The China Insurance Regulatory Commission (CIRC) announced on
Wednesday that it has promulgated a new regulation that requires
all insurers to deposit a portion of their premiums in an insurance
protection fund starting this year. The fund will be used to
compensate policyholders in event of insurer bankruptcy.
CIRC expects the fund to have collected 2.5–3.0 billion yuan
(US$302.0–398.7 million) from insurers by the end of this year.
The new regulation applies to foreign and Sino-foreign insurance
companies operating in China as well as domestic ones. Thirty-nine
foreign insurers have entered the Chinese market and have set up 70
operational entities, including branches and joint ventures.
Jiang Xianxue, deputy director-general of CIRC's Finance and
Accounting Department, said that the new system reflects that the
insurance industry is the first financial subsector in the nation
to break away from the years-old practice running to the government
for a bailout if a company goes bankrupt.
"Because of the bankruptcy compensation arrangements, insurance
companies that have serious solvency problems can, in the future,
peacefully exit under market principles," Jiang said.
No insurers have declared bankruptcy in China since the industry
was restarted more than 20 years ago following a suspension for
political reasons.
According to the new regulation, the fund will fully cover
policyholders' losses not exceeding 50,000 yuan (US$6,000) when a
non-life insurer goes bankrupt and its assets are insufficient to
repay liabilities. The fund will pay 90 percent of losses in excess
of that amount for individual policyholders and 80 percent for
corporate policyholders.
In a case of life insurer bankruptcy, the company's policies
will be transferred to another life insurer, which will then
receive compensation not to exceed 90 percent of individual
policyholders' losses or 80 percent of corporate policyholders'
losses.
Jiang said that since the typical individual non-life claim is
for less than 50,000 yuan, the majority of policyholders will be
completely covered under the new regulation.
"Therefore, it's fair to say that, after the establishment of
the insurance protection fund system, the functioning of the
insurance market will be healthier, while the interests of
policyholders will be better protected," Jiang said.
He indicated that a special division would be set up under his
department, probably in the first half of the year, to oversee the
fund temporarily. An insurance protection fund council is to be
assembled later with officials and specialists to manage and
supervise the use of the fund.
The life and non-life segments are each expected to contribute
about 1 billion yuan (US$120 million) to the fund each year,
although the total will depend on premium growth. The two segments
operate under separate regulations in China.
Insurers are required to submit up to 1 percent of retained
premiums to the fund, with the percentage varying by business
lines, until the total contribution amounts to 6 percent of total
assets for non-life insurers and 1 percent for life insurers.
The regulation will have a bigger impact on the balance sheets
of life insurers than their non-life counterparts, which have been
setting aside protection reserves since 1999.
China Life, the country's largest, will contribute an estimated
200 million yuan (US$24 million) annually to the fund from this
year. However, the impact on its net profit will be smaller since
the contribution is deductible from 33 percent income tax,
according to CIRC.
(China Daily January 6, 2005)