Overview of the Draft Rule on Foreign-funded Insurance Companies

Yuan Min, Lin Zhe, Lai Yunjie Finance & Capital Markets, King & Wood Mallesons

In order to carry out the central government policy of opening up financial market and implement the Regulations on Administration of Foreign-funded Insurance Companies (the “Regulations”) amended by the PRC State Council on September 30, 2019, China Banking and Insurance Regulatory Commission (the “CBIRC”) issued a Draft for Comments of the Implementing Rules for the Regulations on Administration of Foreign-funded Insurance Companies (the “Draft Rule”) on December 31, 2020 for public opinion. The Draft Rule proposes to clarify some major issues presented during the implementation of the Regulations, such as the ambiguity in recognizing the “Foreign Insurance Group Company” and the “Overseas Financial Institution”. Below we would like to provide an overview of the Draft Rule and highlight the major changes.

1. Foreign Insurance Group Company can be the Major Shareholder of foreign-funded insurance companies

The Regulations, amended by the PRC State Council on September 30, 2019, include two major amendments – allowing the Foreign Insurance Group Companies to set up foreign-funded insurance companies and; allowing the Overseas Financial Institutions to invest in foreign-funded insurance companies. However, there are potential conflicts between the new breakthroughs and the “Major Shareholder Requirement” stipulated in the Article 4 of the Implementing Rules for the Regulations on Administration of Foreign-funded Insurance Companies (the “Implementing Rules”), providing that a foreign-funded insurance company must have an insurance company operating normally as the Major Shareholder. Specifically, in practice, a Foreign Insurance Group Company normally tends to wholly own or hold the majority shareholding of a foreign-funded insurance company in China. However, the problem is that having an insurance company as the Major Shareholder means that another shareholder, which is an insurance company, has the largest percentage of shares or equity in the foreign-funded insurance company; or has significant influence on the foreign-funded insurance company. Thus, the Foreign Insurance Group Company is actually not able to wholly own or hold the majority shareholding of a foreign-funded insurance company. Nevertheless, the Regulations explicitly allows a Foreign Insurance Group Company to set up foreign-funded insurance companies. We understand that it is not in line with the central government’s opening up policy if a Foreign Insurance Group Company is prevented by the “Major Shareholder Requirement” from wholly owning or holding the majority shareholding of a foreign-funded insurance company in China. This problem is expected to be solved as the Draft Rule provides that the Foreign Insurance Group Companies may also be recognized as the Major Shareholders of foreign-funded insurance companies.

Moreover, the Regulations allow the Overseas Financial Institutions to invest in foreign-funded insurance companies and does not expressly restrict the shareholding percentage that an Overseas Financial Institution may hold in a foreign-funded insurance company. It leads to some arguments in the market regarding whether a foreign-funded insurance company invested by an Overseas Financial Institution can have some flexibility when complying with the “Major Shareholder Requirement” – otherwise the shareholding percentage that an Overseas Financial Institution may hold is restricted as there must be another insurance company as the Major Shareholder. The Draft Rule clarifies this issue by explicitly stipulating that only the insurance group company or the insurance company can be the Major Shareholder. Thus, the Foreign Financial Institutions do need to take the “Major Shareholder Requirement” into consideration when designing and negotiating the equity structure of foreign-funded insurance companies

2. Definitions of Foreign Insurance Group Companies and Overseas Financial Institutions are clarified

The Regulations allow the Foreign Insurance Group Companies to set up foreign-funded insurance companies and; allows the Overseas Financial Institutions to invest in foreign-funded insurance companies. However, the standards of defining the “Foreign Insurance Group Company” and the “Overseas Financial Institution” are not clear.

a）Foreign Insurance Group Company

Different from the practice in China, the “Insurance Group Companies” are normally not subject to specific supervision or license in other jurisdictions. A “Group Company”, as the name suggests, generally refers to the first-level company in a company group. However, for many large overseas insurance groups, their first-level companies are usually not directly involved in holding and managing business subsidiaries, and the companies actually focusing on holding and managing insurance companies in the group are often not the first-level company of the group. Therefore, for these foreign investors, using the first-level company as the shareholder of their PRC insurance subsidiaries are not in line with their internal practice, but the entities that are actually responsible for holding and managing the business of insurance sector in the group may be at the second level or even lower in the group. It is not clear whether these entities, although holding insurance business in the group, could be recognized as the “Insurance Group Company” by the CBIRC.

