Ibid., art.35. 45 Ibid., art.36.

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various reserves are real and sufficient; (4) Whether the internal control rules and internal governance comply with the provisions of the insurance regulatory authority; (5) Whether its solvency is adequate; (6) Whether its utilization of funds is legal; (7) Whether the information disclosed is adequate; (8) Whether its business operations and financial condition are legal, and whether its reports, statements, documents, and materials are timely, integrated, and veracious; (9) Whether insurance clauses and premium rates have been reported for approval or recordation as required; (10) Whether other matters requiring to be reported ex post have been reported as required; (11) Other matters as set out by the insurance regulatory authority in accordance with the law.46 The solvency management of mutual insurance organizations shall be governed by reference to the provisions on the solvency management of insurance companies, except as otherwise prescribed by the CBIRC. When insolvent, a mutual insurance organization shall give a risk alert to its members in a timely manner and convene a meeting of the assembly of members (representatives) within two months to determine measures for improving solvency.47 A mutual insurance organization shall file statistical statements as required and well conduct the statistical work. A general mutual insurance organization shall file solvency reports, financial and accounting reports, actuarial reports, compliance reports, and other relevant reports, statements, documents, and materials with the insurance regulatory authority within the prescribed time limits as required. A specialized or regional mutual insurance organization shall file solvency reports, financial and accounting reports, business reports, and other relevant reports, statements, documents, and materials with the insurance regulatory authority in a timely manner.48 The Pilot Measures 2015 shall apply, mutatis mutandis, to mutual insurance companies and cooperative insurance organizations engaging in insurance business49 and shall be subject to interpretation by the CBIRC.50 22.4 Conclusion The Pilot Measures 2015 have three major features. The first one is of overall convergence. The essential differences between mutual insurance and joint-stock insurance lie in the differences in respect of ownership and governance methods. There are no obvious differences in daily operations and business rules. In various countries in the world, basically the same regulatory rules are applied to the business supervision for the two types of insurance institutions. Therefore, the Pilot Measures 2015 follows the existing regulatory framework and adopts the rules that are essentially the same as those for the joint-stock companies in terms of business supervision. The second feature is to reflect pertinence. In order to fully reflect

46 47 48 49 50

Ibid., art.37. Ibid., art.48. Ibid., art.49. Rules for solvency are discussed in chapter 11 of this book. Ibid., art.40. Ibid., art.41.

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the characteristics of the mutual insurance membership system and democratic management, the Pilot Measures 2015 made specific provisions in terms of governance structure and information disclosure to fully protect the rights and interests of participating members. The third feature is to reflect the difference in the size and speciality of the mutual insurance organizations. The Pilot Measures 2015 treats different types of mutual insurance organizations appropriately. The same current regulatory system used for the supervision of insurance companies is applied to the supervision of the general mutual insurance organizations, while the regulatory requirements for regional, specialized, and agricultural-related mutual insurance organizations are appropriately relaxed according to the actual situation. For regional, specialized small and medium-sized mutual insurance organizations, the CBIRC is to explore the practicality of authorizing local insurance regulatory bureaus to implement territorial supervision. When conditions become ripe, they can also gradually implement registration management. It should be noted that the Pilot Measures 2015 is the leading and basic document for carrying out supervision of mutual insurance organization, and it embodies, to a large extent, the main principles and core concepts of mutual insurance supervision.51 In the future, the CBIRC will further develop supporting rules on organizational governance, information disclosure, the making of articles of association, solvency, branches, and risk management, and gradually build a complete and systematic mutual insurance supervision system. The CBIRC will proceed to speed up the relevant legislative process and actively promote the addition of relevant provisions in laws and regulations such as the Insurance Law to create a better legal environment for the development of mutual insurance.52 There are no specific provisions regulating mutual insurance organization in the Insurance Law, so it is necessary to set up such provisions in the next round of Insurance Law reform.

51 The CIRC press conference for the publication of the Pilot Measures, 2 February 2015 (see accessed on 15 October 2020). 52 Ibid.

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CHAPTER 23

Protection of insurance consumers

23.1 Introduction The primary objective and function for insurance regulation is to protect the legitimate rights and interests of the insurance consumers. Protecting insurance consumers is the prerequisite and foundation of the survival and development of the insurance industry and the common responsibility of the insurance industry. In chapters 9, 10, and 11, we considered the regulatory measures for the insurers to follow to improve protection of the insurance consumers: (1) to formulate insurance clauses and premium rates fairly and reasonably; (2) to regulate sales practices and activities; (3) to handle and pay claims fairly and promptly; (4) to promote quality of insurance service; (5) to protect the safety of consumers’ information; (6) to disclose information relating to the insurance products and insurance service; (7) to increase transparency with regard to matters for insurance consumer protection; (8) to severely punish behaviours which harm consumers’ legitimate rights and interests; and (9) to ensure that the insurer is in a financial position to make payment by maintaining adequate solvency capability so as to meet its promises to its insureds. In addition to the measures just mentioned, further mechanisms are also in place to safeguard the policyholders’ interests. We will consider these mechanisms in this chapter, with particular focus on the following three topics: the insurance security fund for the situation where the insurers becomes insolvent, the mechanism in respect of consumers’ complaint handling and dispute resolution, and the CBIRC’s guidelines for building of working systems and mechanisms for the protection of insurance consumers. To begin with, it is convenient to take a look at the legal framework for the protections of insurance consumers 23.2 Legal framework for the protection of insurance consumers The Insurance Law provides several mechanisms to protect the insureds where the insurer becomes insolvent or bankrupt or the insurer damages the public interest in violation of the Insurance Law, which may seriously endanger or has seriously endangered the solvency of the insurer. 1264

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23.2.1 The insurance security fund The major statutory scheme for the protection of the insureds of an insurer which has become insolvent is the insurance security fund. The Insurance Law (art.100) requires insurers to make contributions to an insurance security fund, which is managed as a pool and applied through overall planning in the following circumstances: (1) providing relief to the proposers, the insureds, or the beneficiaries where an insurance company is revoked or declared bankrupt; (2) providing relief to the insurance companies that take over the life insurance contracts from the insurance company which has been revoked or declared bankrupt; or (3) other circumstances as provided for by the State Council. The specific management rules for raising, managing, and using the insurance protection fund shall be formulated by the State Council.1 In accordance with the Insurance Law, the insurance regulatory authority has formulated two major pieces of regulation with regard to insurance security fund and the business of the China Insurance Security Fund Co. Ltd. (CISFCL): (1) The Measures for the Administration of the Insurance Security Fund which was issued and implemented on 11 September 2008.2 (2) The Notice of the General Office of the CIRC on Issuing the Measures for Business Supervision and Administration of China Insurance Security Fund Co., Ltd.; (2015 Revision) which was issued and implemented on 14 December 2015.3 The questions of how the insurance security fund is raised and used and how the CISFCL operates will be discussed in section 23.5 and section 23.6 respectively. 23.2.2 Takeover of certain insurance companies by the regulatory authority According to art.144 of the Insurance Law, where there are any of the following circumstances with respect to an insurance company, the CBIRC may take over the company: (1) the solvency of the company is seriously inadequate; (2) the company is violating the provisions of the Insurance Law and hindering the social and public interest so that its solvency may be seriously threatened or has already been threatened. The debtor-creditor relationships of the insurance company taken over do not change as a result of the takeover.4 The composition of the takeover task force and the takeover procedures shall be determined and publicized by the CBIRC.5 When the term of takeover is to expire, the CBIRC may determine to extend it. However, the maximum term of takeover may not exceed two years.6

1 The Insurance Law, art.100. 2 The CIRC Order No. 2 [2008] (see accessed on 16 October 2020). 3 Bao Jian Ting Fa No. 79 [2015] (see accessed on 16 October 2020). 4 The Insurance Law, art.144. 5 Ibid., art.145. 6 Ibid., art.146.

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Where an insurance company in takeover resumes its normal business operation capacity upon the expiration of the takeover period, the CBIRC shall decide to terminate the takeover and make an announcement thereon.7 Where an insurance company in rectification or takeover falls under the circumstances prescribed in article 2 of the Enterprise Bankruptcy Law of China,8 the CBIRC may apply to the people’s court to subject the company to restructuring or bankruptcy liquidation.9 23.2.3 Transfer of life insurance contracts and reserves to solvent insurers Like any other enterprises, insurance companies can be dissolved or become bankrupt. In the event that an insurance company needs to be dissolved as a result of any split, merger, resolution of the shareholders’ meeting, or occurrence of a cause of dissolution prescribed in the Articles of Association of the company, it shall be dissolved upon the approval of the CBIRC. In order to protect the insureds of a life insurance company, the Insurance Law specifically prohibits its dissolution except for any split, merger, or cancellation according to law.10 A liquidation group shall be set up to perform liquidation of an insurance company to be dissolved.11 Where an insurance company falls under any of the circumstances prescribed in article 2 of the Enterprise Bankruptcy Law of China, upon approval of the CBIRC, the insurance company or any creditor thereof may apply to the people’s court for restructuring, reconciliation, or bankruptcy liquidation; the CBIRC may also apply to the people’s court to subject the company to restructuring or bankruptcy liquidation.12 In the event that a life insurance company is revoked or declared bankrupt, all of the life insurance contracts and reserves held by it must be transferred to other life insurance companies; where no agreement in respect of such transfer can be reached with other insurance companies, the CBIRC shall designate life insurance companies to accept such transfer. Where any life insurance contracts or liability reserves are transferred or accepted according to the designation of the CBIRC, the legitimate rights and interests of the insured and beneficiaries shall be protected.13 The Insurance Law (art.91) sets out the rules for the allocation of properties of a bankrupt insurer, which provides that the bankruptcy property shall be used for repayment in the following order after first repayment of bankruptcy fees and debts incurred for the common benefit of creditors:

7 Ibid., art.147. 8 Article 2 the Enterprise Bankruptcy Law of China provides that if an enterprise legal person is unable to pay off its due debts, and its assets are insufficient to pay off all debts or are obviously incapable of repaying, the debts shall be cleared in accordance with the provisions of this law. If an enterprise legal person is under the circumstances specified in the preceding paragraph, or is likely to be obviously insolvent, it may undergo reorganization in accordance with the provisions of this law. 9 The Insurance Law, art.148. 10 Ibid., art.89. 11 Ibid. 12 Ibid., art.90. 13 Ibid., art.92.

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(1) the wages and salaries, medical fees, disability subsidies, and pensions owed to employees, the basic old-age insurance premiums and basic medical insurance premiums which shall be transferred into the personal accounts of employees, and the compensations which shall be made to employees as required by laws and administrative regulations; (2) insurance indemnities or insurance money; (3) the social insurance fees other than those prescribed in subparagraph (1) and taxes owed by the company; and (4) the general creditors’ rights in bankruptcy. If the bankruptcy property is not enough for repayment of debts in the same order, it shall be distributed pro rata. The salaries of the directors, supervisors, and senior managers of a bankrupt insurance company shall be calculated as per the average wage of the employees of the company. 23.2.4 Consumers’ complaint-handling mechanisms Insurers are required to handle complaints in a fair and timely manner.The CBIRC promulgated the Measures for the Administration of Handling Complaints of Banking and Insurance Consumers on 14 January 2020, which came into force on 1 March 2020.14 These Measures are considered in section 23.8. The CBIRC also chooses to have its own complaints monitoring systems in place in order to benefit from the findings resulting from policyholder complaints. It issued the Measures for the Administration of Public Complaints on 14 January 2020, which came into force on 1 March 2020.15 There are also independent dispute resolution mechanisms in place.The Supreme People’s Court and the insurance regulatory authority have jointly established a new insurance dispute resolution mechanism: the linked litigation-mediation scheme.16 This mechanism will be discussed in section 23.9. 23.2.5 Requirements on insurers and insurance associations to build mechanisms for protection of consumers In order to consolidate the primary responsibilities of banking and insurance institutions for protection of consumers’ rights and interests, the CBIRC recently released the Guidelines of the CBIRC on Strengthening the Development of Consumer Rights and Interests Protection System and Mechanism in Banking and Insurance Institutions on 4 November 2019.17 These guidelines set out requirements for the

14 The CBIRC Order No. 3 [2020] (see accessed on 16 October 2020). 15 The CBIRC Order No.2 [2020] (see accessed on 16 October 2020). 16 Zhen Jing, “A New Insurance Dispute Resolution Mechanism: the Linked Litigation-Mediation Scheme in China” (2018) Journal of Business Law, 40–66. 17 Yin Bao Jian Fa No. 38 [2019] (see accessed on 16 October 2020).

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insurers and insurance associations to follow and will be considered in detail in section 23.7. 23.3 China Insurance Consumer Confidence Index China Insurance Security Fund Co. Ltd. has, since 2016, published four reports on the China Insurance Consumer Confidence Index. The 2019 report shows that the China Insurance Consumer Confidence Index (the CICCI) stood at 71.9 (out of 100) in 2018, 43.8% higher than the neutral value of 50.18 The index within the range of high confidence indicates stable and optimistic insurance consumer confidence. The CICCI in 2015 was 69.2. According to the 2019 report, insurance consumers show stable confidence in the general insurance industry development environment, and they are optimistic about its future development and operations. Insurance consumers also have trust in the industry and make positive comments on the honesty of insurers in selling products and settling claims as well as on the convenient access to product information and services. The consumption confidence is at a higher level. Consumers’ purchase intentions remain strong, and their loyalty is relatively high. The insurance industry, which has shifted its focus back to its basic functions and main businesses, plays a greater role in the insurance security. In the consumer survey in 2019, through face-to-face, telephone, and online interviews, the questionnaire survey collected nearly 20,000 effective responses from commercial insurance consumers in 23 provinces across China. A total of 37 insurers, including China Life, Pacific Life, AIA, PICC, China Life Property & Casualty Insurance, and Yong An Insurance, offered great help to the online interview. They posted the questionnaire weblinks and promotion materials on their official sites, Weibo accounts, and WeChat platforms, attracting over 10,000 effective responses. The CICCI reflects, to some extent, consumers’ confidence in the insurance environment and the insurance industry as well as their trust preferences and purchase intentions. Regular preparation and publication of the index improve insurance service and enhance protection of consumer rights. The CBIRC Consumer Protection Bureau has given opinions and suggestions on the reports of CICCI. On this basis, the CISFCL continue to improve the preparation methodology, optimize the index system, and promote the index application in a bid to bring the insurance industry service to a higher level. 23.4 An overview of the insurance security fund The China Insurance Security Fund (CISF) is an industrial risk bailout fund derived from contributions from insurers. The CISF is regulated by the Insurance Law (art.100) and the Measures for Administration of the Insurance Security Fund 2008.19 It has the features of pooled management and coordinated use, and serves the purpose of bailing out policyholders and policy transferee companies or resolving risks 18 See , accessed on 16 October 2020. 19 The CIRC Order No. 2 [2008].

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of the insurance industry. The CISF has kept growing, gradually refined its management system, and continuously intensified the security functions. As of 30 June 2020, the CISF balance reached ¥152.8 billion yuan, of which the property insurance security fund was ¥95.7 billion yuan, accounting for 62.60% of the total; the life insurance protection fund was ¥57.1 billion yuan, accounting for 37.40%. Currently, 94 life insurer and 85 property insurers are paying insurance security funds.20 The development of the CISF experienced three stages.21 At stage one, insurance companies separately accrued the fund and deposited the fund in special account. The 1995 version of the Insurance Law (art.96) specifies: [I]nsurance companies shall draw the insurance security fund in accordance with the provisions of the financial supervision authority to secure the interests of the insured and support prudential operation of insurance companies. The insurance security fund shall be managed in a concentrated manner and used in a coordinated manner.

This is the first general provision regarding the purpose, accrual, and management of the CISF. The People’s Bank of China and the Ministry of Finance released documents and specified the accrual and use of the security fund in detail. Article 32 of the Provisional Regulations on Insurance Administration issued by the People’s Bank of China in July 1996 prescribes: [A]n insurance company shall withdraw the insurance security fund at 1% of the annual premium revenue, and stop withdrawing the fund when it reaches 10% of the total assets of such a company. The insurance security fund shall be separately withdrawn and deposited in a special account with the People’s Bank of China or a commercial bank designated by the People’s Bank of China.

In May 1997, the Ministry of Finance released the Notice on Financial Management of Insurance Security Fund of Insurance Companies, allowing the security fund to be accounted into the cost and specifying that the security fund can only be used to deposit in the four exclusively state-owned commercial banks and buy government bonds. In 1999, the Ministry of Finance issued the Financial System for Insurance Companies, providing: [A]n insurance company shall withdraw the insurance security fund at 1% of the retained annual premium revenue, and stop withdrawing the fund when it meets 6% of the total assets. Moreover, the insurance company shall withdraw the insurance security fund for the property insurance, personal accidental injury insurance, shortterm health insurance and reinsurance, but withdraw no insurance security fund for the life insurance and long-term health insurance businesses.

Stage two featured concentrated management of special account collection and strengthening supervision intensification. The 2002 version of Insurance Law provides that concrete measures regarding the use of the insurance security fund 20 See accessed on 16 October 2020. 21 See accessed on 16 October 2020.

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shall be formulated by the insurance regulation authority. Accordingly, the China Insurance Regulatory Commission (the CIRC, the former insurance regulatory authority) issued the Measures for Administration of the Insurance Security Fund on 30 December 2004. The Measures specifies that the security fund was classified into the security fund of property insurance companies and that of life insurance companies, the CIRC was responsible for concentrated management and coordinated use of the fund, and the Security Fund Council supervised the management and use of the security fund. In March 2005, the CIRC released the Notice on Issues Concerning the Payment of Insurance Security Fund, specifying that insurance companies should pay the insurance security funds they had withdrawn by the end of 2004 in two instalments to the special security fund account opened by the CIRC within 2005, marking the initiation of concentrated management. The Security Fund Council was established in February 2006, with the members including related ministries, commissions, and insurance companies, and was granted the mission to supervise the management and use of the CISF. Stage three is marked by the establishment of the China Insurance Security Fund Co. Ltd. in 2008. Rapid development of the insurance industry in recent years has raised stricter requirements for the management and operation of the security fund. After thorough evaluation by absorbing international practices and soliciting comments from the members of the Council in 2007, the CIRC suggested establishing a company and implementing professional operation of the CISF in a market-oriented manner, which was approved by the State Council. In September 2008, the CIRC, the Ministry of Finance, and the People’s Bank of China jointly issued the Measures for Administration of the Insurance Security Fund 2008, and sponsored China Insurance Security Fund Co., Ltd., which is responsible for collecting, managing, and using CISF according to the law. The Security Fund Council was automatically terminated after the establishment of the CISFC. The 2009 version of the Insurance Law (art.100) has further defined the basic principles for collection, management, and use of the CISF. 23.5 The administration of the insurance security fund The current regulation for the administration of the CISF is the Measures for the Administration of Insurance Security Fund 2008.The Measures contains 36 articles in seven chapters: the general provisions, Insurance Security Fund Company, the raising of the insurance security fund, the use of the insurance security fund, administration and supervision, legal liabilities, and supplementary provisions. The “insurance protection fund” refers to the non-governmental industry risks relief fund, which are founded by payment in accordance with the Insurance Law and the provisions of the Measures and used for assisting the policyholders and companies with ceded policies, or for handling the risks of insurance industry under the circumstances specified by art.16 of the Measures 2008.22

22 The Measures for the Administration of Insurance Security Fund 2008, art.3.

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The “policy transferee company” means an insurance company operating a life insurance business which accepts the life insurance contracts legally transferred from an insurance company operating life insurance business which is legally abolished or legally bankrupt.23 The insurance security fund is divided into the property insurance protection fund and the life insurance protection fund. The property insurance protection fund is founded by the payments from the property insurance companies. The life insurance protection fund is founded by the payments from the life insurance companies.24 The insurance security fund shall be used under the principle of protecting the interests of policyholders and maintaining the stable operation of the insurance sector, shall be under the centralized management according to the law, and shall be used according to overall planning.25 The wholly state-owned China’s Insurance Security Fund Co. Ltd. has been set up to be responsible for the raising, management, and use of the insurance security fund according to the laws. The Insurance Security Fund Company operates independently in accordance with the laws, and its board of directors are responsible for the legitimate use and security of the insurance security fund.26 23.5.1 Rules regulating the Insurance Security Fund Co. Ltd. The Insurance Security Fund Company is required to establish and improve its corporate governance structure and internal control and risk management rules according to the law, operate according to the law, and conduct independent accounting.27 The Insurance Security Fund Company must conduct the following business according to the law:28 (1) The fundraising, management, and operation of the insurance security fund. (2) Monitoring the risks in the insurance sector and submitting recommendations on regulatory disposition to the CBIRC when discovering any significant risk arising in the operation and management of an insurance company that may damage policyholders and the insurance sector. (3) Providing assistance to policyholders, policy transferee companies, and other individuals and institutions or participation in the risk disposition of the insurance sector. (4) Participation in the liquidation of an insurance company when the company is legally abolished or legally bankrupt.

23 24 25 26 27 28

Ibid. Ibid., art.4. Ibid., art.5. Ibid., art.6. The Measures for the Administration of Insurance Security Fund 2008, art.7. Ibid., art.8.

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(5) The management and disposition of assets acquired from satisfaction of claims. (6) Other business approved by the State Council. Where the Insurance Security Fund Company submits recommendations on regulatory disposition to the CBIRC under item (2) of the preceding paragraph, it shall, in a timely manner, submit a copy of relevant information to the Ministry of Finance and the People’s Bank of China. The Insurance Security Fund Company must have a board of directors, and the members of the board of directors shall be recommended by the CBIRC, the Ministry of Finance, the People’s Bank of China, the State Administration of Taxation, and the Legislative Affairs Office of the State Council. The chairman of the board of directors shall be the legal representative of the company, be recommended by the CBIRC, and be reported to the State Council for approval. The Insurance Security Fund Company shall, in accordance with the Company Law of China, establish its organizational structure and improve corporate governance.29 As needed for assisting policyholders and policy transferee companies according to the law and disposing of risks in the insurance sector, the Insurance Security Fund Company may, after the financing plans are developed by the CBIRC in consultation with the relevant departments and approved by the State Council, raise funds in various forms.30 The Insurance Security Fund Company must establish a mechanism for the sharing of information on insurance companies with the CBIRC. The CBIRC shall, on a regular basis, provide the Insurance Security Fund Company with finance, business, and other operation and management information on insurance companies. Where the CBIRC determines that an insurance company has any hidden risk, the CBIRC shall provide the Insurance Security Fund Company with finance, business, and other special data and materials on the insurance company. The Insurance Security Fund Company shall have the obligation of keeping all data and materials known on insurance companies confidential.31 The dissolution of the Insurance Security Fund Company must be subject to the approval of the State Council.32 23.5.2 Fundraising of the insurance security fund The sources of the insurance security fund shall be as follows:33 (1) Contributions to the insurance security fund made by domestic insurance companies according to the law.

29 30 31 32 33

Ibid., art.9. Ibid., art.10. Ibid., art.11. Ibid., art.12. The Measures for the Administration of Insurance Security Fund 2008, art.13.

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(2) Income from satisfaction of claims legally obtained by the Insurance Security Fund Company from the liquidation property of bankrupt insurance companies. (3) Donations. (4) Return on investment of the aforesaid funds. (5) Other lawful income. An insurance company shall, according to the following provisions, make contributions to the insurance security fund for its property insurance business or personal insurance business, and the insurance business for which contributions to the insurance security fund are made shall be covered by the relief from the insurance security fund:34 (1) 0.8% of the premium income for non-investment-linked property insurance; and 0.08% of the business income for investment-linked property insurance with guaranteed income or 0.05% of the business income for investment-linked property insurance without guaranteed income. (2) 0.15% of the business income for life insurance with guaranteed income or 0.05% of the business income for life insurance without guaranteed income. (3) 0.8% of the premium income for short-term health insurance and 0.15% of the premium income for long-term health insurance. (4) 0.8% of the premium income for non-investment-linked accidental injury insurance; and 0.08% of the business income for investment-linked accidental injury insurance with guaranteed income or 0.05% of the business income for investment-linked accidental injury insurance without guaranteed income. The term “business income” means the total amount paid to an insurance company by insurance applicants as agreed upon in insurance contracts for purchasing corresponding insurance products. An insurance company shall, in a timely manner and in full amount, pay contributions to the insurance security fund into the special account of the Insurance Security Fund Company, but under any of the following circumstances, the payment may be suspended:35 (1) If the balance of contributions to the insurance security fund made by a property company reaches 6% of the company’s total assets. (2) If the balance of contributions to the insurance security fund made by a personal insurance company reaches 1% of the company’s total assets. Where the balance of contributions to the insurance security fund made by an insurance company decreases or the company’s total assets increase, causing the ratio between the balance of contributions to the insurance security fund and the total assets to fail the requirement of the preceding paragraph, the payment of 34 Ibid., art.14. 35 Ibid., art.15.

