On October 1, China enacted a new insurance law that is intended to make the country's commercial and personal insurance markets more efficient and effective while assuring greater protection for consumers. The law, which is the latest version of the People's Republic of China Insurance Law of 1995, addresses a range of concerns and includes 172 new and revised articles. But along with greater consumer protection, many of these changes will impose additional operational costs and compliance demands on the insurance industry and, as a result, will be of significant interest to risk managers and multinational companies doing business in China.
The Chinese government has made a number of regulatory changes designed to strengthen consumer protections including:
Good faith principle. The good faith principle, which limits insurers' right to cancel a policy, has been revised. Under the old law, an insurer was granted the right to cancel an insurance contract due to intentional misrepresentation by the applicant or negligence. Now, an insurer has the right to cancel an insurance contract due to intentional misrepresentation by the applicant or gross negligence. The law also establishes time limitations for the insurer to exercise its right of cancellation.
Obligation of explanation. An insurer is now obligated to provide the applicant with a copy of its full standard form of policy together with the application form and explain the contents to the applicant. They will also have to give sufficient caution and draw the attention of the applicant to the clauses in an insurance contract that exempt the insurer from liability and explain the contents of those clauses to the applicant in writing or verbally. If no express explanation is given, the clauses will be considered void.
Claims handling. Tightened claims handling, specification of the procedures related to notice of a claim and for handling a claim as well as specific time frames for claim adjusting and settlement and also mandated by the new regulations.
Operational rules for insurers. Insurance companies conducting business in China now have more freedom to run their operations in the country. The regulations provide broader opportunities for insurers, allowing them to operate other insurance-related businesses approved by the insurance regulatory body under the State Council.
Local reinsurance requirements may also be less restrictive. Insurers are no longer required to give priority to local insurance companies for reinsurance placement so now they can better respond to actual market conditions. This change also allows China to be consistent with its WTO commitment. The laws, however, still emphasize the importance of selecting reinsurers cautiously.
Insurance supervision and legal responsibility. The new legislation is also expected to precipitate increased enforcement of insurance regulations. Insurers will be expected to operate with a greater degree of corporate governance and apply more rigor to their compliance processes. As compliance standards tighten and penalties for lack of compliance become stiffer, multinationals doing business in China could face a more litigious landscape that puts their bottom line at greater risk. For example, an insurer can be fined up to $15,000 for retaining staff with insufficient qualifications, while products not filed through the right channels can result in fines up to $73,000 and a prohibition against accepting new business or a withdrawal of the insurer's operating permit.
Other market challenges. In addition to these regulatory changes, there is an important premium payment issue worth noting. "The Provisional Rules on Foreign Exchange Administration of Insurance Business," which went into effect November 2002, require that non-life policies issued in China shall be charged and paid in Chinese currency with the exception of the following four types of insurance contracts: the subject of the insurance moves between inside and outside of the territory of China; the subject of the insurance exists or has been realized outside the territory of China; the subject of the insurance exists or has been realized inside the territory of China through international leasing, international syndicate loan or other kinds of international finance; and both the applicant and the beneficiary are overseas legal persons or natural persons.
An insurer violating these rules will be ordered to rectify the behavior; illegal gains will be confiscated, and a fine will be imposed for the equivalent of foreign exchange that has been used illegally.