By Yuan Min and Kirby Carder of King & Wood’s Finance Group

With the implementation of the revised insurance law in October 2009, the China Insurance Regulatory Commission ("CIRC") turned its attention to revising the Provisions on the Administration of the Reinsurance Business ("Reinsurance Provisions" or "old Provisions") that it originally promulgated and implemented in 2005. The CIRC promulgated the revised Provisions ("new Reinsurance Provisions") in April 2010, and the measures officially came into effect on July 1, 2010. Overall, the new Reinsurance Provisions are more in depth, and provide more detailed instructions for direct insurers and reinsurers, which the CIRC probably believes will allow it to more effectively regulate the Chinese reinsurance market, and promote stable and sustainable growth of the Chinese direct insurance market.

I. Legislative Framework

The new Reinsurance Provisions, like the old Provisions, are divided into six chapters: General Principles and Definitions (Chapter 1), Reinsurance Business Operations (Chapter 2), Reinsurance Brokerage (Chapter 3), Regulatory Supervision and Administration (Chapter 4), Legal Liability (Chapter 5), and Supplementary Provisions (Chapter 6).

The new regulation features several notable changes, however, many of the Articles in the new Reinsurance Provisions remain unchanged from the original version of the Reinsurance Provisions except for the fact that the actual number of the Article has been adjusted because a new provision was added prior to that Article. To make our overview of the changes that were made to the New Reinsurance Provisions easier to read we have broken it into four parts: New Features, Deleted Articles, New Articles, and Other Significant Changes.

II. New Features

In general, the new Reinsurance Provisions are more detailed than the old Provisions. A good example of this is the additional definitions for specific terms in Article 2. Terms like "retrocession", "treaty reinsurance", and "facultative reinsurance" now have specific definitions under Chinese law. In addition, several Articles contain details that explain exactly how the CIRC expects insurers and reinsurers to handle their business, and there are new requirements for disclosures that insurers must make to reinsurers.

An example of how the CIRC expects insurers to handle their business can be seen in Article 10’s requirements for the amount of risk each insurer should reinsure. In Article 10, the CIRC makes clear that each year it expects insurers to establish the total amount of risk the insurer will retain across the entire company, as well as, how much risk each of its units will retain. The old Provisions only stated that insurers need to reinsure excess amounts of risk, but it provided no details on how that should be done.

An example of a new disclosure that an insurer must make to its reinsurers can be found in Article 15 of the new Reinsurance Provisions. Article 14 of the old Provisions, which is now Article 15, only required insurers to inform a reinsurer about important information that might have an effect on their reinsurance contracts if the reinsurer asked for that important information. However, in the new Reinsurance Provisions the insurer now has an affirmative obligation to provide the reinsurer information that might be important to the insurer and reinsurer’s reinsurance contracts. Furthermore, Article 15 establishes that this important information must be provided to the reinsurer in writing.

Overall, there are thirty-seven Articles in the new Reinsurance Provisions compared to thirty-five in the old Provisions. However, Articles 36 and 37 of the new Reinsurance Provisions are just Articles 34 and 35 of the old Provisions with new Article numbers.

III. Deleted Articles

Article 11, which required insurers to offer, at least, half of the business that they are going to reinsure to two different Chinese reinsurers, has been removed as a requirement from the new Reinsurance Provisions. Moreover, this requirement has not been incorporated into any of the new measures of other Articles. In turn, under Chinese law this requirement no longer exists. The removal of this requirement is extremely significant because prior to the new Reinsurance Provisions the CIRC appeared to be giving China based reinsurers regulatory preference over non-China based reinsurers by requiring insurers to offer their reinsurance business to, at least, two China based reinsurers prior to offering it to international reinsurers. The new Reinsurance Provisions remove any assumption that there might be a regulatory preference for insurers to use China based reinsurers over international reinsurers.

In addition, Article 13 of the old Provisions, which basically stated that the parties to a reinsurance contract needed to adhere to the reinsurance contract and make all necessary payments in a timely manner, has also been removed. The new Reinsurance Provisions no longer contain an Article that specifically establishes that the parties to a reinsurance contract are required to adhere to the contract, although the sentiment that this Article conveyed has been incorporated into the new Reinsurance Provisions by slight changes in other Articles.

IV. New Articles

Articles 12, 13, 14, 24, and 29 all create requirements that were not specifically listed in the old Provisions.

Article 12 establishes that an insurer must determine what each of its risk units will reinsure, and it must file this methodology for creating each risk unit with the CIRC by March 31st of each year. This methodology filing requirement did not exist in the old Provisions.