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contributions to the insurance security fund shall be automatically resumed. The Insurance Security Fund Company shall conduct separate accounting of the contributions to the insurance security fund made by each insurance company and the changes thereof. The balance of contributions to the insurance security fund made by an insurance company means the cumulative contributions to the insurance security fund made by the company plus the apportioned investment return minus the various apportioned expenditures and the amount of disbursement. 23.5.3 Use of the insurance security fund The insurance security fund may be used under any of the following circumstances:36 (1) An insurance company is legally abolished or legally bankrupt according to the law, and its liquidation property is not sufficient to pay policy benefits. (2) The CBIRC determines in consultation with the relevant departments that there is any significant risk in an insurance company that may seriously damage the public interest and financial stability. To use the insurance security fund, the CBIRC shall draft risk disposition plans and use measures, which shall be submitted to the State Council for approval after consultation with the relevant departments. The Insurance Security Fund Company shall be responsible for handling the registration, granting, fund allocation, and other specific matters in accordance with the risk disposition plans and use measures. The Insurance Security Fund Company shall manage in separate accounts and use separately the property insurance security fund and the personal insurance security fund.37 The property insurance security fund shall be used only for providing assistance to the policyholders of property insurance companies and conducting risk disposition for property insurance companies when there is any significant risk as determined under item (2) of article 16 of these Measures 2008.The personal insurance security fund shall be used only for providing assistance to the policyholders of personal insurance companies and the policy transferee companies acquiring life insurance contracts and conducting risk disposition for personal insurance companies when there is any significant risk as determined under item (2) of article 16 of these Measures 2008.38 Where an insurance company is legally abolished or legally bankrupt, and its liquidation property is not sufficient for paying policy benefits, the insurance security fund shall provide assistance to the policyholders of non-life insurance contracts under the following rules:39 (1) A policyholder’s loss that is not more than ¥50,000 yuan shall be fully covered by the assistance from the insurance security fund. 36 37 38 39

The Measures for the Administration of Insurance Security Fund 2008, art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19.

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(2) If the policyholder is an individual, for his or her loss in excess of ¥50,000 yuan, 90% of the excess shall be covered by the assistance from the insurance security fund; if the policyholder is an institution, for its loss in excess of ¥50,000 yuan, 80% of the excess shall be covered by the assistance from the insurance security fund. The policyholder’s loss as mentioned in the preceding paragraph means the balance between the policyholder’s policy benefits and the payment from the liquidation of property. Where an insurance company operating a life insurance business is legally abolished or legally bankrupt, the life insurance contracts held by it must be legally transferred to other insurance companies operating a life insurance business; if it cannot reach a transfer agreement with other insurance companies, the CBIRC shall designate an insurance company operating a life insurance business to receive the life insurance contracts.40 Where the liquidation assets of an insurance company which is legally abolished or legally bankrupt are not sufficient to pay the policy benefits under life insurance contracts, the insurance security fund may provide assistance to the policy transferee companies under the following rules:41 (1) If the policyholder is an individual, assistance shall be provided under the condition that the policy benefits after transfer shall not exceed 90% of the policy benefits before transfer. (2) If the policyholder is an institution, assistance shall be provided under the condition that the policy benefits after transfer shall not exceed 80% of the policy benefits before transfer. Where the insurance security fund assists policy transferee companies under the preceding paragraph, the amounts of assistance shall be determined under the principle of protecting the rights and interests of small- and medium-sized policyholders to maintain stability of the insurance market and taking into account the condition of the insurance security fund. According to the actual social and economic developments, the CBIRC may, with the approval of the State Council, adjust in due time the amounts and proportions of assistance from the insurance security fund in conjunction with the relevant departments to protect the lawful rights and interests of the policyholders.42 Where an insurance company is legally abolished or legally bankrupt, and the insurance security fund provides assistance to the policyholders or policy transferee companies, the amounts of assistance shall be deducted from the insurance security fund in the following sequence:43 (1) The balance of contributions to the insurance security fund made by the insurance company which is legally abolished or legally bankrupt.

40 41 42 43

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23.

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(2) The balances of contributions to the insurance security fund made by other insurance companies. The amounts deducted from the balances of contributions to the insurance security fund made by other insurance companies shall be calculated according to their market shares in the previous year. Where an insurance company is legally abolished or legally bankrupt, a policyholder may, after the abolition decision is made or before the application for bankruptcy is filed with the people’s court, enter into a claim transfer agreement with the Insurance Security Fund Company, and the Insurance Security Fund Company shall pay the amount of assistance from the insurance security fund to the policyholder and thus acquire the policyholder’s claim against the insurance company. If the payment to the insurance security fund after liquidation is concluded is more than the amount of assistance paid, the insurance security fund shall refund the difference to the policyholder.44 The following business shall not be covered by the assistance from the insurance security fund, for which no contributions to the insurance security fund have been made:45 (1) Overseas direct insurance underwritten by an insurance company. (2) Inbound reinsurance of an insurance company. (3) Policy-oriented insurance in which the final risks are assumed by the state finance as determined by the State Council. (4) Enterprise annuity trustee, account manager, and other enterprise annuity management business of an insurance company. (5) Any other business not covered by the assistance from the insurance security fund as determined by the CBIRC in conjunction with the relevant departments. Where an insurance company is legally abolished or legally bankrupt, if any of its directors, senior executives, or shareholders is directly liable for the abolition or bankruptcy of the company because the director, senior executive, or shareholder violates any law, administrative regulation, or relevant provisions issued by the state, the insurance security fund shall not provide assistance for the policy benefits held in the insurance company by such a director or senior executive or the policy benefits in property loss insurance held in the insurance company by such a shareholder. 23.5.4 Administration and supervision of the insurance security fund The CBIRC shall, according to the law, regulate the business of the Insurance Security Fund Company and the fundraising, management, and operation of the insurance security fund.46

44 Ibid., art.24. 45 Ibid., art.25. 46 The Measures for the Administration of Insurance Security Fund 2008, art.26.

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The Ministry of Finance shall be responsible for the state-owned asset management and financial supervision of the Insurance Security Fund Company. The budget and final account proposal of the Insurance Security Fund Company shall be prepared by the board of directors of the Insurance Security Fund Company and be reported to the Ministry of Finance for approval.47 The Insurance Security Fund Company shall establish a scientific performance evaluation system and on a regular basis report the evaluation results to the CBIRC, the Ministry of Finance, and other relevant departments.48 The insurance security fund shall invest under the principles of safety, liquidity, and profitability, and maintenance and appreciation of asset values shall be achieved under the premise of ensuring asset safety. The insurance security fund shall invest only in bank deposits, government bonds, Central Bank bills, central corporate bonds, and financial bonds issued by central financial institutions and as otherwise approved by the State Council.49 The Insurance Security Fund Company may authorize professional investment management institutions to conduct investment management of the insurance security fund, and place the insurance security fund under authorized investment management under custody of a third party.50 The Insurance Security Fund Company shall submit the relevant reports according to the following provisions:51 (1) Reporting monthly on the fundraising, investment, and use of the insurance security fund to the CBIRC, the Ministry of Finance, the People’s Bank of China, and other relevant departments. (2) Submitting the audited annual financial report of the company to the CBIRC, the Ministry of Finance, the People’s Bank of China, and other relevant departments according to the relevant provisions. (3) Other reports that shall be submitted according to the law. Where the Insurance Security Fund Company fails to submit the relevant reports in a timely manner to the relevant departments of the state in accordance with these Measures 2008, the relevant departments of the state shall order it to take corrective action. The Insurance Security Fund Company shall, on a regular basis, disclose the relevant financial information on the insurance security fund to insurance companies.52 23.5.5 Legal liability Where, in violation of the provisions of the Insurance Law, an insurance company fails to pay in a timely manner contributions to the insurance security fund in accordance with the provisions of these Measures 2008, the CBIRC shall, 47 48 49 50 51 52

Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31. Ibid., art.32.

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according to the law, punish the insurance company, the directly liable senior executive, and other directly liable persons.53 Where a director, a senior executive, or any other staff member of the Insurance Security Fund Company uses the insurance security fund in violation of any law or administrative regulation or these Measures 2008 or illegally possesses funds of the insurance security fund by embezzlement, theft, fraud, and other means, if it is criminally punishable, he or she shall be held criminally liable according to the law.54 23.6 The business operation of the Insurance Security Fund Co. Ltd. The CIRC formulated a specific piece of regulation to govern the business operation of the China Insurance Security Fund Co., Ltd. (CISFCL), namely, the Interim Measures for Business Supervision and Administration of China Insurance Security Fund Co., Ltd. on 7 July 2009.55 The Interim Measures was replaced by the Measures for Business Supervision and Administration of China Insurance Security Fund Co., Ltd. on 14 December 2015 (hereinafter, the Measures 2015).56 The enactment of the Measures 2015 is to strengthen the business supervision of CISFCL and to ensure safe and effective raising, management, and operation of insurance security funds. The CBIRC is responsible for the following:57 (1) Supervision of CISFCL’s business operation and the raising, management, and operation of insurance security funds. (2) Formulation of measures for business supervision and administration of CISFCL. (3) Formulation of measures for the supervision and administration of raising, management, and operation of insurance security funds. (4) Other functions performed by the CBIRC in accordance with the law. 23.6.1 Supervision of the business of the CISFCL The CISFCL is required to establish and improve internal management rules and develop management rules for fundraising, financial management, asset management, risk monitoring, and risk disposal according to the company’s development and business needs and to report to the CBIRC for recordation.58 The CISFCL is required to improve its corporate governance structure and establish a post responsibility system and scientific operation management mechanism

53 Ibid., art.33. 54 Ibid., art.34. 55 Bao Jian Ting Fa No. 51 [2009]. 56 Bao Jian Ting Fa No. 79 [2015]. 57 The Measures for Business Supervision and Administration of China Insurance Security Fund Co., Ltd. 2015, art.3. 58 The Measures for Business Supervision and Administration of China Insurance Security Fund Co., Ltd. 2015, art.4.

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under the principles of independent check and balance, overall control, timeliness, applicability, and accountability.59 The CISFCL must establish and improve a fund application risk control system to guarantee the regulatory compliance of fund application, the effective implementation of internal rules and regulations, and the supervision and inspection of implementation; ensure that the business records, financial records, and other information are safe and reliable; and ensure that fund application managers have sufficient professional competence, risk control awareness, and professional ethics.60 When the CISFCL plans to convene a meeting of the board of directors, it shall submit a proposal of the board of directors to the CBIRC ten working days in advance. If it decides to convene an interim meeting of the board of directors, it shall submit a proposal of the board of directors to the CBIRC three working days in advance. The CBIRC shall dispatch personnel to be present at the meeting of the board of directors of the CISFCL. The CISFCL shall submit the relevant resolution to the CBIRC for recordation within three working days after the board of directors makes a resolution.61 The CISFCL shall solicit the CBIRC’s opinion on its annual budget plans and budget adjustment plans before submitting them to the public finance department for approval. The CISFCL shall submit the official reply on its budgets and final accounts to the CBIRC for recordation.62 The CISFCL shall formulate business performance evaluation rules and merit pay management rules with regard to the raising, management, and operation of insurance security funds under the principles of comprehensiveness, objectivity, and sustainability and submit them to the CBIRC for approval. The CISFCL shall conduct business performance evaluation on a regular basis and report evaluation results to the CBIRC.63 The CBIRC may directly conduct or authorize an intermediary agency to conduct inspection and auditing of the CISFCL, and it shall actively cooperate and provide true and complete financial and business materials.64 The CISFCL shall employ intermediary agencies to provide auditing, asset assessment, and other services, including accounting firms, asset assessment firms, and legal counsellors by means of open tendering or invited tendering and submit the relevant agreements to the CBIRC for recordation. If the CISFCL dismisses the relevant intermediary agency, it shall explain the reason and report to the CBIRC.65 23.6.2 Raising and management of insurance security funds The CISFCL is required to strengthen the raising and management of insurance security funds, ensure that insurance companies pay insurance security funds in 59 60 61 62 63 64 65

Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11.

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the full amount in a timely manner and after completing the final settlement of security funds issue legal receipt vouchers to insurance companies.66 The CISFCL opens a basic account respectively for property insurance security funds and personal insurance security funds to be exclusively used for the receipt and payment and fund transfer of insurance security funds. Where the CISFCL modifies its basic account, it shall report to the CBIRC for confirmation.67 Excluding basic accounts and current deposit accounts opened for the purpose of handling fixed-term deposits, the CISFCL must not open any other current deposit account to deposit insurance security funds. Excluding the renewal of fixed-term deposits at maturity, the CISFCL shall allocate funds through the basic account.68 The CISFCL shall not adjust the scope, amount, time limit, and methods, among others, of insurance security funds paid by insurance companies without approval.69 Where an insurance company falls under any circumstance requiring adjustment as set forth in the aforesaid article 15 of the Measures 2015, the CISFCL shall apply to the CBIRC for confirmation within five working days as of receipt of the application filed by the insurance company. Where the CISFCL finds that the relevant indicators of the insurance company reach the standards for payment resumption, it shall report to the CBIRC in a timely manner and notify the insurance company to resume payment.70 Where the CISFCL is of the opinion that an insurance company has any regulatory violation such as postponement of payment and insufficient payment, it shall report to the CBIRC in a timely manner and offer the corresponding handling suggestion.71 The CISFCL shall conduct separate accounting of the balance of insurance security funds of all insurance companies and on a periodical basis verify with banks and insurance companies, among others, the payment details and balance of insurance security funds and other information.72 The CISFCL shall, on a periodical basis, calculate the investment returns of property insurance funds and personal insurance funds, and according to the allocation methods confirmed by the CBIRC, allocate investment returns, expenses, and fund use amount among personal insurance companies and property insurance companies.73 23.6.3 Asset management of insurance security funds The utilization of insurance security funds shall observe the principles of safety, liquidity, and benefits and shall be maintained and appreciated under the premise of ensuring asset security.74 66 Ibid., art.12. 67 Ibid., art.13. 68 Ibid., art.14. 69 Ibid., art.15. 70 Ibid., art.16. 71 Ibid., art.17. 72 Ibid., art.18. 73 Ibid., art.19. 74 The Measures for Business Supervision and Administration of China Insurance Security Fund Co., Ltd. 2015, art.20.

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The CISFCL shall make annual and quarterly fund utilization plans for insurance security funds and report annual and quarterly fund utilization plans and temporary adjustment plans to the CBIRC for recordation.75 Insurance security funds shall not invest in the bonds of central enterprises and financial bonds issued by central financial institutions falling under any of the following circumstances:76 (1) Rated as AA or below by credit rating agencies recognized by the CBIRC. (2) Having the attributes of subordinated bonds. (3) Any other circumstance prescribed by the CBIRC. The CISFCL shall select state-owned commercial banks, joint-stock commercial banks, Postal Savings Bank of China and urban commercial banks meeting the following conditions as fixed-term deposit banks:77 (1) Their net assets are not less than ¥20 billion yuan, and their capital adequacy ratio and non-performing loan ratio at the end of the previous year comply with the relevant provisions of banking regulatory authorities. (2) They have complete internal audit monitoring rules and risk control rules. (3) They have not committed any serious violation of law or regulation in the past two years. (4) Other conditions prescribed by the CBIRC. An application for the confirmation of fixed-term deposit banks newly selected by an insurance security fund shall be filed with the CBIRC; if a new account is opened in a bank where deposits have been made, the opening shall be reported to the CBIRC for recordation within three working days after the opening.78 Unless confirmed by the CBIRC, a single fixed-term deposit shall not exceed 10% of the beginning balance of property insurance funds or personal insurance funds, and the aggregate balance of all types of deposits in a single bank shall not exceed 20% of the beginning balance of property insurance funds or personal insurance funds.79 The fund utilization of property insurance funds and personal insurance funds shall comply with the following proportion requirements:80 (1) The balance of fixed-term deposits shall not be lower than 60% of balance of funds at the end of the previous month. (2) The amount of authorized investment shall not exceed 20% of the balance of funds at the end of the previous month. (3) The total book balance of bonds of central enterprises, and financial bonds issued by central financial institutions covering authorized investment shall not exceed 20% of balance of funds at the end of the previous month, among which the held amount of single varieties of bonds of the same 75 76 77 78 79 80

Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24. Ibid., art.25. Ibid., art.26.

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period shall not exceed 15% of amount issued of bonds of a single variety or 2% of the balance of funds at the end of the previous month. The relevant proportion in the fund application of property insurance funds and personal insurance funds shall be calculated with their respective fund balance as the base number. When conducting the authorized asset management business, the CISFCL shall follow the principles of fairness, impartiality, and openness. It shall legally formulate administrative measures for the authorized investment of insurance security funds; these measures shall cover the qualification standards for investment management institutions and custody institutions, risk control of authorized investment, and business flow of authorized investment, and so on; and it shall also report to the CBIRC for recordation.81 The CISFCL shall, in accordance with the law, select the authorized investment management institution and custody institution in the form of open tendering or invited tendering and submit the agreement and related documents to the CBIRC for recordation within five working days as of signing agreements with the investment management institution and custody institution.82 Where an investment management institution or a custody institution falls under any of the following circumstances, the CISFCL shall replace it:83 (1) It violates the agreement, and the circumstances are serious. (2) Its relevant business qualification is cancelled by law. (3) It is dissolved, revoked, declared bankrupt or taken over in accordance with the law. (4) The investment management institution and the custody institution have a mutual investment or shareholding relationship or are controlled by the same actual controller or fall under any other circumstance. (5) Any other circumstance prescribed by the state and agreed upon by the relevant agreement. Except agreement-based deposits, bank deposits shall not be authorized for management. Authorized handling of agreement-based deposits, deposit banks, and deposit ratio, among others, shall be governed by the relevant provisions of the Measures 2015.84 Unless otherwise prescribed by the Measures 2015, other fund application forms of insurance security funds shall be reported to the CBIRC for confirmation.85 23.6.4 Risk monitoring and handling of insurance security funds When CISFCL discovers in risk monitoring any major risk that may endanger insurance policyholders and the insurance sector in the business management of 81 82 83 84 85

Ibid., art.27. Ibid., art.28. Ibid., art.29. Ibid., art.30. Ibid., art.31.

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an insurance company, it shall, in a timely manner, report to the CBIRC, and submit supervision and handling proposals.86 The CISFCL shall establish a risk disposal communication and cooperation mechanism with the CBIRC, participate in handling and deliberation, and participate in the CBIRC’s special inspection of companies with serious potential risks and other work.87 The CISFCL shall, according to the risk disposal plan and use methods approved by the State Council, provide relief to insurance policyholders, companies with ceded policies and other individuals and institutions or participate in the risk disposal of the insurance sector and report the progress to the CBIRC in a timely manner.88 23.6.5 Information submission The financial reports and other relevant reports, statements, documents, and materials of the CISFCL must faithfully record the relevant matters and shall not contain any false records, misleading statements, or material omissions.89 The CISFCL shall submit information according to the following requirements:90 (1) It shall, within five working days after the end of each month, submit to the CBIRC the information on the raising, application, and use of insurance security funds of the previous month, including the statements and monthly reports on insurance security funds reflecting the changes of details of deposits in the current month and the change of investment managers, among others. (2) It shall, prior to 31 January each year, submit the annual work plan (draft) to the CBIRC. (3) It shall, prior to 31 May each year, submit to the CBIRC audited financial reports on insurance security funds and the CISFCL in the previous year and management proposals issued by certified public accountants. (4) It shall, prior to 30 June each year, disclose to all insurance companies’ annual work reports of the CISFCL and annual financial reports on insurance security funds. (5) Other information that needs to be submitted in the opinion of the CBIRC. The CISFCL shall report to the CBIRC within two working days of knowing the following matters:91 (1) Serious loss of insurance security funds. (2) Acceptance of inspection conducted by the relevant departments. (3) Lawsuits.

86 The Measures for Business Supervision and Administration of China Insurance Security Fund Co., Ltd. 2015, art.32. 87 Ibid., art.33. 88 Ibid., art.34. 89 Ibid., art.35. 90 Ibid., art.36. 91 Ibid., art.37.

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(4) Punishment imposed on authorized investment management institutions, among others, by regulatory authorities. (5) Any serious violation of law or regulation by a custody institution, which affects the security of insurance security funds. (6) Any other matter that shall be reported according to the CBIRC’s opinion. 23.6. Legal liability Where the CBIRC is of the opinion that the professional competency, and professional ethics, among others, of staff members in key posts fails to comply with the requirements such as fund utilization and risk control, among others, it shall order the CISFCL to adjust his or her job position.92 Where the CBIRC is of the opinion that the intermediary agency’s independence and professional competency, among others, fail to satisfy the relevant business requirements, it may order the CISFCL to replace the agency.93 The CBIRC may ask the CISFCL’s senior executives to explain important matters about the CISFCL’s business activities and risk management.94 The CBIRC may order the change of the banks which do not meet the requirements of these Measures, and may order them to close bank accounts opened without confirmation.95 Where the CISFCL fails to comply with the requirements of the Measures 2015 in business operation, the CBIRC may order the CISFCL to make rectification within a prescribed time limit and report the rectification information in a timely manner.96 23.7 The construction of system and mechanism for protection of consumers In order to further enforce the responsibility of banking and insurance institutions to protect consumer rights and interests and strengthen the consumer rights protection of the banking and insurance industry, the CBIRC has recently released the Guidelines on Strengthening the Development of Consumer Rights and Interests Protection System and Mechanism in Banking and Insurance Institutions 2019 (hereinafter, the Guidelines 2019).97 Because the CBIRC regulates both the banking industry and the insurance industry, sometimes it formulates a piece of regulation for both the banking institutions and insurance institutions on some general topic of interest, such as consumer protection. Thus, these principle-based Guidelines are formulated for both banks and insurance companies to follow. 92 The Measures for Business Supervision and Administration of China Insurance Security Fund Co., Ltd. 2015, art.38. 93 Ibid., art.39. 94 Ibid., art.40. 95 Ibid., art.41. 96 Ibid., art.42. 97 Yin Bao Jian Fa No. 38 [2019] (see accessed on 16 October 2020).

