In August 2006, the China Insurance Regulatory Commission (CIRC) promulgated the Measures for the Administration of Health Insurance (2006) (Measures). The Measures, effective September 1, 2006, mark the first set of rules regulating China's health insurance sector. Arising from China's WTO commitments, foreign insurance providers have been authorized to write health insurance policies in China since December 2004. Since that time, China's health insurance sector has been burgeoning, with annual year-over-year growth rates of up to 15 percent. Given that 90 percent of China's rural population and 60 percent of its urban population remains uninsured, there is ample scope for continued market expansion in the short term. Already, PICC has established a dedicated health insurance company, and foreign players are expected to follow suit.
The Measures require that life insurance companies and health insurance companies seeking to offer health insurance apply to the CIRC for approval. In that regard, the Measures distinguish between "health insurance" and "medical insurance." Health insurance is divided into:
- long-term health insurance, i.e., insurance for a term in excess of one year or for a term of less than one year where the policy contains a warranty renewal clause; and
- short-term health insurance, which refers to policies of less than one year that do not contain a warranty renewal clause.
Medical insurance is divided into two categories:
- "compensatory medical insurance," which refers to the type of insurance that pays the amount required to meet actual medical expenses incurred; and
- "rationed payment medical insurance," which refers to the agreed fixed-sum insurance cover.
The Measures specify the application requirements for establishing a company offering health insurance. These include evidence of:
- a separate accounting system for health insurance business;
- a health insurance actuarial system and risk management system; and
- a health insurance underwriting and claims settlement system.
Once established, an insurance company is obliged to file its proposed policies of insurance with the CIRC for approval as to content. In that regard, content restrictions must be observed:
- disease insurance products in long-term health insurance may include death insurance liability, but the death benefit may not exceed the maximum benefit amount relating to the disease;
- medical insurance products and disease insurance products may not include any survival benefit liability; and
- where health insurance policies include a warranty renewal, the price-fixing and calculating methodology for the liability reserves of the warranty renewal must be specified in the product actuarial report.
There also are obligations:
- to provide professional staff training;
- to fully explain policy content to clients; and
- to refrain from selling policies at medical institutions or entrusting sales to medical personnel.
Actuarial and filing requirements also are proficiently addressed.
The long-awaited Measures are most welcome and provide a sound regulatory regimen for the operation of health and medical insurance in China. We understand that, in response to a lack of direction in the marketplace, the State Council has established a multi-agency task force charged with responsibility for devising a plan with the aim of securing health coverage for up to 90 percent of China's population; the State Council plan is expected to be released early in 2007.
In July 2006, the CIRC issued regulations governing:
- investment in overseas insurance companies by PRC Insurance Enterprises, i.e., the Measures for the Administration of Establishment of Overseas Insurance Institutions by Insurance Companies (2006) (Overseas Insurance Establishment Regulations); and
- investment in PRC non-insurance entities in the overseas insurance sector, i.e., Measures for the Administration of Investment into Overseas Insurance Enterprises by Non-Insurance Institutions (2006) (Overseas Insurance Investment Regulations).
Both sets became effective September 1, 2006, and both are regulations that evidence the growing maturity of China's domestic insurance sector and the need to regulate investment by PRC entities in the foreign insurance market. The Overseas Insurance Establishment Regulations regulate the establishment of "overseas insurance institutions" by PRC-incorporated insurance enterprises - these include the establishment of overseas branches, companies and intermediary institutions and the acquisition of 20 percent or more of the voting capital of existing foreign insurance companies or insurance intermediaries. These regulations empower the CIRC to supervise the domestic insurer's conduct in establishing any overseas insurance institution or in taking over any foreign target institution.1
The regulations oblige insurance companies to apply to the CIRC for approval to engage in such overseas business. Only insurers who satisfy strict regulatory criteria will be approved. These criteria include:
- a minimum two-year business history;
- total assets of at least RMB5 billion in the year preceding the application;
- foreign exchange funds of at least US$15 million (or equivalent in freely convertible currencies) in the year preceding the application;
- a CIRC-approved level of solvency;
- a CIRC-approved internal control system and risk management system;
- no serious regulatory violations in the preceding two years; and
- the country where the overseas insurance institution is to be established must possess a "perfect financial regulatory system" (undefined in the regulations) and have an established and effective regulatory cooperation relationship with the CIRC.
There are similar rules as to solvency and internal control systems for applications for establishing branch offices overseas, but those rules do not include minimum asset value or foreign exchange reserve requirements.
For taking over a foreign insurance company or intermediary, the applicant must submit, inter alia, its financial statements and audited foreign exchange balance sheet. Less stringent conditions apply for the establishment of representative offices.
The Overseas Insurance Establishment Regulations also detail the CIRC filing requirements for domestic insurers with respect to their overseas institutions; these include the filing of management results, financial statements and solvency status. The regulations also require that all "important affiliated transactions" must be reported (within 15 days) to the CIRC. These include:
- any reinsurance business;
- asset management, guarantee and agency businesses;
- dealings in fixed assets or transfer of credits and debits; and
- large borrowing or important trading activities.
Similar application and filing requirements are imposed by the Overseas Insurance Investment Regulations on all overseas investments2 in "overseas insurance enterprises"3 by Chinese "non-insurance institutions."
Finally, in July 2006, the CIRC also promulgated revised regulations pertaining to the governance of foreign insurance representative offices in China. Effective on September 1, 2006, and known as the Measures for the Administration of Foreign Insurance Institutions' Representative Offices in China (2006), these revised regulations had been anticipated since the beginning of 2006. As revised, the regulations require that foreign insurance companies seeking to establish representative offices in China have been engaged in the insurance business for not less than 20 consecutive years, have no record of regulatory violations in the three years preceding the application and satisfy "other prudential conditions prescribed by the CIRC." Of particular note, the regulations require that where a chief representative or general representative does not have a third level qualification, he or she must have not less than 10 years' or eight years' experience, respectively, in the insurance sector.
Interestingly, the regulations require that the chief and general representatives must reside in China for, accumulatively, not fewer than 240 days during each calendar year; when either of such representatives leaves China for a period of 14 consecutive days, a "special person" must be nominated to undertake the representative's responsibilities and duties and notification must be filed with the CIRC. No general or chief representative may assume posts concurrently in two or more representative offices or assume a post concurrently in any other commercial institution. The general filing and reporting requirements of the prior regulation mainly continue unchanged.
Overall, each of the four new sets of regulations has been anticipated, and each serves to bolster both the regulatory regime governing the insurance sector in China and the administrative and supervisory role of the CIRC. Copies of the foregoing regulations are available from Squire Sanders upon request. Should you have any queries relating to the content of the regulations discussed here, you may contact the lawyers listed at right.
1The establishment of an overseas representative office, liaison body, agency or any other nonbusiness institution by a PRC insurance company also is subject to these regulations.
2The term "overseas investment" is defined as "such an activity whereby a non-insurance institution establishes an overseas insurance enterprise abroad or takes over 20% or greater share in an overseas insurance enterprise."
3"Overseas insurance institutions" are defined as "insurance companies, insurance agencies, insurance brokerage institutions and insurance assessment institutions that are established abroad."