Article 13 requires insurers to arrange their "catastrophic" reinsurance contracts reasonably and scientifically, and it must file its "catastrophic" reinsurance contracts with the CIRC by June 30th of each year. We tend to think that the CIRC is requiring this filing because it is what we would consider a regulatory priority based on the fact that Article 7 refers to insurers reinsuring the earthquake, typhoon, and flood insurance contracts. However, Article 13’s requirement that these contracts be made in a scientific and reasonable manner seems almost aspirational in tone because the CIRC does not provide a clear definition of what a decision made in a scientific and reasonable manner will look like. We tend to believe that this lack of a clear definition for scientific and reasonable probably means that the CIRC understands there could be numerous methodologies to determine the best course of action for an insurer, and it does not want to force insurance companies to allocate risk in a specific way. However, the fact that the CIRC added this new filing requirement for insurers shows that, from a regulatory standpoint, the CIRC still wants to track of how these "catastrophic" risks are being managed. Overall, we tend to think the CIRC is willing to give leeway on this matter, and it will determine whether or not an insurer has reasonably and scientifically managed its risk on a case-by-case basis.

Article 14 is another article that sets new standards that insurers should adhere to, yet, only provides general information about how those standards should be met. This Article establishes a general stipulation that an insurer must "carefully" select its reinsurance providers, but there is no clear definition for what "careful" means. We can only speculate at the CIRC’s goal in requiring insurers to "carefully" select reinsurers based on the rest of the Article. In the rest of the clause, the CIRC states that all reinsurance arrangements must be created in accordance with the CIRC’s regulations, and the reinsurers that an insurer enters reinsurance arrangements with must meet the CIRC’s requirements for reinsurers. Thus, we tend to think the CIRC is saying that it will probably consider the reinsurance companies an insurer chooses to enter reinsurance arrangements with to be "carefully" selected, and an insurer’s reinsurance arrangements to be "carefully" entered into, if the insurer adheres to all of CIRC’s requirements for reinsurance arrangements, and if the reinsurers the insurer chooses meet all of CIRC’s requirements for reinsurers.

Article 24 is an important new Article for Chinese foreign-invested insurance companies. It establishes that when a foreign-invested insurance company enters a reinsurance contract with an affiliated enterprise, the insurance company must report that contract to the CIRC within one month of the contract coming into effect. Moreover, Article 24 also establishes that when a foreign-invested insurance company enters a facultative reinsurance agreement with an affiliated enterprise during a calendar year, it must report that facultative agreement to the CIRC within the first month of the next quarter after it signs the agreement. In addition, Article 24 requires that a foreign-invested insurance company keep statistics for how many reinsurance transactions it has with each of its affiliated enterprises. Furthermore, the CIRC requires that the statistics for each affiliated enterprise be kept separately, meaning an insurer must keep separate statistics for each of the affiliated enterprises it has reinsurance contracts with. Finally, Article 24 makes it clear that these records must be provided to the CIRC whenever it asks for them.

Article 29 creates a new duty for property insurance companies to provide the CIRC with reinsurance information reports within one week after the end of each quarter. No Article in the old Provisions created this kind of a requirement.

V. Other Significant Changes

Article 21, which was Article 20 in the old Provisions, is largely unchanged except for one major addition. Article 21 contains a new clause that establishes that an insurance broker must provide a reinsurer any information it knows about a direct insurer, and any information it knows about the direct insurer’s underlying direct insurance contracts that are being reinsured or that are going to be reinsured. In addition, this article requires that this information disclosure be made in writing. The written disclosure requirements of Article 21 did not exist in the old Article 20. However, one requirement that is unchanged in the new provision is the fact that the broker’s duty to inform the reinsurer is not affirmative. The reinsurer must either ask the broker for the information it knows about the insurer and the direct insurance contracts, or the reinsurer must include the broker’s duty to disclose the information to the reinsurer in the contract the reinsurer has with the broker.

Article 25, which is the old Article 23, has a new clause that clearly establishes that life insurers and reinsurers must adopt consistent assessment methods and assumptions when assessing the statutory reserves for the same life insurance business. This requirement did not exist in the old provisions.

Article 28, which was the old Article 26, has been changed in many ways, but the basic concept is still the same. One major change is that the date the report the Article requires is due has changed from March 30th each year to April 30th each year. Another major change is that Article 28 has added a new clause detailing what needs to be reported to the CIRC if a treaty reinsurance agreement is reached after April 30th, and as part of this new clause Article 28 establishes this report must be provided to the CIRC within one month of the agreement being executed.

Finally, Article 34, which used to be Article 32, lowered the minimum fine that individuals can be fined for failing to adhere to the measures requirements from 20,000 RMB to 10,000 RMB. The maximum fine remains at 100,000 RMB. In addition, this Article added a provision that allows CIRC to revoke individuals guilty of failing to adhere to the new Reinsurance Provisions requirements qualifications to hold their positions in the insurance industry, and the CIRC can ban a guilty person from involvement in the Chinese insurance industry for as long as it sees fit, up to the rest of an individual’s life.

Overall, the new Reinsurance Provisions have established significant new reporting requirements for Chinese insurance companies regarding their levels and methodologies for insuring risk, and for foreign-invested companies to report transactions with affiliates. At the same time, insurance companies will have to watch the development of guidelines for satisfying new standards for selecting reinsurance providers and structuring their catastrophic reinsurance contracts.

This article was first published in the firm’s periodical China Bulletin June Issue, 2011, Vol.49