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The Guidelines 2019 consists of eight parts, covering four aspects: system, mechanism, supervision, and industry self-discipline. With regard to the strengthening of the consumer protection system, banking and insurance institutions are required to integrate the protection of consumer rights and interests into all aspects of corporate governance. The board of directors shall assume the ultimate responsibility for the protection of consumer rights and interests. The board of directors shall set up a consumer rights and interests protection committee. The senior management shall ensure the effective implementation of the strategic objectives and policies for consumer rights and interests protection and make sure that the departments perform their duties in consumer rights and interests protection. For the board of directors, committees, senior management, and specific responsible departments, the responsibility of consumer rights and interests protection shall be assigned and implemented at each level. As to mechanism, banking and insurance institutions should strengthen the decision-making, implementation, and oversight mechanism of consumer rights and interests protection. They should effectively reinforce the management of business operations and entrust the internal audit to function its role to rectify wrongdoings in consumer rights and interests protection. They should also have the board of supervisors perform its duty in overseeing the performance of relevant duties at the governance level. A consumer rights and interests protection review mechanism shall be established to carry out reviews on products and services provided to consumers in terms of design and development, pricing management, agreement formulation, and other aspects. The review mechanism should incorporate the consumer protection review into the risk management and internal control system of banking and insurance institutions so that equal attention can be paid to both online and offline sections and the risk control steps can be brought forward. The internal assessment mechanism for consumer protection should be improved, which should cover all relevant departments and personnel, and be incorporated into a comprehensive performance assessment system, accountability system, and human resources management system of the institutions.To strengthen and improve the information disclosure mechanism for consumer protection, including major information on consumer protection work, products and services, complaint management and other related information, consumer demand shall be taken into full consideration, which will help consumers fully understand the features and risks of products and services and make rational decisions. In respect of supervision, the regulatory authorities should strengthen the guidance and supervision on the development of consumer rights and interests protection system and mechanism in banking and insurance institutions in their respective jurisdictions.The regulatory authorities should incorporate the development of such system and mechanism into the supervisory assessment of consumer protection, and take the assessment results as an important reference for comprehensive supervisory rating, allocation of supervisory resources and adoption of supervisory measures. With regard to industry self-discipline, China Banking Association, Insurance Association of China, and China Trustee Association are required to set up the Consumer Rights and Interests Protection Committee to bring their professional 1285

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advantages into full play so as to enhance the self-governance capability of the banking and insurance industry in consumer protection. The release of the Guidelines 2019 is of great significance for reinforcing and unifying the regulatory requirements for the protection of consumer rights and interests in the banking and insurance industry. The Guidelines 2019 shall strengthen the main responsibility of banking and insurance institutions to protect consumer rights and interests, ensure the safety of residents’ financial assets, prevent and resolve financial risks, and maintain financial stability. The CBIRC urges banking and insurance institutions to implement the Guidelines 2019; incorporate the protection of consumer rights and interests into their overall planning; stress and strengthen the development of a consumer rights and interests protection system and mechanism; comprehensively examine the existing deficiencies in corporate governance, organizational structure, and internal management; push the work of consumer rights and interests protection to a higher level; and effectively protect the legitimate rights and interests of financial consumers. We consider these Guidelines 2019 in the next section. 23.7.1 Banking and insurance institutions shall integrate protection of consumer rights and interests into all links of corporate governance98 (1) The board of directors of a banking or insurance institution shall be ultimately responsible for protection of consumer rights and interests. (i) The board of directors, as the paramount decision-making body for protection of consumer rights and interests, shall be responsible for formulating strategies, policies, and goals in relation to protection of consumer rights and interests, ensure fair treatment of consumers, and incorporate protection of consumer rights and interests into business development strategies and enterprise culture construction. (ii) The board of directors shall holistically plan and guide protection of consumer rights and interests, incorporate protection of consumer rights and interests into the evaluation of corporate governance, and urge the effective implementation of strategies, policies, and goals in relation to protection of consumer rights and interests. (iii) The board of directors shall supervise the performance of the duty to protect consumer rights and interests by the senior management; deliberate related work, including annual plans for protection of consumer rights and interests, progress, major issues, and information disclosures; and make relevant resolutions. (2) The board of directors of a banking or insurance institution shall establish a committee on protection of consumer rights and interests (hereinafter referred to as the “committee”) under its board of directors. The banking 98 The Guidelines on Strengthening the Development of Consumer Rights and Interests Protection System and Mechanism in Banking and Insurance Institutions 2019, s.1.

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or insurance institution shall specify the functions, rules of procedures, and processes of the committee and improve the working and operational mechanism of the committee so as to ensure the effective implementation of various tasks and achieve the goals of protection of consumer rights and interests. The committee shall undertake the following functions: (i) Being responsible to the board of directors, submitting reports and annual reports on protection of consumer rights and interests to the board of directors, carrying out related work with authority of the board of directors, discussing and determining related matters, and researching major issues and important policies on protection of consumer rights and interests. (ii) Guiding and urging the establishment and improvement of a framework of management systems for protection of consumer rights and interests and ensuring that the relevant systems and rules are commensurate with corporate governance, enterprise culture construction, and business development strategies. (iii) Supervising the comprehensiveness, timeliness, and effectiveness of the work of the senior management and the consumer protection department in accordance with regulatory requirements and the implementation of strategies, policies, and goals in relation to protection of consumer rights and interests. (iv) Regularly convening meetings on protection of consumer rights and interests and deliberating on the work reports of the senior management and the consumer protection department; researching audit reports, public regulatory statements, internal evaluation results, and the like in connection with annual protection of consumer rights and interests; and urging the senior management and relevant departments to promptly implement the correction of various problems discovered. (3) The senior management of a banking or insurance institution shall ensure the effective implementation of the strategic goals of and policies on protection of consumer rights and interests. (i) The senior management shall implement the laws, regulations, and regulatory provisions related to protection of consumer rights and interests. The senior management shall formulate and review all the basic systems and rules of the institution for protection of consumer rights and interests and establish and improve a framework of systems for protection of consumer rights and interests. (ii) The senior management shall guide the institution in establishing a management system for protection of consumer rights and interests with clear goals.The system shall be reasonably structured, adequately guaranteed, and effectively implemented. It should also specify the functions of all branch offices and related departments in relation to protection of consumer rights and interests and improve the decision implementation mechanism and the evaluation and assessment mechanism for protection of consumer rights and interests. 1287

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(iii) The senior management shall implement resolutions by the board of directors related to protection of consumer rights and interests; formulate, review, and coordinate plans, programs, and tasks for protection of consumer rights and interests; and report regularly on the progress of protection of consumer rights and interests to the board of directors and the committee. (iv) The senior management shall build a system of protection of consumer rights and interests that is commensurate with the organizational structure and operating scale of the institution, ensure the input of resources into protection of consumer rights and interests, and effectively promote the work. (v) The senior management shall strengthen the analysis and application of complaint data and fully consider the issues and needs evinced in consumer complaints during business operations, internal control, and risk management. (vi) The senior management shall cultivate a culture and philosophy of fair and honest protection of consumer rights and interests and build employees’ awareness of protection of consumer rights and interests. (vii) The banking or insurance institution shall specify a member of its senior management having direct oversight of consumer rights and interests. (viii) The banking or insurance institution may, in light of their own actual circumstances, establish a committee on the work (affairs) of protection of consumer rights and interests composed of the relevant members of its senior management and the principal person in charge of relevant departments to uniformly plan and holistically arrange protection of consumer rights and interests. 23.7.2 Banking and insurance institutions shall specify departments performing the function of protection of consumer rights and interests99 (1) Banking and insurance institutions shall specify departments responsible for protection of consumer rights and interests. Consumer protection departments shall be responsible for taking the lead in all the work of protection of consumer rights and interests and organizing, coordinating, urging, and guiding the protection of consumer rights and interests by other departments and subordinate institutions. (2) Banking and insurance institutions may independently decide on the form of establishing consumer protection departments and shall ensure the staffing of and budget for the departments and guarantee the independence, authority, and professionalism of protection of consumer rights and interests. 99 Ibid., s.2.

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(3) The main functions of a consumer protection department include: (i) taking the lead in organizing and implementing all the requirements of the senior management for the institution’s protection of consumer rights and interests, preparing working systems for protection of consumer rights and interests in relation to review of products and services, complaint management, internal evaluation, publicity and education about financial knowledge, and the like, promoting the effective implementation of the requirements for protection of consumer rights and interests by all the product and service management systems of the institution, and providing updates in a timely manner in accordance with regulatory requirements and market changes. (ii) organizing the review of protection of consumer rights and interests and ensuring the implementation of rules for protecting the lawful rights and interests of consumers in design and development of products and services, pricing management, agreement drawing, and other links. (iii) organizing the implementation of the management, guidance, and evaluation of complaint processing work and coordinating and urging the proper processing of various consumer complaints by relevant departments and branch offices, and conducting the operational monitoring and statistical analysis of complaint data and responsible for regularly submitting complaint data and related information to the regulatory authorities. (iv) organizing the supervisory inspection of protection of consumer rights and interests, supervising all links of the sale of products and services, ensuring the implementation of the financial consumer suitability system, assisting in regulating marketing, publicity, and information disclosures, and taking effective measures to urge the implementation of the correction of problems discovered. (v) organizing the launch of financial knowledge publicity and education campaigns, urging relevant departments to implement relevant regulatory requirements, voluntarily preventing and resolving potential conflicts, and improving the financial literacy of consumers, and providing internal education and training and raising employees’ awareness of protection of consumer rights and interests. (vi) organizing the internal evaluation of protection of consumer rights and interests, summarizing the progress of annual protection of consumer rights and interests, reporting regularly to the senior management, and reporting to the board of directors and the committee in due course. (vii) boosting the implementation of the supervision and evaluation of protection of consumer rights and interests provided by intermediaries and third-party institutions in cooperative relationships, incorporating relevant requirements for protection of consumer rights and interests into the access and disqualification conditions for 1289

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intermediaries and third-party institutions, specifying such conditions in cooperation agreements, and preventing the introduction of external risks to the institution. 23.7.3 Banking and insurance institutions shall strengthen the decision implementation and supervision mechanism for protection of consumer rights and interests100 (1) The banking or insurance institution shall establish sound working mechanisms for reviewing products and services in order to protect consumer rights and interests, internal evaluation, information disclosure, complaint management, publicity and education about financial knowledge, emergency response, and the like; promptly update relevant business processes, operating standards, and code of conduct for employees in accordance with regulatory requirements, business development, and market changes; and effectively strengthen the management of business operations. (2) The banking or insurance institution shall ensure the effective operation of the horizontal information sharing and work coordination and cooperation mechanisms for various departments related to protection of consumer rights and interests and fully guarantee that its consumer protection department achieves the functional orientation of organizing, coordinating, and implementing the institution’s protection of consumer rights and interests. (3) The banking or insurance institution shall ensure the effective operation of the vertical communication and implementation mechanism for policies and requirements for protection of consumer rights and interests and underpin relevant work requirements throughout the policy implementation, business operations, and supervision and review of the institution. (4) Its supervisory board shall supervise the performance of duties related to protection of consumer rights and interests by the board of directors and the senior management. The supervisory board may, as it deems necessary, be present in the meetings of the board of directors on protection of consumer rights and interests and conduct special supervisory inspection on the implementation of protection of consumer rights and interests. (5) The banking or insurance institution shall cause internal audit to play a role in supervising protection of consumer rights and interests. The banking or insurance institution shall include the internal audit of protection of consumer rights and interests in the scope of annual audit and establish a normalized and regulated internal auditing work mechanism for protection of consumer rights and interests.

100 Ibid., s.3.

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23.7.4 Banking and insurance institutions shall establish a review mechanism for protection of consumer rights and interests101 (1) For products and services directed at consumers, the banking or insurance institution shall, in links such as design and development, pricing management, and agreement drawing, assess and review policies, systems, business rules, determination of charges, terms of agreements, publicity texts, and the like that may affect consumers, identify and highlight related risks and put forward clear and specific review opinions. (2) The banking or insurance institution shall establish a review system exclusively for protection of consumer rights and interests and specify reviewers, review scope, key points of review, review processes, and other contents. The key points of review shall fully cover all the requirements for protection of consumer rights and interests and ensure the effectiveness of review. (3) The banking or insurance institution shall improve the working mechanism for the review of protection of consumer rights and interests, include the review of protection of consumer rights and interests in its risk management and internal control system, place equal emphasis online and offline, and presuppose risk control. (4) The banking or insurance institution shall update and improve the key points of the review of protection of consumer rights and interests, taking into account complaints, lawsuits, public opinion, satisfaction surveys, and other information related to products and services. 23.7.5 Banking and insurance institutions shall improve their internal evaluation mechanisms for protection of consumer rights and interests102 (1) The internal evaluation of protection of consumer rights and interests shall be aimed at safeguarding all the basic rights and interests of consumers. A comprehensive evaluation of the effectiveness of protection of consumer rights and interests by branch offices and related departments shall be conducted; the quality and effectiveness of the work shall be inspected, internal self-regulation shall be urged, and operations shall conform to the laws and regulations. (2) Banking and insurance institutions shall formulate measures for the internal evaluation of protection of consumer rights and interests and specify key contents such as objects of evaluation, indicators, methods, and periods. The contents of the internal evaluation of protection of consumer rights and interests shall highlight management of products and services, marketing promotion and information disclosure, customer information security, service quality of offices, claims payment, complaint processing, publicity and education about financial knowledge, and protection of special 101 Ibid., s.4. 102 Ibid., s.5.

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consumer groups, among others. The evaluation shall also focus on the key business and critical links in which the rights and interests of consumers in the banking and insurance industries are vulnerable to infringement. The internal evaluation of protection of consumer rights and interests shall be conducted on a yearly basis at a minimum. (3) Banking and insurance institutions shall, in accordance with relevant regulatory requirements and market changes, continue to enrich and improve the indicator development and implementation plans for internal evaluation of protection of consumer rights and interests, establish an assessment and correction mechanism, and achieve scientific and accurate assessment. (4) Banking and insurance institutions shall strengthen the employment of internal evaluation results of protection of consumer rights and interests in business management: (i) Inclusion in the comprehensive performance appraisal system.The internal evaluation results of protection of consumer rights and interests shall be included in institutions’ comprehensive performance appraisal system. The weight assigned to the internal evaluation of protection of consumer rights and interests in the comprehensive performance appraisal system shall reasonably fit its importance so as to maximize the incentive and restraint role of the internal evaluation of protection of consumer rights and interests in regulating operations and improving the quality and efficiency of protection of consumer rights and interests. (ii) Inclusion in the institutions’ accountability systems. The internal evaluation results of protection of consumer rights and interests shall be included in institutions’ accountability systems, and for problems of serious infringement on the rights and interests of consumers discovered by the internal evaluation of protection of consumer rights and interests, relevant departments shall enforce discipline and accountability. (iii) Inclusion in the human resources management system. The internal evaluation results of protection of consumer rights and interests shall be included in performance appraisal, post adjustment, career development, and other human resources management systems so as to effectively improve the importance attached by the workforce of the institutions to protection of consumer rights and interests and ensure that all the requirements for protection of consumer rights and interests are implemented.

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23.7.6 Banking and insurance institutions shall strengthen and improve information disclosure mechanisms for protection of consumer rights and interests103 (1) A banking or insurance institution shall establish a sound management system for information disclosures on protection of consumer rights and interests. The board of directors shall be ultimately responsible for information disclosures on protection of consumer rights and interests. The committee shall be responsible for guiding the disclosure of material information on protection of consumer rights and interests, and the senior management shall be responsible for reviewing and publishing material information disclosures. The consumer protection department shall assist relevant departments in disclosing information on protection of consumer rights and interests. (2) Information on protection of consumer rights and interests of banking and insurance institutions shall include material information on protection of consumer rights and interests, products and services, complaint management, and other related information. (3) Material information on protection of consumer rights and interests shall include without limitation important policies, material measures, key matters, and important events related to protection of consumer rights and interests and other information on protection of consumer rights and interests of banking and insurance institutions. Material information disclosures shall be given on a yearly basis at a minimum, preferentially by annual reports, social responsibility reports, and other means. (4) Information disclosures on products and services shall contain nature, charges, and main terms of contracts at a minimum, especially the terms discharging banking and insurance institutions from liability and other contents, and authentically, accurately, and reasonably disclose risks. Risk disclosures and disclosures on fee rates shall be evinced, accurate, and objective. (5) Information disclosures on protection of consumer rights and interests given by banking and insurance institutions shall fully take into account consumer demand, help consumers fully understand their characteristics and risks before accepting products and services, and enable consumers to make more rational decisions. Information disclosure shall cover presale, sale, and after-sales phases. (6) Banking and insurance institutions shall disclose their complaint channels and processing procedures through offices, official websites, mobile applications, and other channels and disclose the number of complaints for the year, the types of business complaints, and the regional spread of complaints, and so on, by annual reports, social responsibility reports, and other means. (7) The information disclosures on protection of consumer rights and interests given by banking and insurance institutions shall be understandable and

103 Ibid., s.6.

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in conformity with the principles of authenticity, accuracy, completeness, and timeliness. The key information that affects consumer decisions shall also be concise and easily accessible and be disclosed in a well-regulated and standardized format. 23.7.7 Banking and insurance regulatory authorities shall strengthen the supervision and administration of banking and insurance institutions’ development of systems and mechanisms for protection of consumer rights and interests104 (1) Regulatory authorities at all levels shall strengthen the guidance and supervision of banking and insurance institutions’ building working systems and mechanisms for protection of consumer rights and interests within their jurisdictions, pay full attention to the building and implementation of systems and mechanisms during day-to-day regulation, and continue to promote the implementation of regulatory goals and requirements by banking and insurance institutions through their operating goals and conduct. (2) Regulatory authorities at all levels shall incorporate banking and insurance institutions’ building working systems and mechanisms for protection of consumer rights and interests into the regulatory evaluation assessment of protection of consumer rights and interests; cause the elements and indicators of evaluation and assessment to fully reflect all requirements for the building of a framework of systems and organizational structure for protection of consumer rights and interests, work progress, implementation effects, and the like; and prompt banking and insurance institutions to improve their working mechanisms and improve implementation effects. (3) Regulatory authorities at all levels shall regard the results of the regulatory evaluation and assessment of protection of consumer rights and interests as an important reference point for conducting comprehensive regulatory rating, allocating regulatory resources, and taking regulatory measures. For institutions whose evaluation and assessment results are level three or below or whose rankings are in decline among similar institutions, regulatory authorities at all levels shall require them to assign more weight to the internal evaluation of protection of consumer rights and interests in their comprehensive performance appraisal systems. (4) Regulatory authorities at all levels shall urge institutions whose ineffective building and implementation of systems and institutions result in infringement upon consumer rights and interests to take corrective actions and internally enforce accountability. For institutions that ineffectively take corrective actions and enforce accountability, regulatory authorities at all levels shall seriously hold them accountable and impose punishment on them. 104 Ibid., s.7.

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23.7.8 Banking and insurance associations shall establish specialized committees on protection of consumer rights and interests105 (1) The China Banking Association, the Insurance Association of China, and the China Trustee Association shall establish specialized committees on protection of consumer rights and interests, which shall be under the guidance and supervision of banking and insurance regulatory authorities. The specialized committees on protection of consumer rights and interests shall communicate work progress, annual work arrangements, and major matters, among others, to the consumer protection departments of banking and insurance regulatory authorities on a regular or irregular basis. (2) The specialized committees on protection of consumer rights and interests shall, in light of their own orientation, exert their specialized advantages, organize the formulation and implementation of industry rules and conventions in the aspect of protection of consumer rights and interests, take self-regulatory actions against infringement of the lawful rights and interests of consumers in the industries, and build up themselves into platforms for effective communication and exchange within the industry and between consumers and banking and insurance institutions. (3) The China Financing Guarantee Association and the China Micro-Credit Companies Association may, based on their actual circumstances and needs, establish specialized committees on protection of consumer rights and interests according to these Guidelines 2019, with the necessary modifications. The aforementioned Guidelines 2019 represent the requirements and the directions for the development of systems and mechanisms for the protection of insurance consumers.The implementation and improvement of such systems and mechanisms will be the task for the relevant parties to complete in the years to come. 23.8 The handling of consumers’ complaints A complaint can be defined as an expression of dissatisfaction about the service or product provided by an insurer. It may involve, but should be differentiated from, a claim and does not include a pure request for information.106 According to the requirements of Insurance Core Principles (ICP) by the International Association of Insurance Supervisors (IAIS),107 insurers should: (1) establish policies and processes to deal in a fair manner with complaints which they receive. These should include keeping a record of each complaint and the measures taken for its resolution; (2) make information on their policies and processes on complaints handling available to customers; (3) respond to complaints without unnecessary delay; complainants should be kept informed about the handling of

105 Ibid., s.8. 106 International Association of Insurance Supervisors, Insurance Core Principles (ICP) 19.11.1 107 ICP 19.

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their complaints; (4) analyze the complaints they receive to identify trends and recurring risks. Analysis of what leads to individual complaints can help insurers to identify, and enable them to correct, common root causes; (5) analyze complaints that they receive against intermediaries in respect of products that the intermediaries have distributed on their behalf, to enable them to assess the complete customer experience and identify any issues that need to be addressed; and (6) establish a mechanism to review complaints, in order to ensure respective policies on complaint handling are in place. In order to regulate the matters on complaint handling and protect the lawful rights and interests of consumers, the CBIRC enacted the Measures for the Administration of the Handling of Complaints of Banking and Insurance Consumers 2020 (the Measures 2020).108 These Measures are developed in accordance with the Banking Supervision Law of China, the Law on Commercial Banks, the Insurance Law, the Law on the Protection of Consumer Rights and Interests, and other laws and regulations. These Measures apply to both banking institutions and insurance institutions. The term “banking and insurance consumer complaints” (hereinafter, consumer complaints) means the acts of consumers who claim their civil rights and interests against banking or insurance institutions for disputes with banking and insurance institutions or their practitioners arising from the purchase of banking and insurance products or the acceptance of banking and insurance-related services (hereinafter, consumer disputes).109 Consumer complaints must be dealt with under the principles of legality, compliance, convenience, efficiency, addressing both the symptoms and root causes, and diversified solutions.110 As the primary responsible parties for protecting the lawful rights and interests of consumers and handling consumer complaints, banking and insurance institutions shall be responsible for managing, directing, and assessing the handling of the consumer complaints of their entities and branch offices and coordinating with and supervising their branch offices to appropriately handle various consumer complaints.111 All relevant industry associations shall fully play the role of industrial self-regulation in the resolution of consumer disputes and coordinate with and promote their members’ appropriate handling of consumer disputes through negotiation, mediation, arbitration, litigation, and other methods.112 As the national supervisory authority for the handling of complaints of banking and insurance consumers, the CBIRC shall supervise and direct the handling of complaints of banking and insurance consumers across China. The local offices of the CBIRC at all levels shall supervise and direct the handling of complaints of banking and insurance consumers within their jurisdictions and promote the 108 The CBIRC Order No. 3 [2020]. 109 The Measures for the Administration of the Handling of Complaints of Banking and Insurance Consumers 2020, art.2. 110 Ibid., art.3. 111 Ibid., art.4. 112 Ibid., art.5.

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establishment and improvement of the diversified solution mechanism for consumer disputes within their jurisdictions.113 23.8.1 Organization and management Banking or insurance institutions shall ensure the smooth handling of consumer complaints in terms of human resources, material resources, and financial resources; designate senior executives or principals to be in charge of their handling of consumer complaints; set up or designate management departments and positions for the handling of their consumer complaints; and rationally appoint staff members. Banking and insurance institutions shall smooth the channels for filing complaints, set up or designate complaint reception areas, be equipped with audio and video recording equipment, record and preserve the process of accepting and handling consumer complaints, strengthen the construction of a consumer complaint management information system, and regulate the consumer complaint handling procedures and management.114 Banking or insurance institutions shall announce their telephone numbers and communication addresses for complaints filing and other complaint filing channels and consumer complaints handling procedures in conspicuous positions on official websites. If Internet complaint channels such as e-mail and official website platforms are opened, the e-mail address and website address of the institutions for receiving consumer complaints shall be announced. In a product or service contract, a banking and insurance institution shall provide a telephone number for filing consumer complaints or other complaint filing channels.115 In the handling of consumer complaints, banking or insurance institutions shall conduct territorial management and hierarchical responsibility, fully consider and respect the reasonable claims of consumers, and make fair and lawful handling conclusions. They shall find out the causes triggering complaints in a timely manner, improve the traceability and rectification mechanism, pay close attention to consumers’ experience, and improve services.116 Banking or insurance institutions shall strengthen the management of consumer complaints for business in cooperation with third parties. For consumer disputes arising from cooperative sale of products or provision of services, the banking and insurance institutions shall require the relevant third-party institutions to cooperate with the handling of consumer complaints, verify the matters of the consumer complaints, provide the relevant information in a timely manner, and promote the smooth resolution to consumer complaints. Banking or insurance institutions shall incorporate third-party institutions’ cooperation with the handling of consumer complaints into the access and exit assessment mechanism of third-party cooperative institutions.117 113 Ibid., art.6. 114 The Measures for the Administration of the Handling Complaints of Banking and Insurance Consumers 2020, art.7. 115 Ibid., art.8. 116 Ibid., art.9. 117 Ibid., art.10.

