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Allens Arthur Robinson

Focus: Insurance & Reinsurance Asia – May 2005

New Chinese insurance protection fund

In brief: Recent legislative developments in China have resulted in the creation of an insurance protection fund to protect policyholders in the case of an insurer's bankruptcy. Partners Simon McConnell (view CV) and Jeremy Low (view CV)and Lawyer Stephen Sander explain.

Introduction

In AAR's Focus: Insurance & Reinsurance – Asia, March 2005, we reported on the introduction of the Provisions on the Administration of Insurance Brokering Institutions (the Regulations). The China Insurance Regulatory Commission (CIRC) has engaged in extensive reforms of insurance industry regulation over the past few years, which is no doubt largely attributable to China's entry into the World Trade Organisation. The introduction of the Regulations follows a long line of reforms intended to modernise the insurance industry in China and to bring it in line with international standards. Other recent legislative reforms in China include the introduction of:

  • the Provisions on the Administration of Insurance Agencies, which came into effect on 1 January 2005 at the same time as the Regulations and is drafted largely along the same general lines; and
  • the Implementing Rules to the Regulations for the Administration of Foreign-invested Insurance Companies (the Implementing Rules), which came into effect on 15 June 2004 (we reported on this in Focus: Insurance & Reinsurance – Asia, September 2004).

The latest reform introduced in China by CIRC is the establishment of an insurance protection fund (the IPF), which is designed to protect policyholders in the case of an insurer's bankruptcy. The Measures for the Administration of Insurance Protection Fund (the Measures) came into effect on 1 January 2005 and apply to all insurers, including foreign and Sino-foreign insurers.

The purpose of the Measures is the regulation of the payment, management and use of the IPF, which is established to guarantee the interests of policyholders by 'effectively dissolving' financial risk and maintaining financial stability.

The Measures are issued under Article 97 of the Insurance Law of the People's Republic of China (the Insurance Law). Article 97 provides that, in order to protect the interests of insureds and to support the steady and safe operations of insurance companies, insurance companies shall participate in an insurance protection fund according to the provisions issued by CIRC.

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The IPF

Under the provisions of the Measures, the IPF is divided into two separate funds:

  • one fund for property insurance companies, funded by payments from property insurance, comprehensive reinsurance and property reinsurance companies; and
  • another fund for life insurance companies, funded by payments from life insurance, health insurance and life reinsurance companies.
Contributions by insurers

Article 6 of the Measures requires that insurers pay into the IPF the following percentages of premiums:

  • 1 per cent of premiums for property, accidental injury and short-term health insurance policies;
  • 0.15 per cent of premiums for long-term life insurance policies with a guaranteed interest rate and long-term health insurance; and
  • 0.05 per cent of premiums for long-term life insurance policies without a guaranteed interest rate.

The contributions to the IPF will be held in an account established by CIRC. Contributions required to be made to the IPF by insurers must be calculated on a yearly basis and paid in advance each quarter.

Suspension of contribution payment by insurer

Insurance companies are required to make the required payments to the IPF in a timely manner; however, payments to the IPF may be suspended by an insurer, provided that:

  • the IPF surplus of a property insurance, comprehensive reinsurance or property reinsurance company is in excess of 6 per cent of its total assets; or
  • the IPF surplus of a life insurance, health insurance or life reinsurance company is in excess of 1 per cent of its total assets.

If an insurer no longer meets the above criteria, it must resume making payments in accordance with Article 6 of the Measures.

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Distribution of funds from the IPF

In the event that an insurance company has its licence revoked or declared bankrupt and the assets are insufficient to meet the insurer's liabilities under the relevant policies, the funds of the IPF will be distributed to policyholders of non-life insurance policies in accordance with the following principles:

  • losses of up to 50,000 yuan will be covered fully; and
  • for losses in excess of 50,000 yuan, individual policyholders will be covered for 90 per cent of their loss and institutional policyholders will be covered for 80 per cent of their loss.

In the context of the above, 'loss' is defined in the Measures to mean the difference between the benefit due to the policyholder under the relevant insurance policy and the sums received by the policyholder from the liquidator in the liquidation of the insurer.

If the insolvent insurance company's IPF surplus is not sufficient to meet the payments required to be made to its policyholders, the outstanding sum will be paid out from the IPF surplus of other insurers in proportion to their market share in the previous year.

In the event that a life insurer has its licence revoked or declared bankrupt, the life insurance contracts are to be transferred to another life insurer. If agreement cannot be reached with another life insurer to assign those policies, CIRC will designate a life insurer to take over the relevant life insurance contracts (Article 17).

Further, if the assets of the life insurer are insufficient to meet its liabilities under the relevant life policies, the funds of the IPF will be distributed to the insurer that is taking over the relevant life insurance contracts, according to the following principles:

  • individuals will be entitled to receive up to 90 per cent of the pre-transfer policy benefits; and
  • institutional policyholders will be entitled to receive up to 80 per cent of the pre-transfer policy benefits.

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Administration of the IPF

The IPF is supervised and administered by the IPF Council. The IPF Council consists of representatives of the insurers contributing to the IPF, the Legislative Affairs Office of the State Council, the Ministry of Finance, the People's Bank of China and the State Administration of Taxation.

CIRC will audit the IPF within five months of the end of each financial year and the result of the audit will be provided to the IPF Council and all insurers.

Penalties for violations

Any insurance company violating the Measures can be ordered to comply fully with the Measures and to pay a fine of between 50,000 and 300,000 yuan. Where the circumstances of the violation are considered serious:

  • the scope of the relevant insurer's business may be restricted;
  • the relevant insurer may be ordered not to take on new business; or
  • the insurer's operation license may be revoked.

Senior management and other personnel found responsible for violating the Measures:

  • will be given warnings or be dismissed; and
  • may be fined between 20,000 and 100,000 yuan.
Transitionary provisions

Insurance companies were required to have paid 50 per cent of the required funds into the IPF by 31 March 2005 and full compliance must be effected by 31 December 2005. 

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