This problem is expected to be solved as the Draft Rule adopts the international practice, more reasonable standards, providing that the insurance holding company focused on controlling and managing insurance subsidiaries in the group, even by itself may be a secondary or tertiary subsidiary within the group, can be recognized as the “Foreign Insurance Group Company”. This standard is in line with China’s policy of actively opening up the financial market and connecting with international practice, and also facilitate these holding companies actually engaging in managing insurance business to share their advanced insurance operating experience with foreign-funded insurance companies.

b) Overseas Financial Institution

There is no generally accepted standards for defining “financial institutions” in China. Broadly speaking, enterprises that are subject to the supervision and administration of the CBIRC, the China Securities Regulatory Commission and the People’s Bank of China could all potentially be called the “financial institutions”. Strictly speaking, the Guiding Opinions on Regulating Asset Management Business of Financial Institutions (2018) only gives some examples of “financial institutions”, including but not limited to banks, trusts, securities, funds, futures, insurance asset management institutions, financial asset investment companies. Thus, it is not that clear what entities could be recognized as the “Overseas Financial Institutions”. There are arguments now and then whether some overseas financial holding companies or funds managers could be the “Overseas Financial Institutions” thus are eligible to invest in insurance companies in China.

This issue is expected to be clarified as the Draft Rule explicitly stipulates that the “Overseas Financial Institutions” must be the financial institutions that are approved or licensed by the local financial regulatory authority. This standard is relatively strict – overseas institutions established by registration or filing will probably not be recognized as the “Overseas Financial Institutions”.

3. Qualification requirements of Foreign Insurance Group Companies are clarified

The Draft Rule proposes two new articles, Article 33 and Article 35 of the Implementing Rules, to specify the qualification requirements for the Foreign Insurance Group Company applying for setting up a foreign-funded insurance company or becoming a shareholder of a foreign-funded insurance company through equity transfer.

Although the Regulations allow Foreign Insurance Group Companies to set up foreign-funded insurance companies, it does not specify the qualification requirements for the Foreign Insurance Group Companies. The Regulations stipulate in its Article 8 the qualification requirements for foreign insurance companies applying for setting up foreign-funded insurance companies. However, some of these qualification requirements cannot be applied to Foreign Insurance Group Companies. For instance, “the foreign insurance company has been effectively supervised by the competent authorities of the country or region where it is located” – but the Insurance Group Company normally is not subject to financial supervision in many jurisdictions; “in line with the solvency standards of the country or region” – but the Insurance Group Company, unless it runs insurance business itself, is not subject to solvency standards. Thus, it is unclear how would the Insurance Group Company be regarded as qualified as it is not able to refer to all the currently effective qualification requirements.

This issue is expected to be clarified as the Draft Rule stipulates that the Insurance Group Company would be deemed as qualified applicant for becoming the shareholder of a foreign funded insurance company if its insurance subsidiaries meet the relevant qualification requirements.

4. Other requirements for Overseas Financial Institutions are clarified

Whereas, the Measures for the Administration of the Insurance Company Equity issued by the CBIRC in 2018 have provided relatively complete requirements for Overseas Financial Institutions applying to be the shareholders of Chinese insurance companies, it is likely that Overseas Financial Institutions investing in foreign-funded insurance companies may refer to these requirements. However, it is not clear whether the CBIRC will make more strict requirements for Overseas Financial Institutions’ investments in foreign-funded insurance companies. This is expected to be clarified as the Draft Rule clearly stipulates that Foreign Financial Institutions are subject to the relevant provisions of the Measures for the Administration of the Insurance Company Equity and no further requirements are mentioned at present.

5. Other amendments

Apart from the amendments analyzed above, the Draft Rule also clarifies some other issues, such as the application document requirements for a Foreign Insurance Group Company to apply for the establishment of a foreign-funded insurance company; safety review involves the investment of foreign insurance companies; applicable laws for Hong Kong, Macao and Taiwan investors; applicable laws for setting up insurance group company in China, etc.

We believe the Draft Rule, if adopted, would help promote the opening up policy of PRC financial market; facilitate the implementation of opening up measures presented in the Regulations; and significantly reduce the uncertainty of foreign investors’ investments in insurance companies in China.