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23.8.2 Handling of consumer complaints in the banking and insurance industries Banking or insurance institutions shall be responsible for handling consumer complaints arising from the purchase of their products or the acceptance of their services.118 Banking or insurance institutions may require complainants to file consumer complaints through the complaint filing channels announced by them. Where a consumer complaint is filed by interview, a banking or insurance institution may require the complainant to file the complaint at the designated reception premises. Where several complainants file the same consumer complaint by interview, a representative shall be selected to represent not more than five complainants.119 A banking or insurance institution may require a complainant to provide the following materials or information:120 (1) Basic information on the complainant, including the name, identity, and contact method of the natural person or his or her statutory agent; the name, domicile, and unified social credit code of the legal person or any other organization; the name, identity, and contact method of the legal representative or primary person in charge; and the name, identity, contact method, and power of attorney of the complaint agent of the legal person or any other organization. (2) Basic information on the respondent, including the name of the complained banking and insurance institution, the relevant information on the complained banking and insurance practitioner, and the name of the subordinate institution. (3) Complaint claim, main facts, and relevant basis. (4) Where a complainant submits written materials, the complainant shall affix signature or seal to the materials. A banking or insurance institution that has obtained or may obtain the materials by consulting internal information and archives shall not require the complainant to provide the materials. Where it is particularly difficult for a complainant to file a consumer complaint, a banking or insurance institution shall accept the complaint filed by another person on behalf of the complainant. Besides the materials or information specified in article 13 of the Measures 2020, the original power of attorney to which the signature or seal of the complainant is affixed, the identity certificate and valid contact method of the trustee may be required to be provided. A banking or insurance institution shall accept the consumer complaint filed by an inheritor of a consumer. Besides the materials or information prescribed in article 13 of the Measures 2020, the certificate of the inheritance may be required to be provided.121 118 The Measures for the Administration of the Handling of Complaints of Banking and Insurance Consumers 2020, art.11. 119 Ibid., art.12. 120 Ibid., art.13. 121 Ibid., art.14.

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A banking or insurance institution may accept the withdrawal of a consumer complaint by a complainant. Where a complainant withdraws a complaint, the procedures for handling of a consumer complaint shall be terminated on the date when a banking or insurance institution receives an application for withdrawal.122 To file a consumer complaint, a complainant shall ensure objectivity and authenticity and be responsible for the authenticity of the materials provided but shall not provide any false information, fabricate or distort facts, or falsely accuse or frame any other person. During the process of filing a consumer complaint, a complainant shall comply with the laws, administrative regulations, and relevant provisions of the state and maintain the social and public order and the business order of the entity handling the consumer complaint.123 A banking or insurance institution shall establish a disqualification system for the handling of consumer complaints and upon receipt of a consumer complaint shall designate a person without a direct interest in the matter complained to verify the content of the complaint, communicate with the complainant in a timely manner, and actively resolve the consumer disputes through negotiation.124 A banking or insurance institution shall, according to the relevant laws, regulations, and contract, make a fair and impartial decision, and for a consumer complaint with clear facts and simple disputes, shall, within 15 natural days of the receipt of a consumer complaint, make a handling decision and notify the complainant; it may make a handling decision within a time limit extended to 30 days under complex circumstances, and may, under especially complex circumstances or for other special reasons, make a decision within a time limit extended for another 30 days, with approval of the senior executive of its superior institution, headquarters, or head office and upon notifying the complainant. Where authentication, testing, assessment, and other work of external institutions are required during the process of handling a consumer complaint, the relevant term is not required to be included in the time limit for the handling of a consumer complaint, but the complainant shall be notified in a timely manner.Where a complainant refiles the same consumer complaint within the time limit for handling a consumer complaint, a banking or insurance institution may handle the complaints in a combined manner. Where a complainant puts forward new facts and reasons, the time limit for handling shall be recalculated from the date of receiving the new complaint materials. Where, during the process of handling a consumer complaint, a consumer complaint is found not to be filed by a complainant, its statutory agent, or trustee, a banking or insurance institution is not required to handle it and shall notify the complainant.125 While notifying a complainant of a handling decision, a banking or insurance institution shall explain the verification of the consumer complaint, the relevant basis and reasons for making the decision, and the remedy approaches such as application for verification, mediation, arbitration, and litigation that may be taken by a complainant.126

122 123 124 125 126

Ibid., art.15. Ibid., art.16. Ibid., art.17. Ibid., art.18. Ibid., art.19.

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A complainant having any objection to the consumer complaint handling result of a branch office of a banking or insurance institution may, within 30 days of receipt of the handling decision, apply to its superior institution for verification and examination in writing. The verification institution shall verify the consumer complaint handling process, handling time limit, and handling result, and within 30 days of the receipt of a verification application, make a decision of verification and notify the complainant.127 A banking or insurance institution shall, in accordance with the Measures 2020, notify a complainant of the relevant matters and retain the relevant supporting materials, unless it is unable to contact the complainant. Where notification is conducted in writing, the materials shall be submitted in person within the time limit prescribed in these Measures 2020 or sent by post. Where notification is conducted by message, e-mail, or other electronic information means that may be preserved, the materials shall be sent within the time limit specified in these Measures. Where notification is conducted by telephone, the complainant shall be called within the time limit for notification prescribed in these Measures 2020. Where a banking or insurance institution and a complainant reach consensus on a decision for the handling of a consumer complaint, the time limit for notification, the notification method, and other matters, the content determined through negotiation shall be performed.128 In the handling of consumer complaints, a banking or insurance institution shall verify the identity of complainants, protect the information security of complainants, and protect state secrets, trade secrets, and personal privacy from being infringed upon according to the law.129 In the handling of consumer complaints, a banking or insurance institution may, as needed, provide complainants with suggestions of resolving consumer complaints through mediation. Where a complainant agrees to conduct mediation, the banking and insurance institution and complainant shall jointly apply to the mediation organization. The mediation period shall not be included in the time limit for handling consumer complaints.130 A banking or insurance institution shall make full use of the local consumer dispute mediation and handling mechanism and promote the resolution of consumer disputes by establishing temporary authorization, remote authorization, rapid approval, and other mechanisms.131 23.8.3 Working rules for the handling of consumer complaints A banking or insurance institution shall, according to the Measures 2020, improve its working rules for handling of consumer complaints and specify the requirements

127 128 129 130 131

Ibid., art.20. Ibid., art.21. Ibid., art.22. Ibid., art.23. Ibid., art.24.

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for consumer complaint handling procedures, division of responsibilities, and time limit for handling, among others.132 A banking or insurance institution shall establish systems for statistical analysis on, traceability and rectification, information disclosure, and accountability of consumer complaints; analyze consumer complaints on a regular basis and make effective rectification in a timely manner; disclose annual consumer complaints in annual reports and by other means; and hold directly responsible persons and management personnel accountable according to the relevant provisions for the violations found in the handling of consumer complaints.133 A banking or insurance institution shall improve the appraisal and assessment system for the handling of consumer complaints, comprehensively utilize positive incentives and negative restraints, incorporate the consumer complaints and handling thereof into the comprehensive performance assessment indicator system of institutions at all levels, and set rational assessment weights in salary distribution, title promotion, and other respects of senior executives and persons in charge of institutions at all levels as well as staff members of the relevant departments.134 A banking or insurance institution shall establish a consumer complaint handling registration system and a recordation management system. Consumer complaints registration records, handling opinions, and other written materials or information files shall be archived for future reference. Where there are provisions on the period of preservation in the laws and administrations, such provisions shall apply.135 A banking or insurance institution shall, according to the relevant provisions of the state, develop contingency plans for the handling of major consumer complaints and effectively complete prevention and reporting of and emergency response to major consumer complaints. Major consumer complaints shall include the following:136 (1) consumer complaints arising from major natural disasters, safety accidents, and public health incidents, among others; (2) mass complaints of common consumer complaints filed by 20 or more complainants by interviews; (3) other major complaints recognized by the CBIRC and its local offices (hereinafter, collectively called banking and insurance regulatory authorities). 23.8.4 Supervision and administration The banking and insurance regulatory authorities shall specify the supervision and administration department for the handling of consumer complaints by banking and insurance institutions.137 132 The Measures for the Administration of the Handling of Complaints of Banking and Insurance Consumers 2020, art.25. 133 Ibid., art.26. 134 Ibid., art.27. 135 Ibid., art.28. 136 Ibid., art.29. 137 The Measures for the Administration of the Handling of Complaints of Banking and Insurance Consumers 2020, art.30.

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The banking and insurance regulatory authorities shall set up a channel for transferring the handling of consumer complaints to facilitate complainants’ reporting of consumer disputes with banking and insurance institutions.138 Where a complainant reports a consumer dispute with a banking and insurance institution and concurrently proposes other matters that shall be handled by the banking and insurance regulatory authorities, it shall be handled according to the relevant provisions.139 The consumer complaints handling regulatory department of the banking and insurance regulatory authorities shall, within seven working days of the receipt of a consumer complaint within the jurisdiction, forward the consumer complaint to the banking and insurance institution complained against and notify the complainant, unless the complainant cannot be contacted.140 The banking and insurance regulatory authorities shall supervise and administer the handling of consumer complaints by banking and insurance institutions.141 A banking or insurance institution shall, according to the requirements of the banking and insurance regulatory authority, report its relevant rules on the handling of consumer complaints, list of persons in charge of the management of consumer complaints, and changes in the aforesaid matters.142 A banking or insurance institution shall, according to the requirements of the banking and insurance regulatory authority, report its data on consumer complaints and handling of consumer complaints and be responsible for the authenticity, completeness, and accuracy of the data, documents, and materials submitted.143 The banking or insurance regulatory authorities shall announce and disclose the information on consumer complaints forwarded to banking or insurance institutions on a regular basis and urge banking or insurance institutions to effectively protect the rights and interests of consumers.144 The banking and insurance regulatory authorities shall incorporate the handling of consumer complaints by banking and insurance institutions into the annual regulatory evaluation of the protection of rights and interests of consumers.145 The banking and insurance regulatory authorities shall strengthen the guidance of the construction of mediation organizations for banking and insurance consumer disputes, promote the establishment of industry mediation rules and standards, and advance the sound, standard, and orderly development of the industry mediation organizations.146 Where a banking or insurance institution falls under one of the following circumstances in handling of a consumer complaint, the banking and insurance regulatory

138 139 140 141 142 143 144 145 146

Ibid., art.31. Ibid., art.32. Ibid., art.33. Ibid., art.34. Ibid., art.35. Ibid., art.36. Ibid., art.37. Ibid., art.38. Ibid., art.39.

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authorities may require it to make rectification and supervise its rectification within a time limit:147 (1) It fails to announce the information on the handling of consumer complaints according to article 8 of the Measures 2020. (2) It fails to handle consumer complaints and conduct notification under the procedures prescribed in these Measures. (3) It refuses to cooperate with the mediation or performance of the mediation agreement without justified reasons. A banking or insurance institution falling under one of the following circumstances in violation of the provisions of the Measures 2020 shall be ordered by the banking and insurance regulatory authorities to take corrective action within a prescribed time limit; where no corrective action has been taken within the prescribed time limit, the banking and insurance regulatory authorities may, under different circumstances, hold regulatory interviews therewith, take measures such as suspending relevant business, ordering replacement of senior executives, stopping the approval for establishment of new branch offices, and imposing administrative penalties against the banking or insurance institution according to the Banking Supervision Law of China. The CBIRC shall take measures such as imposing penalties, restricting business scope, and ordering them to cease acceptance of new business against insurance institutions and insurance intermediary institutions according to the Insurance Law. The CBIRC shall also take corresponding measures against other entities under its supervision according to the relevant laws and regulations.148 (1) failing to develop and implement the relevant rules on the handling of consumer complaints according to the Measures 2020; (2) failing to report information on the handling of consumer complaints in accordance with the Measures 2020; (3) failing to make rectification as required in violation of article 40 of the Measures 2020; or (4) other violations of these Measures, resulting in serious consequences. 23.8.5 The significance of the Measures 2020 A number of significant features can be seen in the Measures 2020. For example, consumer complaints in the banking and insurance sectors must be processed, determined, and responded to within 15 natural days of receipt of the complaint. In complex circumstances, this 15-day response period may be extended up to 30 days. Where external entities are involved in the appraisal, reviewing, or assessment of a complaint, then the time required for such work will not be included in this 15–30 day time frame (art.18). Banking and insurance institutions shall on a regular basis run analysis seeking to identify the main reasons triggering broad categories of consumer complaints 147 Ibid., art.40. 148 Ibid., art.41.

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and make such analyses available to internal departments and subsidiaries with the aim of achieving expeditious rectification of factors leading to consumer complaints. In circumstances where the processing of a consumer complaint reveals breaches of law or regulation by the bank or insurer, then such bank or insurer is obligated to hold directly responsible persons and management personnel accountable according to the relevant provisions for the violations found in the handling of consumer complaints (art.26). Banks and insurers must establish systems and protocols allowing for the simple lodgement and processing of consumer complaints (art.25). All records associated with the handling of a consumer complaint must be retained by the bank or insurer (art.28). Banks and insurers must draw up contingency plans for dealing effectively and appropriately with large-scale and severe consumer complaints, including consumer class actions. Major consumer complaints could be triggered by (1) natural disaster, safety incident, or public health incident; (2) 20 or more consumers joining a consumer class action; (3) any other circumstance so deemed by CBIRC (art.29). 23.9 Consumer disputes resolution With rapid development of the insurance industry, insurance disputes have also increased in recent years. The increased insurance disputes have in turn greatly overloaded the people’s courts, resulting in a significant delay in resolving insurance disputes by court. Moreover, cases that go to trial are far more costly to resolve and sometimes result in the insured incurring significant out-of-pocket expenses. Thus it is important to establish and improve multi-mechanisms for settling insurance disputes in a simple, quick, fair, affordable, efficient, and effective manner. To accomplish this goal, the Supreme People’s Court of China (the SPC) and the CIRC jointly issued the Notice on Carrying out Pilot Work of Establishing the Mechanism for Linking Litigation with Mediation for Insurance Disputes in Some Regions of China (the SPC and the CIRC Notice 2012) on 18 December 2012.149 The pilot work of establishing the mechanism for linking litigation with mediation for insurance disputes was carried out jointly by the people’s courts, insurance regulatory bureaus, and insurance associations in 32 regions in China. After more than three years of pilot work in these regions, a new mechanism for insurance dispute resolution − the Linked Litigation-Mediation Scheme (LLMS) – was established in China. It has increasingly become a favoured alternative to the traditional and unlinked mediation and litigation. The SPC and the CIRC then decided to expand this mechanism to most cities in China. They jointly issued the Opinions on Promoting the Construction of the Mechanism of Linking Litigation and Mediation for Insurance Disputes Nationwide in China (the SPC and the CIRC Opinions 2016) on 14 November 2016.150 149 See accessed on 18 September 2020. 150 The SPC No. 374 [2016] (see accessed on 16 October 2020).

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The LLMS is a new and unique mechanism with Chinese characters for insurance dispute resolution. To put it simply, the LLMS links insurance industry mediation with judicial mediation and adjudication to resolve insurance disputes. It is a connected and interactive platform on which insurance industry mediation, judicial mediation, and adjudication are conducted. The establishment of the LLMS enables the people’s courts, insurance regulators, and insurance industry associations to form a concerted effort to overcome the drawbacks of the separate industry mediation and judicial mediation, so that the insurance disputes can be resolved in a more diversified and coordinated manner.151 Industrial mediation and judicial mediation are the two limbs of the LLMS and are discussed further now. 23.9.1 Insurance industry mediation Insurance industry mediation refers to the process conducted by an insurance industry association as the main body of mediation. Through persuasion and counselling, the parties are encouraged to voluntarily reach a mediation agreement on the basis of equal consultation so as to resolve disputes arising from business activities in the insurance industry. Most insurance disputes are basically contractrelated. The parties involved in the disputes are often the two contractual parties, that is, the insurer and the insured. Sometime a third party may be involved under a liability or life insurance contract. The disputes are commonly due to misunderstandings about insurance terms, the coverage under the insurance policy, or breach of policy terms and conditions. In 2007, the CIRC issued the Guidance on Promoting the Pilot Work for Establishing A Quick Insurance Contract Dispute Resolution Mechanism. In the following years, insurance disputes mediation centres are established by the insurance association or/and the insurance regulatory bureau in cities in China. For instance, on 25 March 2008, the Beijing Insurance Association set up the Insurance Contract Dispute Mediation Committee.152 The disputants can go to the Mediation Centre for the resolution of their disputes with the assistance of a mediator. If the disputants reach a settlement agreement, this agreement is as effective as a contract between the parties. If the parties cannot reach a settlement agreement, they will seek litigation to resolve their disputes.153 Insurance industry mediation has its unique features. The first feature is the professionalism of the industry mediation. The parties involved in disputes usually turn to the insurance mediation centre for mediation of their disputes, mainly because the insurance association is very professional on the insurance-related matters and is able to quickly and rationally resolve disputes between the parties. With rich experience in the insurance industry, the mediators are usually experts in the 151 Zhen Jing, “A New Insurance Dispute Resolution Mechanism: the Linked Litigation-Mediation Scheme in China” (2018) Journal of Business Law, 40–66. 152 See China Insurance News, 7 July 2013 (see accessed on 16 October 2020). 153 According to art. 24 of the Civil Procedure Law, a lawsuit for insurance contract dispute shall be under the jurisdiction of the people’s court located in the place where the defendant has his domicile or where the insured subject matter is located.

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profession and so able to pick up the main issues of a dispute and to clarify the rights and obligations of the two sides from the legal and technical point of view quickly. Thus the rate of successful mediation of disputes is increased. The second feature is the relative authority of the industry mediation. Insurance associations play an important role of self-regulation and self-discipline within the industry.They require their members to be fair and honest with their customers in conducting their business. This requirement to a certain extent promotes the success of the industry mediation. The disciplining of dishonesty by the industry association can also provide a guarantee for the effectiveness of mediation. The third feature is the cost-effectiveness of the industry mediation. If the industry disputes go to court proceedings, the litigation costs will be much higher. On the other hand, a mediation agreement reached by the disputants with the assistance of an insurance medication centre only has the effect of a contract,154 so it is not as enforceable as a court judgment. As a result, the compliance with the mediation agreement by the parties is not guaranteed. If one party to the agreement fails to honour his or her promise, the other party has to resort to litigation to resolve the dispute definitively. 23.9.2 Judicial mediation Chinese courts are empowered to undertake judicial mediation for civil cases. The same judge can act in the dual roles of mediator and adjudicator in the same litigation. Judicial mediation is an integral and important part of the litigation process in China.155 This is in contrast to the common law style mediation which, although encouraged by the courts, is strictly a private matter for the disputants and a thirdparty mediator that is not connected to the litigation.156 The substantive law dealing with judicial mediation is provided in Chapter 8 (mediation) of the Civil Procedure Law (the CPL), which sets forth the basic principles and procedures for judicial mediation. The SPC has issued six main 154 Article 1 of the Provisions of the Supreme People’s Court Concerning Trying Civil Cases Relating to People’s Mediation Agreement, which was published on 5 September 2002 and became effective of 1 November 2002. Article 10 of the Several Opinions of the Supreme People’s Court on Establishing and Improving the Link-up of Litigation and Non-litigation Mechanism for Resolution of Contradiction and Disputes, which was issued 24 July 2009. 155 Article 2 of the Several Opinions of the Supreme People’s Court on Further Displaying the Positive Roles of Litigation Mediation in the Building of a Harmonious Socialist Society 2007 states: Litigation mediation is an important part of China’s litigation system, an important way for the people’s courts to exercise their trial power and an importance composition of harmonious jurisdiction. It is a way for settling disputes, which is rooted in China’s historic and cultural tradition and has been proved as effective over a long period of judicial practice. It not only conforms to the current value and litigation awareness of the general public, but also embodies the Chinese nation’s longing for harmonious natural order and social order. In recent years, the people’s courts have improved their trial work to a large extent, accumulated precious experiences during the process, and established the principle of “mediating when possible, judging when necessary, combining mediation with judgment and solving the dispute once the case is concluded” as the guideline for civil trial work.The people’s courts at various levels shall take “solving the dispute once the case is concluded” as the goal of trial work, correctly understand the status and roles of litigation mediation in their trial work and make great efforts to put litigation mediation work forward.

156 M.Tai and D. McDonald, “Judicial mediation in mainland China explained” (see accessed on 16 October 2020).

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pieces of judicial guidance on mediation in the form of the SPC Opinions and Provisions,157 including: (1) The Provisions of the SPC on Several Issues Concerning the Civil Mediation Work of the People’s Court, which was issued on 16 September 2004. (2) The Several Opinions of the SPC on Further Displaying the Positive Roles of Litigation Mediation in Building of a Harmonious Socialist Society, which was issued on 1 March 2007. (3) The Notice of the SPC on Issuing Several Opinions on Further Implementing the Work Principle of “Giving Priority to Mediation and Combining Mediation with Judgment”, which was issued on 7 June 2010. (4) The Interpretations of the SPC Concerning the Application of the Civil Procedure Law of the People’s Republic of China, which was issued on 18 December 2014 and came into force on 4 February 2015. Chapter 4 of the Interpretation is concerned with mediation (articles 142–151). (5) The Provisions of the SPC on People’s Court Invited Mediation, which was adopted on 23 May 2016 and became effective on 1 July 2016. (6) The Opinions of the SPC on the People’s Court Further Deepening of Reform on Multi-Mechanisms for Dispute Resolution, which was issued on 28 June 2016. Judicial mediation must strictly follow the principle of the voluntariness of the disputants. The courts distinguish between right and wrong and mediate disputes according to the principle of parties’ voluntariness and based on clear facts.158 If the parties are not willing to participate in the mediation or conciliation, the courts cannot compel it. When a court conducts mediation, a single judge or a collegial bench may preside in the mediation. Mediations shall be conducted locally whenever possible.159 The court may request assistance from other relevant units or individuals to assist the people’s court in mediation.160 A judicial mediation agreement must be based on voluntariness of both parties, and shall not be reached through compulsion.The content of the mediation agreement cannot contravene the law.161 When a mediation agreement is reached, the court shall draw up a written mediation statement, clearly setting forth the claims of the action, the facts about the case, and the result of the mediation. The mediation statement shall be signed by the judge and the court clerk, sealed by the people’s court, and served on both parties. Once the mediation statement is signed and received by both parties, it becomes enforceable.162 If no agreement is reached through mediation or if one 157 This SPC opinion and provisions are binding on lower courts and fill in many of the gaps in the Civil Procedure Law. 158 The CPL, art.93. 159 Ibid., art.94. 160 Ibid., art.95. 161 Ibid., art.96. 162 Ibid., art.97. The court need not draw up a mediation statement for the following cases when an agreement is reached through mediation: (a) Divorce cases in which both parties have become reconciled after mediation; (b) Adoption cases in which adoptive relationship has been retained through mediation; (c) Cases in which the claims can be immediately satisfied; and (d) Other cases that do not require mediation statements. Any agreement that does not require a mediation agreement shall be entered into the

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party retracts his or her reconciliation before the mediation statement is served, the court shall render a judgment without delay.163 In the course of litigation, the two parties in conflict have the option to reach a settlement agreement on their own by reconciliation.164 Where the parties concerned reach a settlement agreement by themselves during the process of litigation, the court may, following the application of the parties, confirm the agreement in accordance with the law and draw up a mediation statement (although the dispute was not settled by mediation of the court). Where the parties apply to the court for coordinating the reconciliation activities in the course of the reconciliation, the people’s court may appoint the auxiliary staff of trial or invite or entrust the related entities and individuals to engage in the coordination activities.165 The mediator’s style of mediation can be facilitative,166 evaluative,167 and even advisory.168 The mediator should focus on the specific circumstances of the case when choosing the appropriate methods of mediation. He or she can help the parties to reach a settlement agreement by themselves. Sometimes he or she can put forward proposals to resolve the dispute. To help the parties reach a mediation agreement, the mediator can invite a person to attend the mediation who can be of help with the parties to reach a settlement agreement.169 If the parties reach a mediation agreement on a part of the claim, the people’s court may first confirm the agreement on that part and make a mediation statement.170 Where the parties have reached a mediation agreement on the main part of the claim and request the people’s court to put forward its opinions on the remaining part of the claim that has not been agreed on by the parties, and also have accepted the court’s advice and decision, the court’s opinion is taken as part of the mediation agreement and put into the mediation statement.171 The major drawback of judicial mediation is related to confidentiality, where a judge acting as mediator is required to keep the matters discussed in the mediation confidential. The SPC sets forth a rule that anything unfavourable disclosed in transcript and become legally effective after the transcript is signed or sealed by both parties, the judge, and the court clerk (the CPL, art.98). 163 The CPL, art.99. 164 Ibid., art.50. 165 Article 4 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Civil Mediation Work of the People’s Court, which have been adopted at the 1321st meeting of the Judicial Committee of the People’s Court 2004. 166 Facilitative mediators assist the parties to find a solution through the process, leaving the active evaluation and articulation of views on the merits in the hands of the parties. 167 A mediator who practices evaluative mediation helps the parties in conflict arrive at a resolution by showing them the weaknesses in their case and evaluating what a judge or jury would be likely to decide if the case were brought to litigation. Focusing on legal rights of the parties instead of “fairness”, an evaluative mediator will likely meet with each party and their solicitor in separate meetings. The process of evaluative mediation usually involves a point-by-point evaluation of cost vs. benefits in deciding whether or not to pursue legal action in a case. 168 Advisory (or directive) mediation is a subset of evaluative mediation that relies on a person bringing an expert in a particular field to meet with disputants and encourage them to negotiate. This expert also collects alleged facts, evidence, and arguments and gives information, opinion, and advice. 169 The Provisions of the Supreme People’s Court on People’s Court Invited Mediation 2016, art.17. 170 The Provisions of the Supreme People’s Court on Several Issues Concerning the Civil Mediation Work of the People’s Court 2004, art.17. 171 Ibid.

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the mediation cannot be used against the party disclosing this information in the subsequent litigation process.172 However, in practical terms, due to the dual roles of a judge, it is almost impossible to keep mediation confidential since the judge, while acting as adjudicator, will inevitably know the information disclosed to him during mediation. As a result, disputants may not be open to compromise. This will adversely affect the disputants’ free expression and willingness to make concessions during mediation, thereby undermining the chances of a successful mediation.173 The newly developed LLMS successfully overcomes the drawbacks of the insurance industry mediation and the judicial mediation. This can be seen next. 23.9.3 The LLMS for insurance disputes resolution For the purpose of construction and operation of the LLMS for the resolution of insurance disputes, the SPC and the CIRC require the people’s courts, insurance regulatory bureaus, and insurance associations to adhere to four basic principles.174 First, under the principle of lawfulness and fairness, the LLMS shall be carried out in accordance with the law, administrative regulations, and judicial interpretations and shall not prejudice the lawful rights and interests of the parties and other interested parties, shall not violate the basic principles of the law, and shall not harm the public interest. Second, under the principle of voluntariness, the wishes of the parties concerned must be fully respected. No compulsory mediation shall be conducted so as to protect the parties’ own civil and litigation rights. Third, under the principle of efficiency and convenience for people, the conduct of the LLMS shall pay attention to work efficiency; in light of the actual circumstances of disputes, the mediation method, time, and place shall be flexibly determined so as to provide convenience for the parties and reduce the costs of the parties for settling disputes. If the parties in conflict do not want their dispute to be resolved by a court, they may go to an insurance mediation centre to seek assistance to settle their dispute and reach a mediation agreement. The mediation agreement can be confirmed by the court. The confirmed mediation agreement is as enforceable as a judgment by the court.175 In this situation, the link-up between the independent mediation and judicial activities seems to be the parties’ application for and the judicial confirmation of the mediation agreement.The “contract” (mediation agreement) is somehow converted to “judgment” by judicial confirmation in terms of enforceability. The link-up of insurance industry mediation and the judicial confirmation of mediation agreement effectively overcomes the drawback of the separate industry mediation, that is, lack of enforceability of the mediation agreement.

172 Some Provisions of the Supreme People’s Court on Evidence in Civil Procedure 2001, art.67. 173 J. Lee, “Mediation in mainland China and Hong Kong: Can They Learn from Each Other?” (2014) Asian-Pacific Law and Policy Journal, 16(1), p. 109. 174 The Opinions of the Supreme People’s Court and the China Insurance Supervisory Commission on Promoting the Construction of the Mechanism of Linking Litigation and Mediation for Insurance Disputes Nationwide in China 2016, s.1(2), 175 The Provisions of the SPC on People’s Court Invited Mediation 2016, art.25(2).

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If a party, such as an insured whose claim for insurance payment under the insurance policy is unreasonably rejected by the insurer, does not know the idea and the service of industry mediation and turns to court for a lawsuit, the court can, prior to the filing of the case, inform him or her of the idea and the service of mediation. If the parties (such as the insured and the insurer) are willing to resolve their dispute through mediation, the court will designate an insurance mediation centre to conduct the mediation process, helping the parties settle their dispute. This process is called court-designated mediation.176 In the case that the lawsuit is accepted and docketed by the court, the parties can still have the option to mediation. If they agree to mediate, the court will entrust an independent third party (such as an Insurance Dispute Mediation Centre) to conduct the mediation. This process is termed as court-entrusted mediation.177 This is in effect a delegation of the court’s mediation powers and provides an alternative to judicial mediation. The mediation agreement reached by the parties through the court-designated mediation can be confirmed by the court in accordance with the law.178 Where a mediation agreement is reached by the parties through the court-entrusted mediation, the court shall issue a mediation statement to the parties.179 If no mediation agreement can be reached by the parties, the court will proceed to docket the case (where the case has not been docketed) or make a judgment for the case (where the case has been already docketed).180 The litigation and mediation processes are then effectively and seamlessly linked up by the court-designated mediation, the court-entrusted mediation, the court’s confirmation of mediation agreement, and the adjudication.These processes are the essential components of the LLMS, which merit further consideration. 23.9.4 The platform of the LLMS The people’s courts, the insurance regulatory bureaus, and insurance associations have different responsibilities in constructing the platform and carrying out mediation on the platform of the LLMS. The people’s courts invite the qualified mediation centres and individual mediators to join the register of the invited mediation organizations. The courts may invite the delegates of the National People’s Congress, members of Chinese People’s Political Consultative Conference, people’s jurors, experts and scholars, lawyers, arbitrators, retired legal practitioners, and other qualified individuals to join the invited mediators register.181 The register contains the details of mediation centres and individual mediators for the parties in dispute to choose. The courts shall 176 The Opinions of the Supreme People’s Court and the China Insurance Supervisory Commission on Promoting the Construction of the Mechanism of Linking Litigation and Mediation for Insurance Disputes Nationwide in China 2016, s.9. 177 Ibid., s.10. 178 Ibid., s.9. 179 Ibid., s.10(2). 180 Ibid., s.9 and s.10. 181 The Provisions of the SPC on People’s Court Invited Mediation 2016, art.6.

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issue certificates to those whose details are included in the register. The register established by a court can also be used by a lower court.182 The courts also bear the following duties in the LLMS: (1) to guide the parties to choose the mediation centres or individual mediators from the register; (2) to guide the work of a mediation centre and mediators; (3) to manage the flow of mediation cases and register the relevant data; (4) to provide the necessary places, office facilities, and other related services for mediation; (5) to organize training of the mediators; (6) to organize the evaluation of mediation performance; and (7) to undertake other duties related to the LLMS.183 The insurance regulatory bureaus are responsible for guiding the insurance associations to establish and improve the LLMS and to promote standardization of the Insurance Mediation Centres. The insurance associations shall submit to the local insurance regulatory bureaus a list of the mediation centres and individual mediators for the record. The insurance regulatory bureaus then submit the list to the courts for them to establish the register containing the detail of the mediation centres and individual mediators in the region.184 The insurance associations shall formulate the rules and regulations for the management of the mediation centres; establish the evaluation mechanism for the evaluation of the performance of the mediation centres; raise and manage funds of the mediation centres; formulate the standard for the use of the funds; and guide the mediation centres to formulate and improve the mediation rules, management of archives, statistics, and other systems to strengthen the hardware and software construction of the mediation centres.185 The Insurance Mediation Centres shall establish and improve the system for the mediator selection, certification, training, assessment, rewards and punishments, and resignation. The Centres select skilled and experienced staff for the organization and implementation of mediation work.The Centres are responsible for establishing a pool of mediation experts, organizing relevant professionals to provide guidance to specific mediation work, and planning the training of the mediators as part of the annual work schedule in order to improve the mediators’ professional morality, legal knowledge, insurance knowledge, and mediation skills.186 The mediation can be conducted in the mediation office in the court, in the Insurance Mediation Centre, or in any other place agreed to by the two parties and upon the approval by the court.187 The courts and the Insurance Mediation Centres are encouraged to set up a one-station dispute resolution model, which means that the mediation and litigation are carried out at one station (i.e. at a court) to promote the rapid handling of disputes and to effectively reduce the burden on

182 Ibid., art.5. 183 Ibid., art.3. 184 The Opinions of the Supreme People’s Court and the China Insurance Supervisory Commission on Promoting the Construction of the Mechanism of Linking Litigation and Mediation for Insurance Disputes Nationwide in China 2016, s.(4). 185 Ibid., s.(5). 186 Ibid., s.(6). 187 The Provisions of the SPC on People’s Court Invited Mediation 2016, art.14.

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the disputants. The one-station model is particularly suitable for handling disputes on traffic accidents and medical insurance.188 23.9.5 The procedure of the LLMS The procedure of the LLMS can be classified into two types: the procedure for court-designated mediation which occurs prior to the filing of the insurance case by the court and the procedure for court-entrusted mediation which occurs after the dispute has been docketed (registered) by the court. (a) The procedure for court-designated mediation includes four steps:189 (1) Court guidance. After receiving a written writ or verbal lawsuit for an insurance dispute, before the filing of the case, the court shall guide the parties to choose mediation as the means to resolve the dispute. If the parties agree to mediate prior to the filing of the case, they shall fill in an application form for mediation and sign the form to confirm their willingness to go for the mediation. Alternatively, the court shall issue a “pre-filing mediation proposal” or a “pre-filing mediation confirmation form” and request the parties to sign it for confirmation of their willingness for the mediation. The parties can choose a mediator from the register containing the details of the mediators. If the two parties do not agree on who will act as the mediator, the court or the Mediation Centre will appoint a mediator. If the two parties do not agree with the appointed mediator, they are deemed not to be willing to enter into mediation.190 If the parties expressly disagree with the mediation, the court shall docket the case according to law.191 (2) Court designation. The court shall send a mediation letter and related materials to an Insurance Dispute Mediation Centre, requesting the Centre to carry out mediation. (3) Conduct of mediation.The mediator chosen by the two parties conducts mediation according to the mediation procedure.192 The mediation is usually carried out by one mediator. For a case which is important, difficult, complex, or where the parties concerned require mediation by two or more mediators, it may be mediated by two or more mediators. The Mediation Centre or the court will appoint one of the two mediators to chair the mediation. If the parties have justified reasons, they may apply for the replacement of the mediators.193 If the parties reach an agreement, the Mediation Centre shall draw up a mediation 188 The Opinions of the Supreme People’s Court and the China Insurance Supervisory Commission on Promoting the Construction of the Mechanism of Linking Litigation and Mediation for Insurance Disputes Nationwide in China 2016, s.(7). 189 Ibid., s.(9). 190 The Provisions of the SPC on People’s Court Invited Mediation 2016, art.12. 191 Ibid. 192 A mediation centre has its own rules and procedure for conducting the mediation. 193 The Provisions of the SPC on People’s Court Invited Mediation 2016, art.13.

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agreement which is signed by the mediator and the parties. If no agreement can be reached, the Mediation Centre shall reply to the court in a timely manner. If the parties apply for filing a case, the court shall register the case in accordance with the law.194 The case will go for trial. (4) Judicial confirmation. Where the parties apply for judicial confirmation of the mediation agreement, the court shall review of the mediation agreement according to the law to confirm the effectiveness of the mediation agreement. (b) The procedure for court-entrusted mediation includes two steps:195 (1) Court entrustment. Where the case has been docketed by the court, according to the circumstances of the case, with the consent of both parties, the court can entrust an Insurance Mediation Centre to conduct the mediation. The court shall write a letter of entrustment to the Centre, which includes the name of the court and the name of the judge who is in charge of the case, the names of the two parties, the cause of action and the case briefing. It shall transfer to the Centre a copy of the writ, the pleadings, the main evidence, inventory of the documents, and other relevant materials. (2) Conduct of mediation. The mediator chosen by the two parties conducts the mediation. If the parties reach an agreement, the Mediation Centre shall draw up a mediation agreement which is signed by the mediator and the parties. The Centre shall report to the court the outcome of the mediation and return all the documents to the court in a timely manner. The court shall issue a mediation statement to the parties, which is as enforceable as a judgment by the court.196 In the case that no mediation agreement can be reached by the parties, the court will hear the case without delay.197 In this process, the link-up of litigation and mediation can be viewed as two circumstances: in the case of a successful mediation, the mediation agreement drawn by the Mediation Centre and signed by the two parties is converted to the mediation statement by the court; in the case of an unsuccessful mediation, the dispute goes into litigation process without delay. 23.9.6 Mediation agreements If the a matter settles, the Mediation Centre will draw up a formal mediation agreement containing the basic information of the two parties, the facts and issues 194 The Opinions of the Supreme People’s Court and the China Insurance Supervisory Commission on Promoting the Construction of the Mechanism of Linking Litigation and Mediation for Insurance Disputes Nationwide in China 2016, s.(9). 195 Ibid., s.(10). 196 The Provisions of the SPC on People’s Court Invited Mediation 2016, art.25(2). 197 The Opinions of the Supreme People’s Court and the China Insurance Supervisory Commission on Promoting the Construction of the Mechanism of Linking Litigation and Mediation for Insurance Disputes Nationwide in China 2016, s.(10).

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of the dispute, and the outcome of the mediation.198 If the parties think that it is unnecessary to draw up a formal mediation agreement, an oral agreement can be used instead, but the mediator must write down the content of the oral agreement.199 The resulting mediation statement must be signed by the two parties and the mediator and sealed by the Mediation Centre.200 The mediation agreement reached through court-designated mediation becomes effective from the moment the two parties sign the agreement.201 The court-entrusted mediation statement becomes legally binding once the mediation statement is received by the parties.202 If the two parties receive the mediation statement at a different date, the latest date is the effective date.203 A mediation agreement is a private contract between the parties. If a dispute occurs over the content or the performance of the agreement, a party to the agreement can make a lawsuit to a court on the matter of the agreement, and the court shall hear the case. If any one of the two parties makes a lawsuit on the basis of the original dispute (which was settled by the mediation agreement), the other party who defends himself or herself by the mediation agreement must provide a copy of the agreement.204 If the parties have reached a reconciliation agreement on their own or a mediation agreement with the assistance of a mediator, and they request the court to issue a judgment statement according to the reconciliation agreement or the mediation agreement, the court shall not uphold such a request.205 23.9.7 Judicial confirmation of the mediation agreement Judicial confirmation of mediation agreement is an important component of the LLMS. The first statutory law setting forth provisions on judicial confirmation of mediation agreement is the People’s Mediation Law of China (the PML),206 According to the PML, a mediation agreement reached by the parties with the mediation of the People’s Mediation Committee is legally binding, and the parties shall perform the obligations as agreed.207 The parties may apply to the people’s courts for judicial confirmation of the agreement within 30 days from the date of the agreement becoming effective, and the people’s court shall promptly review the 198 The Provisions of the SPC on People’s Court Invited Mediation 2016, art.24. 199 Ibid., art.23. 200 Ibid., art.24. 201 Ibid. 202 The CPL, art.97. 203 The Interpretations of the SPC Concerning the Application of the Civil Procedure Law of the People’s Republic of China 2014, art.149. 204 The Provisions of the SPC on People’s Court Invited Mediation 2016, art.25. The Notice of the Supreme People’s Court on Issuing the Overall Plan on Expanding the Pilot Reform on the Link-up of Litigation and Non-litigation Mechanism for Resolution of Contradiction and Disputes 2012, art.10. 205 The Provisions of the SPC on Several Issues Concerning the Civil Mediation Work of the People’s Court 2004, art.18. 206 The People’s Mediation Law of the People’s Republic of China was adopted at the 16th meeting of the Standing Committee of the 11th National People’s Congress of the People’s Republic of China on August 28, 2010 and came into force on January 1, 2011. 207 The People’s Mediation Law, art.31

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agreement and confirm its effectiveness according to relevant laws.208 Where the people’s court has confirmed that the mediation agreement is valid, if one of the parties refuses to perform the duties or does not fully comply with the agreement, the other party may apply to the people’s court for enforcement.209 Similar rules are adopted in the recent amendment of the Civil Procedure Law in 2012. Where judicial confirmation of a mediation agreement is to be applied for, the two parties shall, in accordance with the People’s Mediation Law and other laws, within 30 days from the date of entry into force of the mediation agreement, jointly submit their application to the basic people’s court.210 The people’s court shall examine the agreement and confirm the validity of the mediation agreement. If a party refuses to perform or fails to perform the whole of the court-confirmed agreement, the other party may apply to the people’s court for enforcement. If the mediation agreement does not meet the requirements of the law, the court shall reject the application for confirmation. The parties concerned may bring a lawsuit against the court’s rejection of confirmation of the agreement or alter the original mediation agreement by mediation and reach a new mediation agreement.211 For a mediation conducted by an independent mediation centre or a courtdesignated mediation, where the parties apply for judicial confirmation of the mediation agreement, the court shall, in accordance with the Several Opinions of the SPC on Establishing and Improving the Link-up of Litigation and Nonlitigation Mechanism for Resolution of Contradiction and Disputes 2009, the Opinions of the SPC on the People’s Court Further Deepening of Reform on Multi-Mechanisms for Dispute Resolution 2016, and the relevant provisions of the Civil Procedure Law212 and the People’s Mediation Law, review the mediation agreement and confirm the effectiveness of the mediation agreement.213 Judicial confirmation shall be administered by the basic people’s court where the mediation organization is located or by the court which designated the mediation to the Mediation Centre.214 For a court-entrusted mediation, the mediator shall submit the mediation agreement to the court. The court shall review the mediation agreement and then issue a mediation statement to the parties. The case will then be closed by the court.215 If any of the following circumstances occur, the court shall not confirm the effectiveness of the mediation agreement: (1) in violation of the mandatory provisions of laws and administrative regulations; (2) infringing upon the interests of the state and the public interest; (3) infringing upon the lawful rights and interests of outsiders; (4) involved in the case of whether or not to hold criminal responsibility of the parties concerned; (5) the content of the agreement is not clear 208 Ibid., art.33. 209 Ibid. 210 The Civil Procedure Law, art, 194. 211 Ibid., art, 195. 212 Articles 194 and 195. 213 The Opinions of the Supreme People’s Court and the China Insurance Supervisory Commission on Promoting the Construction of the Mechanism of Linking Litigation and Mediation for Insurance Disputes Nationwide in China 2016, s.9(4). 214 The Provisions of the SPC on People’s Court Invited Mediation 2016, art.19. 215 Ibid., art.20.

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and cannot be confirmed and executed; (6) mediation organizations or mediators forcing mediation or other serious violations of professional ethics; and (7) other circumstances under which the agreement cannot be confirmed.216 Where the parties have entered into a mediation agreement against their wills, or the mediator has an interest in the case, and the mediation is unfair, the people’s court shall not confirm the validity of the mediation agreement, with the exception that the parties know these situations and still insist on applying for confirmation.217 The mediation agreement confirmed by the court or the mediation statement issued by the court is enforceable. If one party fails to honour his or her promise, the other party can apply to the court for enforcement.218 After the mediation statement becomes legally binding, if one party can show evidence that the mediation was conducted against the principle of voluntariness, or the content of the mediation agreement was in violation of law, the party can apply for a rehearing of the case. If the claim is proved to be true in court, the case shall be reheard.219 23.9.8 The advantages of the LLMS The people’s courts, insurance regulators, and insurance industry associations form a concerted effort to resolve insurance disputes in a more efficient and diversified way on the platform of LLMS, which inherits the advantages of industry mediation and judicial mediation and overcomes the shortcomings of industry mediation and judicial mediation. Because of the link-up of litigation and mediation and their interaction, the LLMS gains additional advantages over the separate industry mediation and judicial mediation. First, the LLMS is quick. The time limit for resolving an insurance dispute by LLMS is 20 days.220 This is considerably less than the six-month limit for litigation of a civil case,221 or three months for a simple litigation procedure,222 or the threemonth limit for a second trial.223 Second, the LLMS is flexible. The flexibility can be seen at all stages of the application of the LLMS. At the pre-litigation stage, an insurance dispute can be resolved by an independent insurance mediation centre. After a lawsuit was made but prior to the filing of the case, the court can designate an insurance mediation centre to mediate the case. During the period of trial, the court can entrust an insurance mediation centre to mediate the case or invite an independent mediator to join the court for mediating the case. If the mediation fails, court shall adjudicate 216 The Several Opinions of the SPC on Establishing and Improving the Link-up of Litigation and Non-litigation Mechanism for Resolution of Contradiction and Disputes 2009, art.24. 217 Ibid. 218 The Provisions of the SPC on People’s Court Invited Mediation 2016, art.25. 219 The Civil Procedure Law, art.201. 220 The Opinions of the Supreme People’s Court and the China Insurance Supervisory Commission on Promoting the Construction of the Mechanism of Linking Litigation and Mediation for Insurance Disputes Nationwide in China 2016, s.11. 221 The CPL, art.135. 222 Ibid., art.146. 223 Ibid., art.159.

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the case without delay. The place where the mediation takes place is flexible; it can be at a court, or at a mediation centre, or at any other place with the approval of the court.224 The way of mediating a dispute is flexible: it can be facilitative, evaluative, or advisory. The form of mediation agreement is flexible: it can be oral or in writing; it can be in the form of a contract, or it can be confirmed by a court. Third, the LLMS is efficient and effective. A mediation agreement has the effect of a contract, so it is not as enforceable as a court judgment. Therefore, the compliance with the mediation agreement by the parties is not guaranteed. Through the LLMS, the parties of a mediation agreement can apply to the court for judicial confirmation of the agreement. Once the agreement has been confirmed, it can be enforced.225 The confirmation of the mediation agreement by a court has significantly increased the effectiveness of the mediation agreement. For a court-entrusted mediation, upon receiving the mediation agreement from the mediator, the court shall issue a mediation statement to the parties, which is as enforceable as the judgment by the court.226 In the case of failure in mediation, the case will be adjudicated by the court, so there is no gap between mediation and litigation. The close connection and interaction between a mediation centre and a court have greatly enhanced the efficiency of dispute resolution by the LLMS. As mentioned earlier, the major drawback for judicial mediation is the compromise of the confidentiality of the mediation; due to the dual roles of a judge as a mediator and as an adjudicator, it is almost impossible to keep mediation confidential. The separation of mediation and adjudication for the same case in terms of procedure and personnel in the LLMS effectively overcomes the drawback of the traditional judicial mediation. The court-designated and court-entrusted mediation directs most insurance disputes to the insurance mediation centres, reduces the flow of cases to judicial mediation or litigation, and consequently effectively alleviates the case-load to the courts. Finally, the LLMS is inexpensive. For insurance consumers, the insurance mediation centres do not charge for the service provided.227 For insurance companies, some mediation centres do not charge for the service provided, but the insurance companies must pay membership fee to the insurance industry association. Some other mediation centres charge the insurance companies on the number of cases handled by the centres.228 In comparison, the LLMS costs much less to the insured and insurer than litigation. All relevant parties can benefit from the LLMS. It benefits the insured by resolving disputes without the cost, time, and resources needed for a trial. It benefits the third-party claimant because he or she receives his or her compensation quicker than he or she would have had it gone to trial. It benefits the insurer because it will not 224 The Provisions of the SPC on People’s Court Invited Mediation 2016, art.14. 225 Ibid., art.25(2). 226 Ibid. 227 For example, Qingdao Insurance Dispute Mediation Centre does not charge the parties in dispute. See the newspaper, Qingdao Finance and Economics Daily 12 March 2015 (see accessed on 16 October 2020). 228 China Insurance News, 12 May 2015 (see accessed on 16 October 2020).

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incur litigation expenses, and the claim can be closed without harming the insurer’s reputation. It benefits the courts by reducing its docket load and by concluding more cases than it would have been able to otherwise. In addition, it benefits the Insurance Regulatory Bureaus by reducing consumers’ complaints to them. 23.9.9 The unique features of the LLMS The LLMS is a new and unique mechanism which links insurance industry mediation with judicial mediation and adjudication to form a connected and interactive platform for resolving insurance disputes. The LLMS inherits the advantages of industry mediation and judicial mediation, overcomes the shortcomings of industry mediation and judicial mediation, and gains additional advantages. It has been proved to be a quick, flexible, inexpensive, efficient, and effective mechanism for resolving insurance disputes. The LLMS has a number of unique features. First, insurance disputes can be resolved by independent insurance mediation centres before the disputants seek litigation. The mediation agreement reached by the parties through an insurance mediation centre can be confirmed by a court. The judicially confirmed mediation agreement is as enforceable as court judgment. This greatly enhances the effectiveness of the mediation agreement. This can be viewed as the first link-up of litigation with mediation. Second, insurance disputes can be mediated after a lawsuit has been submitted but prior to the filing of the case; this so called court-designated mediation directs the flow of insurance disputes to the insurance mediation centres. This can reduce the number of disputes entering into litigation and saves a great deal of judicial resources. This can be viewed as the second link-up of litigation with mediation. Third, even if an insurance dispute has been docketed or entered into trial, the dispute can still be directed to an insurance mediation centre with the willingness of the two parties. The mediation agreement can be converted to mediation statement by the court which is enforceable. Consequently, judicial mediation is, to a large extent, replaced by the court-entrusted mediation, that is, a delegation of court’s mediation power to a third-party mediation centre. This again greatly reduces the caseload to the courts. This so-called court-entrusted mediation can be viewed as the third link-up of litigation with mediation. It is envisaged that the major task for further improving the LLMS in the future is to strengthen the construction of the mediator teams. There is no doubt that the LLMS will expand nationwide and be further improved gradually and steadily in the future in China. 23.10 Conclusion In China, protection of insurance consumers can be achieved by a numbers of mechanisms. First, the insurance policy terms and premium rates are regulated by the Insurance Law and the CBIRC regulations to ensure that they are fair and reasonable to consumers. Second, the insurers’ conduct of business is strictly regulated to ensure that insurers and intermediaries treat customers fairly throughout the insurance life cycle, from the time before a contract is entered into and through to the 1318

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point at which all obligations under a contract have been satisfied. Third, in the case of insolvency of an insurer, the insurance security fund (as a safety net) is in place to fulfil the insurer’s obligation of paying the insureds’ insurance benefits. Fourth, a complaint-handling mechanism is in place for the insurers to deal with complaints in a timely and fair manner. Fifth, independent dispute resolution mechanisms are in place to deal with disputes, of which the LLMS is a new and unique mechanism which links insurance industry mediation with judicial mediation and adjudication to form a connected and interactive platform for resolving insurance disputes.

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CHAPTER 24

The self-regulatory institutions

24.1 Introduction According to art.180 of the Insurance Law, the insurance association is a selfdisciplinary organization of the insurance industry and is a social organization with legal person status. An insurance company must join the insurance industry association; while an insurance agent, insurance broker, or insurance adjusting firm may join the insurance industry association.1 As mentioned earlier in this book, the insurance industry is regulated at four levels in China. The highest level is the statutory regulation by the National People’s Congress. The rules of law at this level come from the Insurance Law. The second level is the administrative regulation by the State Council of China, which promulgates rules for certain important areas of insurance, such as administration of foreign-funded insurance companies in China’s insurance market, agriculture insurance, and compulsory motor vehicle insurance. The third level is the departmental regulation by the CBIRC, which regularly enacts administrative rules for the regulation of insurance in China. The fourth level is self-regulation. We have considered the first three levels of regulation in the previous chapters of this book. In this chapter, we consider the fourth level of regulation, namely, insurance industry self-regulation. The major nationwide self-regulatory institution in China is the Insurance Association of China (IAC). Its main function is to assist the CBIRC as an additional channel of regulatory control of China’s insurance industry and insurance market. Another nationwide self-regulation institution is the Insurance Asset Management Association of China (IAMAC), which specializes in the self-regulation of insurance asset management. As to self-regulation of insurance intermediaries, there has been so far no nationwide insurance intermediary association, but there are insurance intermediary associations in many provinces and municipal cities in China. In this chapter, we will see how the IAC operates as a self-regulation institution, how the IAMAC plays its role as a specialized self-regulation institution for insurance asset management, and how insurance intermediary associations function in self-regulation of the insurance intermediary sector, taking Beijing Insurance Intermediary Association as an example.

1 The Insurance Law, art.180.

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24.2 The Insurance Association of China The Insurance Association of China (IAC),2 established on 23 February 2001, is a non-profit social organization and a national self-regulatory institution that was approved by the China Banking and Insurance Regulatory Commission (CBIRC) and registered in the Ministry of Civil Affairs of China.3 In following the requirement of art.180 of the Insurance Law, as of 30 June 2020, 331 insurance institutions have joined the IAC, of which 13 are insurance groups, 86 are property insurance companies, 89 are life insurance companies, 12 are reinsurers, 14 are asset management companies, 56 are professional insurance intermediaries, 44 are local insurance associations (including intermediary associations), and 17 are insurance-related institutions.4 The IAC operates at the national level. It has the power to create and enforce stand-alone industrial and professional regulations and standards on its own. The main function of the insurance association is to assist the CBIRC as an additional channel of regulatory control. The IAC has introduced model insurance policy wordings, such as Compulsory Motor Vehicles Insurance Clauses, for the members to follow. The IAC represents the collective interests of China’s insurance industry. It speaks out on issues of common interest, helps to inform and participate in debates on public policy issues, and acts as an advocate for high standards of customer service in the insurance industry. 24.2.1 The structure of the IAC The highest authority of the IAC is the General Meeting, with the council being its executive body.5 The full-time president responsibility system is adopted, with a full-time president being responsible for the daily work of the Association and for appointing the secretary general, deputy secretary general, and other staff, if necessary. The IAC deliberates over the work of the Association through the annual meeting of the Council. The IAC has 32 subordinate departments as follows: Internet Branch Committee, Specialized Committee on Information Technology, Specialized Committee on Statistics, Specialized Committee on Development Strategy, Specialized Committee on Fund Application, Specialized Committee on Local Association, Specialized Committee on Property Insurance, Specialized Committee on Motor Vehicle Insurance, Specialized Committee on Claims Settlement, Specialized Committee on Non-Motor Vehicle Insurance, Specialized Committee on Agricultural Insurance, Specialized Committee on Reinsurance, Specialized Committee on Personal Insurance, Specialized Committee on Endowment Insurance, Specialized Committee on Health Insurance, Specialized Committee on Personal Insurance Operations Management, Specialized Committee on Insurance Marketing, Specialized Committee on Insurance Brokerage, Specialized Committee on Insurance 2 3 4 5

See the website of IAC, accessed on 15 October 2020. The Articles of Association of the IAC, art.2. See accessed on 15 October 2020. The Articles of Association of the IAC, art.18.

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Assessment, Specialized Committee on Bancassurance, Specialized Committee on Law, Specialized Committee on Anti-Insurance Fraud, Specialized Committee on Compliance, Specialized Committee on Corporate Governance, Specialized Committee on Auditing, Specialized Committee on Accounting, Specialized Committee on Human Resources, Specialized Committee on Education and Training, Specialized Committee on Group Standards, Specialized Committee on Foreign Insurance Institutions, Specialized Committee on School Education, and Specialized Committee on Industry Culture and Image Construction. The daily work of the departments shall be borne by the corresponding working units. The IAC also exchanges information and coordinates works through regular meetings of national associations. Currently, the IAC has 16 permanent administrative bodies: Office (Procurement Office), Human Resources Department (Party Affairs, Discipline Inspection and Supervision Department), Statistics, Information Technology and Research Department, Fund Application Department, Member Services and Local Department, Property Insurance Department I, Property Insurance Department II, Personal Insurance Department I, Personal Insurance Department II, Intermediary Work Department, Legal Compliance Department (Corporate Governance Department), Training and Certification Department, Standardization Construction Department, External Liaison Department, School Education Department, and Culture and Communication Department (Editorial Department). 24.2.2 The missions of the IAC The missions of the IAC are complying with the national constitution, laws, regulations, and economic and financial policies; complying with social morality and thoroughly implementing the scientific concept of development; urging members to coordinate with the insurance regulatory authorities and regulate themselves in accordance with the Insurance Law; promoting the development of the industry; and providing services for members; promoting the market to be open, fair, and just; and comprehensively improving the capability of the insurance industry to serve the harmonious socialist society.6 24.2.3 The functions and duties of the IAC The IAC’s actions of self-discipline include urging members to operate in conformity with the law, organizing members to sign self-discipline conventions, formulating rules of self-discipline, restraining unfair competition, maintaining fair and orderly market environment, and formulating industry standards.7 Commissioned by the relevant governmental departments, the IAC organizes and formulates industry quality standards, technical specifications, service standards, and regulations in accordance with the relevant laws and regulations and the development of the insurance industry and actively promotes the insurance 6 The Articles of Association of the IAC, art.3. 7 Ibid., art.6.

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industry credit system. Other duties include establishing and improving the insurance industry system and credit information system for insurance institutions and practitioners and exploring the establishment of the industry credit evaluation system and carrying out self-management of members. Members who violate the Articles of Association, self-discipline conventions, self-discipline rules, and management system, damage the lawful rights and interests of the policyholders and the insureds, and participate in unfair competition and infringe the interests of the industry and the image of the industry are to be penalized. As for those suspected of violating the law, they shall be brought to the regulatory authorities or other law enforcement departments.8 Other matters related to industry self-discipline are also dealt with by the IAC.9 Safeguarding legal rights: On behalf of the industry, the IAC participates in the decision-making of the reform and development of the industry and other industryrelated arguments, puts forward relevant recommendations, and safeguards the legitimate rights and interests of the industry. The IAC also strengthens communication with the regulatory authorities, relevant government departments and other industries; strives for an external environment conducive to the development of the industry; and safeguards the legitimate rights and interests of members. When the legal rights and interests of members are damaged, the IAC shall represent members to communicate with relevant institutions. The IAC guides the establishment of a dispute mediation mechanism for the industry and strengthens the construction and maintenance of the insurance consumer rights coordination and communication mechanism. Entrusted matters from regulatory authorities and government departments are received and handled. Services: The IAC takes the initiative to carry out investigation and study and reports the risks and problems of the insurance market in a timely manner to the regulatory authorities and relevant departments of the government; it also makes comments and suggestions. It coordinates the relationships among members and between members and practitioners. It resolves contradictions and creates a healthy and harmonious environment.The relationship between the members and the insurance consumers and the public are coordinated. The IAC protects the legitimate rights and interests of the parties involved in insurance activities, builds industry education and training systems to carry out qualification management and training of employees, and organizes exchanges of business, data, technology, and experience among members to promote resource sharing and common development.10 Communication: The IAC establishes an information communication mechanism among members to promote exchanges in the industry. After being approved by relevant organizations, it issues information publications and builds up websites in accordance with relevant provisions. The IAC also strengthens the communication and coordination with other relevant industry associations to promote foreign exchange of the industry; builds international exchange platforms and actively joins in international insurance organizations; guides the industry to broaden the 8 Ibid. 9 Ibid., art.7. 10 Ibid., art.8.

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international perspective; and expands foreign cooperation fields and space. It actively participates in international conferences and related activities and helps the industry learn from advanced foreign technology and experience.11 Publicity: The IAC integrates publicity resources, formulates publicity planning, and organizes and performs publicity and advisory activities related to the industry. It advocates and implements the core concept of the insurance industry “keeping promises, shouldering risk, focusing on service, abiding by norms” to promote the construction of industry culture. The IAC follows hot spots and focus issues and guides positive consensus publicity. It also popularizes insurance knowledge and promotes insurance in different ways. After being approved by relevant organizations, it commends advanced models, establishes the industry ethical stance, and creates a good image of the industry.12 24.3 Insurance Asset Management Association of China The Insurance Asset Management Association of China (IAMAC), established in September 2014, is a national self-regulatory organization of the Chinese insurance asset management industry under the supervision of the CBIRC. At present, the Association has 554 members from all sectors of the financial market, including 535 institutions and 11 renowned Chinese and foreign economists.13 The IAMAC adheres to the purpose of dedicated services for the regulatory authorities and the market players. It provides over 20 services, including insurance asset management product registration, investment projects matchmaking, market agency and financial product evaluation, system and index development, innovation promotion, research and investigation, market analysis, seminars, education and training, as well as media and brand promotion.The IAMAC has actively promoted and participated in green finance, responsible investment, and social welfare. It also develops the Product Registration System, Project Matchmaking System, Product Valuation Model, Asset Management Cloud Platform, Fund Investment Trading System, and other infrastructure platforms of the asset management market. The IAMAC is committed to cooperation across borders, sectors, and markets. It has built connections not only with central and local governments but also with banks, securities, trusts, funds, private funds, financial leasing companies, as well as many leading international investment companies and multilateral financial organizations, such as Blackrock, Blackstone, Schroders, Partners Group, IfoA, and AIMA. The Association expands its influence across the world and drives the global asset allocation of the industry to develop in a stable and sound way. With the purpose of building a market-oriented, professionalism-focused, globalization-advanced, and data-based organization, the IAMAC plays an important role for a prosperous future of the Chinese insurance asset management industry. 11 Ibid., art.9. 12 Ibid., art.10. 13 See accessed on 15 October 2020.

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24.3.1 The missions of the IAMAC The missions of the IAMAC are: (1) to play the role of bridge and link between market entities and regulatory authorities, implement industry self-discipline, promote compliance operations, and standardize market order; (2) to provide industry services, study industry issues, deepen industry exchanges and cooperation, and formulate industry standards, improve industry standards, and improve industry service levels; (3) to promote business innovation, strengthen industry education, and enhance industry competitiveness; (4) to strengthen communication and coordination, create a good environment, safeguard the legitimate rights and interests of the industry, and promote the sustained, stable, and healthy development of the insurance asset management industry.14 24.3.2 The functions and responsibilities of the IAMAC The IAMAC has a number of functions, as follows:15 It safeguards the legal rights of members and the legal rights of the industry in accordance with the law and represents members and the industry in reporting to the regulatory authorities, government departments, and other relevant institutions in respect of problems, suggestions, and requirements of members in business activities. It formulates industry self-discipline rules, implements member self-discipline management, supervises and inspects members’ business conduct, imposes disciplinary sanctions on members who violate the Articles of Association of the IAMAC and self-discipline rules, and maintains market order. Entrusted by regulatory authorities, the IAMAC formulates codes of conduct, professional norms and practice standards for practitioners, organizes practitioners to receive continuing education, business training and practice management, and improves their overall quality, business skills and practice level. Entrusted by regulatory authorities, the IAMAC formulates and implements business rules, industry standards, operating procedures, and service specifications; supervises members to operate in compliance; faithfully performs fiduciary duties and social responsibilities; and improves service levels. It provides technical support and services for registration, custody, trading, valuation, credit rating, risk monitoring, in relation to asset management business and promotes the construction of related technical systems and platforms. According to industry needs, it organizes members to research and promote business innovation to improve industry competitiveness. According to the authorization, it carries out industry statistics, collects, organizes, and publishes relevant information and statistical data; provides information services for members; and promotes member information construction. It cooperates among members at home and abroad, organizes research on business issues and industry development issues, and provides suggestions for member business expansion and competent departments to promote market development. 14 The Articles of Association of the IAMAC, art.3. 15 Ibid., art.6.

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It establishes a communication and coordination mechanism in the industry, coordinates major industry-related matters according to the needs of members, resolves conflicts and disputes among members fairly and reasonably, and maintains a fair and competitive market environment. It carries out investor education and industry culture construction, establishes a public opinion propaganda mechanism, strengthens communication and understanding between members and the public, and maintains and enhances industry reputation. It carries out relevant work in accordance with laws and regulations authorized by the CBIRC. 24.3.3 Self-discipline convention for members of the IAMAC In order to strengthen industry self-discipline; standardize member practice behaviours; enhance the awareness of integrity, law-abiding and fair competition, common development, and risk prevention; and promote the healthy and stable development of the industry, according to the Articles of Association of IAMAC, the IAMAC have reached a consensus through consultation to formulate the Self-discipline Convention for Members of the Insurance Asset Management Association of China (2018 amendment).16 All the members have agreed to abide by the Convention. A member shall strictly abide by laws and regulations, the Articles of Association, various self-discipline rules, and other relevant regulations, follow the principle of fair competition, observe business ethics, conscientiously maintain industry reputation and industry image, and promote the healthy and stable development of the industry and all members.17 A member shall support the real economy, serve the development of the industry, practise the concepts of long-term investment, value investment, and responsible investment and earnestly fulfil social responsibilities. It shall actively participate in domestic and international exchanges, strengthen market and policy research, and establish talent development that is compatible with industry characteristics strategy. It shall promote system innovation, organizational innovation, product innovation, and service innovation and improve industry competitiveness.18 A member shall improve corporate governance and establish a long-term incentive and restraint mechanism. It must adhere to the principle of priority of the principal’s interests and strictly prohibit insider trading, transfer of interests, unfair trading, and market manipulation and other illegal activities. It must also ensure the safety, liquidity, and profitability of assets.19 A member shall strengthen the awareness of compliance operations, establish a scientific, reasonable, and efficient internal control system, strengthen the check

16 See accessed on 15 October 2020. 17 The Self-discipline Convention for Members of the IAMAC (2018 amendment), art.1. 18 Ibid., art.2. 19 Ibid., art.3.

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and balance mechanism, continuously improve risk management capabilities and effectively prevent and resolve various risks.20 A member shall be diligent, fulfil duties, professionally and prudently engage in asset management, investment, and financing services and related work; continuously improve service quality and service level; and improve service efficiency. It shall strictly keep business secrets and safeguard the legitimate rights and interests of customers.21 Information disclosure shall follow the principles of truthfulness, accuracy, completeness, timeliness, and effectiveness. Disclosures shall not contain false records, misleading statements, or major omissions.22 A member shall strictly abide by the principle of sales appropriateness; carry out sales promotion activities honestly; refrain from falsifying, deliberately exaggerating, or creating misleading publicity about products; refrain from defrauding or misleading clients to carry out investment and other related businesses, and refrain from carrying out business activities for improper benefits for a member itself or for others.23 A member shall truthfully cooperate and offer mutual support where appropriate, and strictly prohibit commercial bribery and vicious price competition or malicious derogation of peers. To safeguard the common interests of the industry, employees of other companies shall not be employed for the purpose of maliciously competing for customers or projects.24 A member shall conscientiously accept the supervision of regulatory authorities, industry self-regulatory organizations, clients, and the general public.25 For members who violate this Convention, the IAMAC will take self-disciplinary measures against them in accordance with relevant self-discipline rules and record them in the member integrity file. Members are obliged to accept and cooperate with investigations.26 This Convention applies to all members of the IAMAC. From the date of obtaining membership, it is deemed to have joined this Convention voluntarily, and this convention will automatically take effect for it.27 24.4 Insurance intermediary associations In China, no nationwide insurance intermediary association has been established, but there are insurance intermediary associations at provincial and municipal levels. Let’s take Beijing Insurance Intermediary Association (BIIA) as an example to show the duties and functions of an insurance intermediary association.

20 21 22 23 24 25 26 27

Ibid., art.4. Ibid., art.5. Ibid., art.6. Ibid., art.7. Ibid., art.8. Ibid., art.9. Ibid., art.10. Ibid., art.11.

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The BIIA was established on 18 April 2006. It is a non-profit social organization jointly initiated by professional insurance intermediaries in Beijing and approved by the Beijing Municipal Civil Affairs Bureau. The business supervisor is the Beijing Banking and Insurance Regulatory Bureau.28 As of 1 June 2020, the BIIA has 333 members in Beijing, including 135 insurance agency companies, 170 insurance broker companies, and 28 insurance adjustment companies.29 The composition of member companies includes state-owned enterprises (including central enterprises and municipal enterprises), joint-stock enterprises, private enterprises, Sino-foreign joint ventures, and Hong Kong, Macao, and Taiwan enterprises. Most of them are professional insurance intermediaries that are competitive, that are honest and trustworthy, and that operate in compliance with laws and regulations. 24.4.1 The missions of the BIIA The missions of the BIIA are to provide services to members, safeguard the interests of the intermediary industry, and promote the development of the intermediary industry. The basic responsibilities include self-discipline, rights protection, coordination, communication, and publicity.30 The goals of the BIIA are through the implementation of the spirit of supervision, it formulates rules and regulations, and guides enterprises to operate in compliance with laws and regulations; through self-discipline rights protection, it safeguards legitimate rights and interests, and establishes a positive image of the industry; through various activities, it organizes industry exchanges and maintains a harmonious market environment; through coordinating the relationship between all parties, it improves service capabilities and leads the healthy development of the industry. 24.4.2 The functions and business scope of the BIIA31 The BIIA is responsible for organizing industry training, business consulting, information exchange, and other activities. It participates in relevant government decision-making meetings relating to intermediary industry development, reform, or industry interests; it may put forward suggestions on insurance industry policies and legislation; and participates in relevant hearings held by the National People’s Congress and the government. It represents the insurance intermediary institutions to conduct certain activities, such as to submit industry appeals or responding activities to relevant government departments or to submit investigation applications to relevant government departments.

28 See the website of the BIIA accessed on 15 October 2020. 29 See the website of BIIA accessed on 15 October 2020. 30 The Articles of Association of the BIIA, art.36 31 Ibid., art.6

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In accordance with the Articles of Association or industry regulations, it formulates the intermediary industry’s quality specifications, technical regulations, and service standards and participates in the formulation of local or national business technical standards for relevant industries. Through the authorization of laws and regulations, it carries out industry statistics, industry surveys, releases industry information, issues public trust certificates, price coordination, industry access qualifications, and qualification reviews. It operates industry self-discipline. It promotes the establishment of an industry credit system, establishes and improves a member integrity self-discipline management system, and establishes an industry integrity punishment mechanism in a timely manner. It supervises members to operate in compliance with laws and regulations. For members who violate the Articles of Association and regulations, fail to meet quality standards, service standards, harm the legitimate rights and interests of consumers, participate in unfair competition, and damage the collective image of the industry, the BIIA shall take corresponding measures according to the Articles of Association. It coordinates the relationships between members and between members and non-members in the industry, members and other industry operators, members and consumers and other social organizations. It organizes industry exchanges. It organizes members to exchange business; technology, and work experience; improves information and data through publications, websites, and so on; reflects industry trends; establishes information sharing mechanisms; and carries out domestic and foreign business and technical exchanges and cooperation. It strengthens industry publicity, integrates publicity resources of members, vigorously strengthens the overall publicity of the industry, and raises public insurance awareness and the legal awareness of market entities. It carries out other activities stipulated by laws, regulations, rules, and the Articles of Association. 24.5 Conclusion In China, the insurance self-regulation institutions play an important part in the development of China’s insurance industry and maintaining the order of insurance market. The primary responsibilities of self-regulation include urging members to operate in conformity with the law, organizing members to sign self-discipline conventions, formulating rules of self-discipline, restraining unfair competition, maintaining fair and orderly market environment, and formulating industry standards and model insurance clauses. With the rapid development of the insurance intermediary market, it is necessary to establish a nationwide insurance intermediary association to regulate activities of insurance intermediaries in China.

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APPENDIX

The Insurance Law of the People’s Republic of China

(Adopted at the 14th session of the Standing Committee of the 8th National People’s Congress on June 30, 1995, amended three times on 28 October 2002, on 28 February 2009, and on 24 April 2015) Chapter I General Provisions Article 1 This Law is formulated for the purpose of regulating the insurance activities, protecting the legitimate rights and interests of parties to insurance activities, strengthening the supervision and administration of the insurance industry, safeguarding the social and economic order as well as social and public interests, and promoting the healthy development of the insurance industry. Article 2 “Insurance” in this Law refers to a commercial insurance transaction whereby an proposer, in accordance with the terms and conditions of a contract, pays insurance premiums to an insurer, and the insurer assumes liability to make indemnity payments where property loss or damage is caused as a result of the occurrence of an insured event that is agreed upon in the contract, or to pay insurance benefits upon the occurrence of death, injury, or illness of the insured or the attainment of certain age or time limit agreed upon in the contract. Article 3 This Law is applicable to the conduct of insurance activities within the territory of the People’s Republic of China. Article 4 The conduct of insurance activities shall be in conformity with laws and administrative regulations as well as social moral, and shall never harm social and public interests. Article 5 Parties to insurance activities shall follow the principle of good faith in exercising rights and performing obligations.

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Article 6 Insurance business shall be carried out by insurance companies formed according to this Law or other insurance institutions prescribed by laws and administrative regulations. No other entities or individuals shall carry out insurance business. Article 7 Legal persons and other organizations within the territory of the People’s Republic of China which need domestic insurance coverage shall take out insurance from insurance companies within the territory of the People’s Republic of China. Article 8 Insurance, banking, securities and trust businesses shall be operated and regulated separately; insurance companies shall be set up separately from bank, securities and trust business organizations, unless otherwise prescribed by the State. Article 9 The insurance supervision and regulation authority of the State Council is responsible for the supervision and regulation of the insurance industry according to law. The insurance supervision and regulation authority of the State Council sets up local branch offices according to the needs for performing its duties. The local branch offices shall perform the responsibilities for supervision and regulation according to the authorization of the insurance supervision and regulation authority of the State Council. Chapter II Insurance Contracts Section 1 General Provisions Article 10 An insurance contract is an agreement whereby the rights and obligation are agreed upon by the proposer and the insurer. A proposer is a party who enters into an insurance contract with the insurer and is obliged to pay the premium under the contract. An insurer refers to an insurance company which enters into an insurance contract with a proposer and is obliged to make indemnity payment or pay insurance benefits under the contract. Article 11 An insurance contract shall be concluded by agreement through consultation, and the rights and obligations of both parties shall be determined according to the principle of fairness. An insurance contract shall be concluded on a voluntary basis, except for those insurance made compulsory by laws and administrative regulations. Article 12 When entering into an insurance contract, the proposer of a personal insurance shall have an insurable interest in the insured.

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The insured in property insurance shall have an insurable interest in the subject matter of insurance when an insured event occurs. Personal insurance refers to the type of insurance where the life and physical body of a person are the subject matter insured. Property insurance refers to the type of insurance where properties and the interests therein are the subject matter insured. An insured refers to a party whose property or life or physical body is covered by an insurance contract and who is entitled to claim for insurance money. A proposer may be the insured. An insurable interest refers to an interest which the proposer or the insured has in respect of the insured subject matter and is legally recognised. Article 13 An insurance contract is formed when a proposer makes an application and the insurer agrees to underwrite the business. The insurer shall issue to the proposer, in a timely manner an insurance policy or other insurance certificate. The insurance policy or other insurance certificate shall specify the contents of the contract as agreed by both parties. The parties may agree to specify the contents of the contract in other written form. A legally formed insurance contract shall become effective upon its formation.The proposer and insurer may attach conditions or time limit with regard to the effectiveness of the contract. Article 14 After the conclusion of an insurance contract, the proposer shall pay the insurance premiums in accordance with the agreement of the contract, and the insurer shall start to assume the insurance liability from the agreed time. Article 15 Unless otherwise provided in this Law or agreed in the insurance contract, where an insurance contract is formed, the proposer may rescind it and the insurer may not. Article 16 When entering into an insurance contract, the insurer may raise questions concerning relevant details of the insured subject matter or of the insured. The proposer shall truthfully disclose such details to the insurer. The insurer shall have the right to rescind the insurance contract where the proposer fails to fulfil the obligation of truthful disclosure provided in the preceding paragraph intentionally or by gross negligence so that the failure of disclose or representation shall sufficiently influence the insurer’s decision on whether he will accept the insurance or raise the premium rate. The right of rescission provided in the preceding paragraph shall lapse where the insurer does not exercise it in thirty days after he knows that there is the cause for rescission. Where over two years have passed from the date of formation of the contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payment or paying insurance benefits.

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Where the proposer fails to perform his duty of disclosure and truthful representation of information to the insurer intentionally, the insurer shall not be liable for making indemnity payments or paying insurance benefits in connection with the insured events that occur prior to the rescission of the contract, and shall not refund the premium. Where the failure of the proposer to perform his duty of disclosure and truthful representation by gross negligence has a material impact on the occurrence of the insured events, the insurer shall not be liable for making indemnity payments or paying insurance benefits in connection with the insured events that occur prior to the rescission of the contract, but he shall refund the premium. Where the insurer knows that the proposer fails to make a truthful disclosure at the time of entering into a contract, the insurer may not rescind the contract; where an insured event occurs, the insurer shall be liable for making indemnity payment or paying insurance benefits. An insured event refers to an event falling within the scope of cover agreed under the insurance contract. Article 17 When standard clauses provided by the insurer are adopted for concluding an insurance contract, the standard clauses provided by the insurer to the proposer shall be attached to the insurance application form, and the insurer shall explain contents of the contract to the proposer. When concluding an insurance contract, the insurer shall make notes on clauses which exempt the insurer of its liabilities on the application form, the insurance policy, or other certificate that are so conspicuous as to draw the proposer’s attention, and make specific and clear explanations thereof to the proposer orally or in writing; otherwise such clauses shall have no effect. Article 18 An insurance contract shall contain the following elements: (1) Name and address of the insurer; (2) Names and addresses of the proposer and the insured and, in the case of personal insurance name and address of the beneficiary; (3) Insured subject matter; (4) Scope of cover and exclusions; (5) Period of insurance and commencement of insurance liability; (6) Sum insured; (7) Premium and method of premium payment; (8) Method of payment of indemnity or insurance benefits; (9) Liabilities arising from breach of contract and resolution of dispute; and (10) The date month and year of the signing of the contract The proposer and the insurer may agree on any other matters relating to the insurance. A beneficiary means a person designated by the insured or the proposer in a personal insurance contract, who is entitled to make claims for the insurance benefits. The proposer or the insured may be the beneficiary. The sum insured means the maximum limit of the indemnity payment or insurance benefits for which the insurer is liable.

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Article 19 The following terms and conditions in an insurance contract concluded by adopting the standard-form contract provided by the insurer shall be invalid: (1)

(2)

those that exempt the insurer of the obligations that the insurer should have born according to law or that aggravate the obligations of the proposer and the insured; and those that deny the proposer, the insured or the beneficiary the rights that they should have been entitled to according to law.

Article 20 The proposer and the insurer may alter the contents of an insurance contract through consultation. Where an insurance contract is altered, the insurer shall endorse the original insurance policy or any other insurance certificate or attach an endorsement slip to the insurance contract or insurance certificate, or the proposer and the insurer may enter into a written agreement on the alterations. Article 21 Where the proposer, the insured or the beneficiary knows the occurrence of an insured event, it shall notify the insurer thereof in a timely manner. Where notice is not sent in a timely manner intentionally or due to gross negligence, and as a result, the nature, cause and extent of loss of the insured event are hard to be ascertained, the insurer shall not be liable for making indemnity payment or paying insurance benefits in respect of the portion that cannot be ascertained, but with the exception that the insurer has known in time or should have known in time the occurrence of the insured event through other channels. Article 22 After the occurrence of the insured event, the proposer, the insured or the beneficiary, in making claims to the insurer for indemnity payments or insurance benefits, shall provide the insurer with evidence and information which is relevant in ascertaining the nature, cause and extent of loss of the insured event, and which he is able to provide. Where the insurer, based on the terms of the insurance contract, considers the relevant evidence or information insufficient, the insurer shall, in a timely manner, advise the proposer, the insured or the beneficiary, once and for all, to provide additional evidence or information Article 23 The insurer shall, after receipt of a claim for indemnity or insurance benefits from the insured or the beneficiary, determine the matter in a timely manner; if the claim is complicated, the insurer shall make a determination within 30 days, unless otherwise agreed on in the contract. The insurer shall inform the insured or the beneficiary of the result of the determination; where the claim is covered, the insurer shall fulfil its obligations to pay indemnity or insurance benefits within 10 days after reaching an agreement on the amount of indemnity payment or insurance benefits with the insured or the beneficiary. Where there are provisions in the insurance contract as to the period within which indemnity or the payment of the insurance benefits should be effected, the insurer shall fulfil its obligation accordingly.

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Where the insurer fails to fulfil its obligations as prescribed in the preceding paragraph in a timely manner, the insurer shall compensate the insured or the beneficiary for any damages incurred therefrom, in addition to payment of the amount insured. No entity or individual shall illegally interfere with the insurer’s performance of the obligation of paying indemnity or insurance benefits, or restrict the insured’s or beneficiary’s right of obtaining insurance money. Article 24 After making a determination according to the provisions in article 23 therein, where the claim is not covered, the insurer shall, within 3 days from the date the determination is made, send to the insured or the beneficiary a notice rejecting indemnity or payment of insurance benefits and specifying reasons therefor. Article 25 If the amount of indemnity payment or insurance benefits cannot be determined within sixty days of receipt of the claim for indemnity payment or insurance benefits and the evidence and information relevant thereto, the insurer shall effect payment of the amount determinable with the evidence and information available; the insurer shall pay the difference accordingly after the final amount of indemnity payment or insurance benefits is determined. Article 26 For the insured and the beneficiary of the insurance contracts other than life insurance, the period of prescription for making a lawsuit in relation to claims for indemnity payment or insurance benefits is two years, starting to run from the date when the insured or the beneficiary knows or ought to know the occurrence of an insured event. For the insured or beneficiary of life insurance, the period of prescription for making a lawsuit in relation to claims for indemnity payment or insurance benefits is five years, starting to run from the date when the insured or the beneficiary knows or ought to know the occurrence of an insured event. Article 27 Where no insured event has occurred, and the insured or the beneficiary fraudulently reports that an insured event has occurred and submits a claim for indemnity payment or insurance benefits, the insurer may rescind the contract and refuse to refund the premium paid. Where the proposer or the insured intentionally causes the occurrence of an insured event, the insurer may rescind the contract, shall not be liable for indemnity payment or insurance benefits, and, except as provided under article 43 of this Law, does not refund the premium paid. Where the proposer, the insured or the beneficiary, following the occurrence of an insured event, fabricates false causes of the insured event or overstates the extent of loss by means of forged or altered relevant documents, information or other evidence, the insurer shall not be liable for indemnity payment or insurance benefits in respect of the portion which is fraudulently claimed. Where the proposer, the insured or the beneficiary has any of the acts provided in the three preceding paragraphs which leads the insurer to pay insurance benefits or incur expenses, it shall refund the insurance benefits paid or reimburse the expenses so incurred.

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Article 28 Where an insurer transfers a portion of its written business to another insurer by way of cession, the transaction is reinsurance. When requested by the reinsurer, the cedant shall inform the reinsurer in writing of the cedant’s own liabilities and the relevant information with respect to the primary insurance. Article 29 The reinsurer shall not demand payment of premium from the proposer of the primary insurance. The insured or the beneficiary of the primary insurance shall not make claims to the reinsurer for indemnity payment or insurance benefits. The cedant shall not refuse or delay fulfilment of its liabilities of its primary insurance on the grounds that the reinsurer fails to fulfil the reinsurance liabilities. Article 30 With respect to an insurance contract entered into by adopting the standard-form contract supplied by the insurer, where there is any dispute arising out of or in connection with the contract terms between the insurer and the insured or the beneficiary, the terms shall be interpreted in accordance with the usual understanding of the terms. Where there are two or more interpretations of a term of the contract, the people’s court or arbitration organization shall interpret such a term in favour of the insured and the beneficiary. Section 2 Personal Insurance Contracts Article 31 The proposer has an insurable interest in the following persons: (1) (2) (3) (4)

The proposer himself/herself; The proposer’s spouse, children and parents; Either family members other than above or close relatives with whom the proposer has a relationship of fosterage, support or and maintenance; or Workers who have labour relationships with the proposer.

In addition to the persons mentioned in the preceding paragraph, the proposer shall be deemed to have an insurable interest on other person’s life who agrees that the proposer may conclude a contract of insurance on his life. Where the proposer enters into an insurance contract without an insurable interest in the life insured, the contract shall be invalid. Article 32 Where the age of the life insured declared by the proposer is untruth, and the actual age of the life insured does not fall within the age limit specified in the contract, the insurer may rescind the contract and refund the cash value of the insurance policy according to the contract. Where the insurer exercises the right of rescission, the prevision in paragraph three and six in article 16 of this Law shall applicable. Where the age of the life insured declared by the proposer is untruth so that the insured has paid premiums less than they should have been, the insurer shall have the right to

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rectify the misrepresentation and request the proposer to make up the balance or at the time of payment, to pay the insurance benefits in proportion to the amount of premium actually paid to the amount that should have been paid. Where the age of the insured declared by the proposer is untrue so that the insured has paid more than they should have been, the insurer shall refund the overpaid portion to the proposer. Article 33 A proposer shall not take out personal insurance on the life of a person who has no civil conduct capacity, under which insurance money shall be paid on condition of the death of the life insured, and insurer shall not underwrite such insurance. Parents who take out personal insurance for their minor children shall not be subject to the preceding paragraph. However, the total insurance money paid for the death of the life insured shall not exceed the limit as prescribed by the insurance supervision and regulation authority of the State Council. Article 34 A contract with death as the condition for payment of insurance benefits is invalid without the life insured’s consent thereto and acceptance of the sum insured. An insurance policy with death as the condition for payment of insurance benefits shall not be transferred or pledged without the written consent of the life insured. Personal insurance taken out by parents for their minor children shall not be subject to paragraph 1 of this article. Article 35 The proposer may pay an insurance premium to an insurer in a lump sum or in instalments in accordance with the insurance contract. Article 36 Where the contract specifies payment of the premiums in instalments and the proposer has paid the first instalment but fails to pay the current instalment over thirty days from the date when the insurer reminds the payment or over sixty days from the date the instalment is due, the contract shall be suspend, or the insurer may reduce the sum insured in accordance with the contract, unless otherwise agreed in the contract Where an insured event occurs in respect of the insured within the time limit mentioned in the preceding paragraph, the insurer shall pay the insurance benefits according to the contract but may deduct the outstanding premium. Article 37 An insurance contract suspended in accordance with article 36 of this Law can be reinstated where the insurer and the proposer have reached an agreement through consultation and the proposer has paid the outstanding premiums. However, the insurer has the right of rescission where no agreement has been reached by the parties within two years from the date of the lapse of the contract. Where the insurer rescinds the contract in accordance with the preceding paragraph, he shall refund the proposer the cash value of the policy

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Article 38 With respect to life insurance, the insurer shall not resort to litigation to demand payment of the insurance premiums by the proposer. Article 39 The beneficiary of life insurance shall be designated by the life insured or the proposer. Designation of beneficiary by the proposer is subject to the insured’s consent. Where a proposer effects a personal insurance on its worker with whom it has labour relationship, the proposer may not designate anyone other than the life insured or the life insured’s close relatives as the beneficiary. Where the life insured is a person with no or limited capacity for civil conducts, his or her guardian may designate the beneficiary. Article 40 The life insured or the proposer may designate one or more beneficiaries. Where there are more than one beneficiaries, the life insured or the proposer may specify the order of the beneficiaries and their respective proportions insurance benefits; in the absence of such specification on proportions, all the beneficiaries shall share the insurance benefits equally. Article 41 The life insured or the proposer may change the beneficiary by written notice to the insurer. The insurer shall endorse the change on the insurance policy or any other insurance certificate or attach an approval slip thereto after receiving the written notice. Change of the beneficiary by the proposer is subject to the consent of the life insured. Article 42 After the death of the life insured, under any of the following circumstances, the insurance benefits shall be treated as part of the estate of the life insured, and the insurer shall perform the obligation of paying insurance benefits according to the Inheritance Law of the People’s Republic of China: (1) (2) (3)

no beneficiary has been designated or the beneficiary has not been explicitly designated and cannot be determined; the beneficiary dies before the life insured and there is no other beneficiary; or the beneficiary legally loses or waives the beneficiary right and there is no other beneficiary.

Where the beneficiary and the life insured die in a same event, and the sequence of their death cannot be ascertained, it is presumed the beneficiary dies first. Article 43 Where the proposer has intentionally caused the death, injury, disability or illness to the life insured, the insurer shall not be liable for paying insurance benefits.Where the proposer has paid insurance premium for two or more years, the insurer shall, in accordance with the contract, refund the cash value of the policy to other persons entitled thereto.

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Where the beneficiary has intentionally caused the death, injury, disability or illness of the life insured, or attempted to murder the life insured but failed, the beneficiary shall lose the right to receive payment as a beneficiary. Article 44 With respect to a contract with death as the condition for payment of insurance benefits, where the life insured commits suicide within two years after contract is formed or reinstated, the insurer shall not be liable for payment of insurance benefits, unless the life insured is an incapacitated person at the time of committing suicide. Where the insurer is not liable for payment of insurance benefits according to the preceding paragraph, it shall refund the cash value of the insurance policy in accordance with the contract. Article 45 Where the life insured is disabled or killed as a result of intentionally committing a crime or resisting a measure of compulsion taken according to law, the insurer shall not be liable for payment of the insurance benefits. If, however, the proposer has paid premiums for two years, the insurer shall refund the cash value of the policy in accordance with the contract. Article 46 Where an insured event, such as death, disability, or illness, etc. occurs inspect of the life insured as a result of a third party’s act, the insurer shall, after paying insurance benefits to the life insured or the beneficiary remains entitled to claim compensation from the third party. Article 47 Where a proposer rescinds the contract, the insurer shall refund the cash value of the policy within thirty days in accordance with the contract after receipt of notice of rescission. Section 3 Property Insurance Contracts Article 48 Where an insured event occurs and the insured does not have an insurable interest in the subject matter insured, the insured may not make a claim to the insurer for indemnity payment. Article 49 Where the insured subject matter is assigned, the assignee of the insured subject matter shall enjoy the rights and assume the obligations of the insured. Where the insured subject matter is assigned, the insured or the assignee shall notify the insurer thereof in a timely manner, with the exception of cargo transportation insurance contracts and those contracts which provide otherwise. Where the insured subject matter is assigned and the level of risk increases substantially as a result, the insurer may increase the premiums in accordance with the contract or rescind

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the contract within 30 days of receipt of the notice provided in the preceding paragraph. Where the insurer rescinds the contract, it shall refund to the proposer the premiums received after deducting the premiums in accordance with the contract for the period from the date of commencement of the insurance liability to the date of rescission. Where the insured or the assignee fails to fulfil the obligation of giving notice provided in paragraph two of this article, an insured event occurs due to the substantial increase in the level of risk in respect of the insured subject matter as a result of the assignment, the insurer shall not be liable for indemnity payment. Article 50 For a cargo transportation insurance contract or a voyage insurance contract for a means of transport, once the insurance liability commences, neither of the parties to the contract shall rescind the contract. Article 51 The insured shall comply with relative provisions of the State with respect to fire prevention, safety, production operations and labour protection, etc. and ensure the safety of the insured subject matter. The insurer may inspect the safety conditions of the insured subject matter in accordance with the contract and gives written recommendations to the proposer and the insured for eliminating risky elements and latent problems. Where the proposer or the insured fails to fulfil his/her duties to ensure the safety of the insured subject matter in accordance with the agreement, the insurer shall have the right to demand increase of the premium or to rescind the contract. The insurer, with the insured’s consent, may take preventive safety measure to protect the insured subject matter. Article 52 Where there is a material increase of risk of the subject matter of insurance during the term of a contract, the insured shall notify the insurer in a timely manner in accordance with the contract. The insurer can, in accordance with the contract, demand an increase in the premium or rescind the contract. Where the insurer rescinds the contract, he will refund to the proposer the premiums received after deducting the premiums in accordance with the contract for the period from the date of commencement of the insurance liability to the date of termination. Where the insured fails to perform the obligation of giving notice provided in the preceding paragraph, the insurer shall not be liable for paying insurance money in respect of an insured event which occurs due to the increased level of risk of the insured subject matter. Article 53 Unless otherwise specified in the contract, the insurer shall reduce the insurance premium, and refund the corresponding amount of premium calculated on the number of days passed, where there is either of the following circumstances: (1) (2)

the relevant condition based on which the insurance premium rate is determined changes and the degree of peril of the subject matter insured greatly decreases; or the insurable value of the subject matter insured greatly decreases.

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Article 54 Where a proposer requests to rescind the contract before commencement of the insurance liability, the insurer shall refund the premiums after deducting the handling charges; where the proposer requests to rescind the contract after commencement of the insurance liability, the insurer shall refund to the proposer the premiums received after deducting the premiums in accordance with the contract for the period from the date of commencement of the insurance liability to the date of rescission. Article 55 Where the proposer and the insurer have agreed on the insured value of the insured subject matter and specified the value in the contract, and loss or damage occurs on the insured subject matter, the agreed insured value shall be the basis for calculating the amount of indemnity payment. Where the proposer and the insurer have not agreed on the insured value of the insured subject matter, and loss or damage occurs to the insured subject matter, the actual value of the insured subject matter at the time of the occurrence of the insured event shall be the basis for calculating the amount of indemnity payment. The sum insured shall not exceed the insured value of the insured subject matter. Any portion in excess of the insured value is null and void, and the insurer shall refund the corresponding premiums. Unless otherwise specified in the contract, where the sum insured is less than the insured value, the insurer shall assume liabilities for indemnity in proportion to the sum insured and the insured value. Article 56 In the event of double insurance, the proposer shall notify all the insurers concerned of the relevant information with respect to such double insurance. The total sums of indemnity payments made by all insurers concerned in double insurance shall not exceed the insured value. Unless specified otherwise in the contract, the insurers concerned shall be liable for indemnity payment in proportion to their respective sum insured and the total amount of the sum insured. The proposer of double insurance may, with respect to the portion of the total amount of the sum insured which exceeds the insured value, request each insurer to return the premiums pro rate. Double insurance refers to the insurance where a proposer enters into insurance contracts with two or more insurers in respect of the same insured subject matter, the same insurable interest and the same insured event, while the total sums insured exceed the insurable value of the subject matter. Article 57 Following the occurrence of an insured event, the insured is obliged to take necessary measures to prevent or mitigate loss or damage. The insurer shall bear the necessary and reasonable expenses incurred by the insured for preventing or mitigating loss of or damage to the insured subject matter after occurrence of the insured event; the amount of such expenses borne by the insurer shall be calculated separately from the indemnity for the loss of or damage to the insured subject matter and the maximum amount shall not exceed the sum insured.

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Article 58 Where the subject matter insured suffers a partial loss, the proposer may rescind the contract within 30y days from day when the insurer pays indemnity. Unless it is otherwise provided for by the contract, the insurer may also rescind the contract provided that it shall notify the proposer 15 days in advance. Where the contract is rescinded, the insurer shall refund the proposer the premium received for the part of the subject matter insured which has not suffered any loss or damage after deducting the earned premium in accordance with the contract from the day of commencement of insurance liability to the day of contract rescission. Article 59 Where an insured event occurs, and the insurer pays in full the sum insured and the sum insured equals to the insured value, all rights to the insured subject matter which is lost or damaged shift to the insurer; where the sum insured is less than the insured value, the insurer shall obtain partial rights to the insured subject matter which is lost or damaged in proportion to the sum insured and the insured value. Article 60 Where a third party damages the subject matter of the insurance, thereby leading to the occurrence of an event insured against, the insurer shall, from the date of payment of insurance moneys to the insured, be subrogated to the insured’s right to claim indemnity from a third party within the amount of the payment. Where the insured has been indemnified for losses by the third party after the insured incident prescribed in the preceding paragraph occurs, the insurer may, when paying insurance money, deduct the corresponding amount of indemnity which the insured has obtained from the third party. The insurer’s exercise of its subrogation right shall have no impact on the insured’s right to claim against the third party for the portion which has not been indemnified by the insurer. Article 61 Where the insured waives his right to claim indemnity from a third party following the occurrence of an event insured against and prior to the insurer’s payment of insurance moneys, the insurer shall not be liable for the payment of insurance moneys. Where the insured, without the consent of the insurer, waives his right to claim indemnity from a third party after the insurer has paid insurance moneys to him, the waiver shall be invalid. Where the insurer is unable to exercise his right to claim indemnity by subrogation due to the intention or the gross negligence of the insured, the insurer may make a corresponding deduction from the amount of indemnity or request such an amount be returned. Article 62 The insurer may not exercise his right to claim indemnity by subrogation against the insured’s family members or other persons comprising such a family of the insured,1 unless the insured’s 1 The meaning of the Chinese version of the phrase “bei bao xian ren de zu cheng ren yuan” is not very clear.There are two different translations for this phrase: one being “other persons comprising such family of the insured”, and the other being “staff members of the insured”.

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family members or other persons comprising such a family of the insured cause an event insured against to occur intentionally as mentioned in art.60(1) hereof. Article 63 When the insurer exercises the right of subrogation to a claim for indemnity against a third party, the insured shall provide the insurer with necessary documents and relevant information known to him/her. Article 64 The necessary and reasonable expenses paid by the insurer and the insured for investigating and ascertaining the nature and cause of an insured event or the extent of loss of or damage to the subject matter insured shall be borne by the insurer. Article 65 The insurer may directly indemnify a third party for loss or damage caused by the insured of a liability insurance in accordance with the provisions of law or the insurance contract. Where the insured of a liability insurance causes loss or damage to a third party, and the indemnity liability of the insured to the third party is ascertained, upon a request by the insured, the insurer shall make indemnity payment to the third party directly. Where the insured neglects (daiyu) in making a request, the third party shall have the right to claim indemnity payment directly from the insurer for the portion it is entitled to. Where the insured of a liability insurance causes loss or damage to a third party, and the insured does not indemnify the third party, the insurer shall not make indemnity payment to the insured. Liability insurance shall refer to the type of insurance of which the insured subject matter is the insured’s liability to indemnify a third party according to law. Article 66 Where an arbitration or litigation is instituted against the insured of liability insurance due to an insured incident which causes loss or damage to a third party, the arbitration or litigation costs and other necessary and reasonable expenses paid by the insured shall be borne by the insurer, unless specified otherwise in the contract. Chapter III Insurance Companies Article 67 The formation of an insurance company shall be subject to the approval of the insurance supervision and regulation authority of the State Council. When examining an application for formation of an insurance company, the insurance supervision and regulation authority of the State Council shall consider the needs of the insurance industry for development and fair competition. Article 68 The formation of an insurance company shall meet the following requirements:

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(1)

(2) (3) (4) (5) (6) (7)

the insurance company’s principal shareholder shall have a sustainable capability to make profits, have a good credit standing, have no record of material violation of law or regulation in the last three years and have a net assets value not less than ¥200 million yuan; the Articles of Association in conformity with the Law and the Company Law of the People’s Republic of China; the insurance company shall have a registered capital in compliance with this Law; the insurance company shall have directors, supervisors and senior managers who have the expertise and business experience required for their positions; the insurance company shall have a sound organizational structure and management system; the insurance company shall have business premises and other facilities related to business operation in compliance with the relevant requirements; and other requirements as set out by laws, administrative regulations and the insurance supervision and regulation authority of the State Council.

Article 69 The minimum amount of registered capital of an insurance company to be formed shall be ¥200 million yuan. The insurance supervision and regulation authority of the State Council may adjust the minimum amount of registered capital of an insurance company according to the business scope or scale of the insurance company, but the amount shall not be less than the amount as set out in paragraph 1 of this Article. The registered capital of an insurance company must be paid-in monetary capital. Article 70 To apply for forming an insurance company, the applicant shall apply in writing to the insurance supervision and regulation authority of the State Council, and submit the following materials: (1) (2) (3) (4) (5)

(6)

a formation application form, which shall specify the name, registered capital, business scope, etc. of the insurance company to be formed; a feasibility study report; a formation preparatory plan; the investor’s business license or other background data and the accounting report of the last year which has been audited by an accounting firm; a list of the person in charge of the formation preparatory group and the proposed chairman of the board of directors and managers who are acknowledged by the investor, and the acknowledgement certificates of such persons; other materials as specified by the insurance supervision and regulation authority of the State Council.

Article 71 The insurance supervision and regulation authority of the State Council shall examine an application for forming an insurance company, make a decision on approval or disapproval of formation preparation within six months after accepting the application and notify the applicant in writing. If disapproving the application, the seasons therefor shall be given in writing.

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Article 72 An applicant shall complete the formation preparation within one year after receiving the notice of approval on formation preparation, and shall not carry out any insurance business operation during the formation preparation period. Article 73 An applicant may apply to the insurance supervision and regulation authority under the State Council for opening business if it satisfies the formation conditions as prescribed in Article 68 of this Law after completing the formation preparation. The insurance supervision and regulation authority of the State Council shall, within 60 days after accepting the application for opening business, make a decision of approval or disapproval on opening business. If approving the application, it shall issue an insurance business operation permit; if disapproving the application, it shall notify the applicant in writing and give reasons. Article 74 Setting up branch offices of insurance companies within the territory of the People’s Republic of China shall be subject to the approval of the insurance supervision and regulation authority. The branch offices of insurance companies shall have no corporate status, and their civil liabilities shall be assumed by insurance companies. Article 75 To set up a branch office, an insurance company shall apply in writing to the insurance supervision and regulation authority, and submit the following materials: (1) (2) (3) (4)

an application form; a three-year business development planning of the branch office to be set up and market analysis materials; the resumes and relevant certificates of the proposed senior managers of the branch office; and other materials as specified by the insurance supervision and regulation authority of the State Council.

Article 76 The insurance supervision and regulation authority shall examine an insurance company’s application for setting up a branch office, and, within 60 days after accepting the application, make a decision on approval or disapproval. If approving the application, it shall issue an insurance business operation permit for a branch office; if disapproving the application, it shall notify the applicant in writing and give reasons. Article 77 The insurance company or the branch office thereof approved to be formed or set up shall conduct the registration formalities at the administrative body for industry and commerce on the basis of the insurance business operation permit, and obtain a business license.

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Article 78 Where an insurance company or a branch office thereof, without any good reasons, fails to conduct the registration formalities at the administrative body for industry and commerce within six months from the day when it obtains an insurance business operation permit, its insurance business operation permit shall become invalid. Article 79 Setting up subsidiary companies and/or branch offices outside the territory of the People’s Republic of China by insurance companies shall be subject to the approval of the insurance supervision and regulation authority of the State Council. Article 80 Setting up representative offices within the territory of the People’s Republic of China by foreign insurance companies shall be subject to the approval of the insurance supervision and regulation authority of the State Council. None of such representative offices shall carry out any insurance operating activity. Article 81 The directors, supervisors and senior managers of insurance companies shall have good conduct, be familiar with laws and administrative regulations on insurance, have the management capability required for performing their duties and have obtained the corresponding post-holding qualifications approved by the insurance supervision and regulation authority before holding posts. The scope of senior managers of insurance companies shall be prescribed by the insurance supervision and regulation authority of the State Council. Article 82 A person under any of the circumstances prescribed in Article 146 of the Company Law of the People’s Republic of China or any of the following circumstances shall not hold a post of director, supervisor or senior manager in an insurance company: (1)

(2)

For a former director, supervisor or senior manager of a financial institution, whose post-holding qualification has been cancelled by the financial regulatory body for any lawbreaking or disciplinary violation, it has not been five years since the day when he is disqualified; or for a former lawyer, certified public accountant or professional of an institution such as asset assessment institution or verification institution, whose practicing qualification has been revoked for any lawbreaking or disciplinary violation, it has not been five years since the day when he is disqualified.

Article 83 A director, supervisor or senior manager of an insurance company who breaks a law or administrative regulations or provisions in the Articles of Association of the company in the process of performing duties for the company and causes any loss to the company shall assume the compensatory liability.

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Article 84 An insurance company shall obtain the approval of the insurance supervision and regulation authority under any of the following circumstances: (1) (2) (3) (4) (5) (6) (7)

(8)

change of name; change of registered capital; change of business premises of the company or a branch office thereof; cancellation of a branch office; split or merger of the company; amendment of the Articles of Association; change of any shareholder whose amount of capital contribution accounts for 5% or more of the total capital of the company which is a limited liability company, or change of any shareholder who holds 5% or more of the shares of the company which is a joint-stock limited company; or any other circumstance as specified by the insurance supervision and regulation authority of the State Council.

Article 85 An insurance company shall employ professional actuaries certified by the insurance regulatory body of the State Council and establish an actuarial reporting system. An insurance company shall employ professionals and establish a compliance reporting system. Article 86 Insurance companies shall file the relevant reports, statements, documents and materials according to the requirements of the insurance supervision and regulation authority. The solvency reports, financial and accounting reports, actuarial statements, regulatory compliance reports and other relevant reports, statements, documents and materials of insurance companies must truthfully record the insurance business matters, and contain no false record, misleading statement or material omission. Article 87 Insurance companies shall properly maintain complete account books, original documents and relevant materials about their insurance business operations as required by the insurance supervision and regulation authority of the State Council. The above-mentioned account books, original documents and relevant materials shall be kept for at least five years if the duration of insurance is less than one year or ten years if the duration of insurance is more than one year from the day when an insurance contract is terminated. Article 88 To employ or dismiss an accounting firm, an asset assessment institution, a credit rating agency or any other intermediary service provider, an insurance company shall report to the insurance supervision and regulation authority, and, in the case of dismissal, give reasons.

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Article 89 Where an insurance company needs to be dissolved as a result of any split, merger, resolution of the shareholders’ meeting or occurrence of a cause of dissolution prescribed in the Articles of Association of the company, it shall be dissolved upon the approval of the insurance supervision and regulation authority of the State Council. An insurance company which operates the life insurance business shall not be dissolved except for any split, merger or cancellation according to law. A liquidation group shall be set up to perform liquidation of an insurance company to be dissolved. Article 90 Where an insurance company falls under any of the circumstances prescribed in article 2 of the Enterprise Bankruptcy Law of the People’s Republic of China, upon approval of the insurance supervision and regulation authority of the State Council, the insurance company or any creditor thereof may apply to the people’s court for restructuring, reconciliation or bankruptcy liquidation; the insurance supervision and regulation authority of the State Council may also apply to the people’s court for subjecting the company to restructuring or bankruptcy liquidation. Article 91 The bankruptcy property shall be used for repayment in the following order after first repayment of bankruptcy fees and debts incurred for the common benefit of creditors: (1)

(2) (3) (4)

the wages and salaries, medical fees, disability subsidies and pensions owed to employees, the basic old-age insurance premiums and basic medical insurance premiums which shall be transferred into the personal accounts of employees, and the compensations which shall be made to employees as required by laws and administrative regulations; insurance indemnities or insurance money; the social insurance fees other than those prescribed in subparagraph 1 and taxes owed by the company; and the general creditor’s rights in bankruptcy.

If the bankruptcy property is not enough for repayment of debts in the same order, it shall be distributed pro rata. The salaries of the directors, supervisors and senior managers of a bankrupt insurance company shall be calculated as per the average wage of the employees of the company. Article 92 Where an insurance company conducting life insurance business is revoked or declared bankrupt according to law, all of the life insurance contracts and liability reserves held by it must be transferred to other insurance companies conducting life insurance business; where no agreement in respect of such transfer can be reached with other insurance companies, the insurance supervision and regulation authority of the State Council shall designate insurance companies conducting life insurance business to accept such transfer.

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Where any life insurance contracts or liability reserves as provided for in the preceding paragraph are transferred or accepted according to the designation of the insurance supervision and administration authority of the State Council, the legitimate rights and interests of the insured and beneficiaries shall be protected. Article 93 Where an insurance company terminates its business operation according to law, its insurance business operation license shall be revoked. Article 94 Insurance companies shall be governed by the Company Law of the People’s Republic of China, unless it is otherwise provided for by this Law. Chapter IV Rules of Insurance Business Operation Article 95 The scope of business of an insurance company shall be as follows: (1) (2) (3)

personal insurance, including life insurance, health insurance, accidental injury insurance, etc.; property insurance, including property loss or damage insurance, liability insurance, credit insurance and surety bonds, etc.; and other insurance-related businesses approved by the insurance supervision and regulation authority under the State Council.

No insurer shall concurrently operate the personal insurance business and the property insurance business. However, upon the approval of the insurance supervision and regulation authority of the State Council, an insurance company which operates the property insurance business may operate the short-term health insurance business and the accidental injury insurance business. Insurance companies shall operate insurance business within the scope of business approved by the insurance supervision and regulation authority of the State Council. Article 96 Upon the approval of the insurance supervision and regulation authority of the State Council, an insurance company may operate the following reinsurance of the insurance businesses prescribed in article 95 of this Law: (1) (2)

outward reinsurance; and inward reinsurance.

Article 97 An insurance company shall sets aside a guarantee fund at the rate of 20% of its total registered capital, deposit it into a bank designated by the insurance supervision and regulation authority of the State Council, and use it for no purpose other than repayment of debts at the time of liquidation of the company.

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Article 98 An insurance company shall sets aside various liability reserve funds according to the principle of protecting the interests of the insureds and guaranteeing solvency. The specific measures for setting aside and carrying forward liability reserve funds by an insurance company shall be formulated by the insurance supervision and regulation authority of the State Council. Article 99 An insurance company shall set aside statutory surplus reserve according to law. Article 100 Insurance companies shall make contribution to the insurance protection fund. The insurance protection fund shall be managed in a centralized way and used according to overall planning under the following circumstances: (1) (2)

(3)

providing relief to the proposers, the insureds or beneficiaries, where an insurance company is cancelled or declared bankrupt; providing relief to the insurance company which accepts the life insurance contracts of a bankrupt insurance company, where the latter is cancelled or declared bankrupt; or any other circumstance as specified by the State Council.

The specific measures for raising, managing and using the insurance protection fund shall be formulated by the State Council. Article 101 An insurance company shall have the minimum solvency appropriate for its scale of business and degree of risk. The difference between the admissible assets and the admissible liabilities of an insurance company shall not be less than the amount prescribed by the insurance regulatory body under the State Council; otherwise, the insurance company shall take corresponding measures to reach the prescribed amount according to the requirements of the insurance supervision and regulation authority of the State Council. Article 102 The self-retained insurance premium in the current year of an insurance company which operates the property insurance business shall not exceed four times the sum of its actual capital and provident funds. Article 103 The liability undertaken by an insurance company for each risk unit, namely, the maximum loss caused by a single insured incident shall not exceed 10 percent of the sum of its actual capital and provident funds. The excess shall be reinsured. Insurance companies shall classify risk units according to the provisions of the insurance supervision and regulation authority of the State Council.

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Article 104 The method of measuring risk units and the plan for arranging catastrophic risk of an insurance company shall be filed with the insurance supervision and regulation authority of the State Council. Insurance companies shall submit their methods for classifying risk units and arrangement plans on risk of major disasters to the insurance supervision and regulation authority of the State Council for archival purposes. Article 105 Insurance companies shall make reinsurance according to the provisions of the insurance supervision and regulation authority of the State Council, and select their reinsurer in a prudent way. Article 106 Insurance companies must use funds according to the principles of steadiness and safety. Insurance companies may only use their funds in the following forms: (1) (2) (3) (4)

bank deposits; trading bonds, stocks, shares of securities investment funds and other negotiable securities; investing in real estate; and other forms of fund use prescribed by the State Council.

The specific measures for the administration of the use of funds by insurance companies shall be formulated by the insurance supervision and regulation authority of the State Council according to the preceding two paragraphs. Article 107 Upon the approval of the insurance regulatory body under the State Council in conjunction with the securities regulatory authority under the State Council, insurance companies may set up insurance asset management companies. Insurance asset management companies shall conduct securities investment activities according to the Securities Law of the People’s Republic of China and other relevant laws and administrative regulations. The measures for the administration of insurance asset management companies shall be formulated by the insurance supervision and regulation authority in conjunction with other relevant departments under the State Council. Article 108 Insurance companies shall establish rules for the management and information disclosure of affiliated transactions according to the provisions of the insurance supervision and regulation authority of the State Council. Article 109 None of the controlling shareholders, actual controllers, directors, supervisors and senior managers of insurance companies shall damage the interests of the companies through affiliated transactions.

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Article 110 Insurance companies shall truthfully, accurately and completely disclose their financial and accounting reports, risk management status, insurance product trading information and other major matters according to the provisions of the insurance supervision and regulation authority of the State Council. Article 111 The insurance salespersons of insurance companies shall have good conduct and professional capacity required for insurance sales. The code of conduct and the measures for the administration of the insurance salespersons shall be provided for by the insurance supervision and regulation authority of the State Council. Article 112 Insurance companies shall set up an insurance agent registration system and strengthen the training and administration of insurance agents, and shall not incite or induce insurance agents to act against the obligation of good faith. Article 113 Insurance companies and their branch offices shall use the insurance business operation license according to law, and shall not transfer, lease or lend the insurance business operation license. Article 114 Insurance companies shall, according to the provisions of the insurance supervision and regulation authority of the State Council, fairly and reasonably determine the insurance clauses and premium rates, without prejudice to the legitimate rights and interests of proposers, the insureds and beneficiaries. Insurance companies shall perform the obligation of paying indemnity or insurance money in a timely manner according to insurance contracts and this Law. Article 115 Insurance companies shall operate business according to the principle of fair competition, and shall not commit unfair competition.

Article 116 An insurance company and its employees shall not have any of the following acts in the course of conducting business: (1) cheating the proposers, the insureds or the beneficiaries; (2) concealing from the proposers material information relevant to the insurance contracts;

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(3) preventing the proposers from fulfilling their obligation of making truthful disclosure provided under this Law or inducing them not to fulfil such an obligation; (4) giving or promising premium rebates or other benefits other than those provided for in the contracts to the proposers, the insureds or the beneficiaries; (5) refusing to fulfil the obligation of paying indemnity or insurance benefits agreed upon in an insurance contract according to law; (6) deliberately fabricating insured events that have never occurred, making up insurance contracts or deliberately exaggerating insured events that have occurred to make false indemnities and defrauding the company of insurance benefits or seeking other illegitimate gains; (7) misappropriating, withholding or pilfering premiums; (8) entrusting agencies that have not obtained lawful qualifications to engage in activities of insurance sales; (9) seeking illegitimate gains for other organisations or individuals by taking advantage of the insurance business; (10) using insurance agencies, insurance brokers or insurance adjusting firms to engage in illegal activities such as siphoning off commission by making up insurance agency business or fabricating surrender of policies; (11) damaging the commercial reputation of its rivals by fabricating and disseminating false facts or other acts of unfair competition, disturbing the order of the insurance market by other acts of unfair competition; (12) divulging the business secrets of the proposers or the insured that they become known in their business activities; (13) other acts violating laws, administrative regulations and provisions of the insurance supervision and regulation authority of the State Council.

Chapter V Insurance Agents and Insurance Brokers Article 117 Insurance agents shall be institutions or individuals which charge insurers for commissions and operate the insurance business to the extent as authorized by insurers. Insurance agencies shall include full-time insurance agencies which only operate the insurance agency business and part-time insurance agencies which concurrently operate the insurance agency business. Article 118 Insurance brokers shall be institutions which, based on the interests of insurance applicants, provide intermediary services for insurance applicants and insurers to enter into insurance contracts, and charge commissions according to law. Article 119 Insurance agencies and insurance brokers shall satisfy the requirements prescribed by the insurance supervision and regulation authority of the State Council, and have obtained the insurance agency business license or brokerage business license issued by the insurance supervision and regulation authority.

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Article 120 For a full-time insurance agency or an insurance broker to be formed as a company, its minimum amount of registered capital shall be governed by the Company Law of the People’s Republic of China. The insurance supervision and regulation authority of the State Council may adjust the minimum amount of registered capital of a full-time insurance agency or an insurance broker according to its business scope or scale, but the amount shall not be less than the amount as set out in the Company Law of the People’s Republic of China. The registered capital or capital contribution of a full-time insurance agency or an insurance broker must be paid-in monetary capital. Article 121 The senior managers of a full-time insurance agency or an insurance broker shall have good conduct, be familiar with insurance laws and administrative regulations, have the management capability required for performing their duties and have obtained the corresponding post-holding qualifications approved by the insurance supervision and regulation authority before holding posts. Article 122 Individual insurance agents, practitioners of insurance agencies and practitioners of insurance brokers shall have good conduct and professional capacity required for practicing insurance agency business or insurance brokerage business. Article 123 Insurance agencies and insurance brokers shall have their own business premises and set up special account books to record the revenues and expenditures of the insurance agency or brokerage business. Article 124 Insurance agencies and insurance brokers shall deposit guarantee funds or take out professional liability insurance according to the provisions of the insurance supervision and regulation authority of the State Council. Article 125 An individual insurance agent, in conducting life insurance agency business, shall not accept entrustment of more than two insurers concurrently. Article 126 In entrusting an insurance agent to conduct insurance business, an insurer shall sign an agency agreement with the insurance agent to provide for the rights and obligations of the parties according to law.

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Article 127 An insurer shall be liable for the acts of its insurance agents when they transact insurance business on behalf of the insurer in accordance with the delegated authority. Where an insurance agent enters into a contract in the name of an insurer, while the agent has no authority of agency or acts beyond the scope of the authority, or his authority of agency ceases, in such a way that the proposer has reason to believe that the agent has authority, the act of agency is effective. The insurer may pursue the insurance agent for liabilities of ultra vires acts according to law. Article 128 An insurance broker shall be liable for loss and damage caused to the proposer or the insured due to its fault. Article 129 Parties to insurance activities may entrust independent assessment agencies duly established such as an insurance adjusting form or persons with related professional expertise to carry out adjustments and assessments of loss and damage resulting from the occurrence of the insured events. Institutions and persons entrusted to adjust and assess loss and damage resulting from the occurrence of the insured events shall carry our adjustment and assessment legally, independently, objectively and fairly, no unit or individual shall intervene therewith. An institution or the person shall be liable for any damage or loss caused to the insurer or the insured intentionally or negligently. Article 130 Insurance commissions may only be paid to the insurance agents and insurance brokers and may not be to others. Article 131 In handling insurance business, insurance agents and insurance brokers and their practitioners are not allowed to conduct any of the following acts in the course of conducting business: (1) cheating the insurers, the proposers, the insureds or the beneficiaries; (2) concealing from the proposers material information relevant to the insurance contracts; (3) preventing the proposers from fulfilling their obligation of making truthful disclosure provided under this Law or inducing them not to fulfil such an obligation; (4) giving or promising any interests other than those provided for in the contracts to the proposers, the insureds or the beneficiaries; (5) using their administrative power, position or the advantage of their profession or any other illicit means to force, induce or restrict the insured to sign insurance contracts;

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(6) forging or altering an insurance contract arbitrarily, or providing false certification materials to the parties to an insurance contract; (7) diverting, retaining or encroaching on premium or insurance benefits; (8) seeking illegitimate gains for other organisations or individuals by taking advantage of the business; (9) defrauding the insurer of insurance benefits by colluding with the proposers, the insureds or the beneficiaries; (10) divulging the business secrets of the proposers or the insured that they become known in their business activities. Article 132 The provisions of paragraph 1 of article 86 and article 113 of this Law shall apply to insurance agencies and insurance brokers. Chapter VI Supervision and Administration of the Insurance Industry Article 133 The insurance supervision and regulation authority shall, under the principle of legality, openness and fairness, supervise and administer the insurance sector according to this Law and its duties prescribed by the State Council so as to maintain the order of the insurance market and protect the legitimate rights and interests of the proposers, the insureds and the beneficiaries. Article 134 The insurance supervision and regulation authority of the State Council shall formulate and issue administrative rules on the supervision and administration of the insurance industry according to laws and administrative regulations. Article 135 The insurance clauses and premium rates for insurance products which concern the public interests, compulsory insurance products and newly developed life insurance products shall be subject to the approval of the insurance supervision and regulation authority of the State Council which shall follow the principle of protecting the public interests and preventing unfair competition in the process of examination and approval. The insurance clauses and premium rates for other insurance products shall be subject to filing with the insurance supervision and regulation authority. The specific measures for the examination and approval and filing of insurance clauses and premium rates shall be formulated by the insurance supervision and regulation authority of the State Council according to the preceding paragraph. Article 136 Where any insurance clause or premium rate used by an insurance company violates a law or administrative regulation or the provisions of the insurance supervision and regulation authority of the State Council, the insurance supervision and regulation authority shall order the insurance company to stop using it and make correction within a prescribed time

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limit; and if the circumstances are serious, may prohibit the insurance company from applying for new insurance clauses or insurance premium rates within a prescribed time limit. Article 137 The insurance supervision and regulation authority of the State Council shall set up and improve a system for the supervision and administration of the solvency of insurance companies to monitor the solvency of insurance companies. Article 138 The insurance supervision and regulation authority of the State Council shall regard insolvent insurance companies as the key objects of supervision, and may take the following measures as the case may be: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

ordering an increase of capital or reinsurance; limiting the scope of business; restricting the payment of dividends to shareholders; restricting the purchase of fixed assets or the scale of operation costs; restricting the forms and proportion of use of funds; restricting the formation of additional branch offices; ordering an auction of non-performing assets or transfer of insurance business; restricting the level of salaries of directors, supervisors and senior managers; restricting commercial advertisements; or ordering a stop of accepting new business.

Article 139 Where an insurance company fails to set aside or carry forward the liability reserve funds or conduct the reinsurance formalities as required by this Law, or seriously violates the provisions of this Law on the use of funds, the insurance supervision and regulation authority shall order it to make correction within a prescribed time limit, and may order it to adjust the person in charge and the relevant managers. Article 140 Where an insurance company fails to make correction within a prescribed time