The Use of Insurance Funds Interim Measures (Decree No. 9 of 2010) published by the China Insurance Regulatory Commission (CIRC) came into force on 31 August. The Measures are significant in the ways that they ensure the safe use of insurance funds, safeguard the rights and interests of general insurance policy holders and attempt to minimize risks in the insurance industry.
Applicability of the Measures
The Measures apply to the use of insurance funds by insurance group (holding) companies and insurance companies established within China. Insurance asset management institutions should also refer to the Measures for the management and use of their insurance funds. In the Measures, “insurance funds” are defined as capital, reserve funds, undistributed profits, various reserves and other funds of insurance group (holding) companies and insurance companies denominated in domestic and foreign currencies.
Scope of the use of funds
Article 106 of the Insurance Law is restated in the Measures. This article limits the use of insurance funds to four forms of investment: bank deposits; dealing in negotiable securities such as bonds, stocks and securities investment fund units; investment in real property; and other forms of use specified by the State Council. The major provisions in the Measures relating to the scope of the use of insurance funds are as follows.
- Bonds to be invested in should have been assessed with credit ratings by a credit rating agency approved by CIRC. These bonds primarily include government bonds, financial bonds, enterprise (corporate) bonds and non-financial corporate debt financing instruments.
- Stocks to be invested in primarily comprise publicly offered and traded shares and shares issued by listed companies to specific targets in non-public offerings. In addition, the Measures have left some policy space for the investment of insurance funds in shares on ChiNext and in shares subscribed for and traded in foreign currencies, which will be regulated by CIRC in separate rules.
- Equity to be invested in should be that of limited joint stock companies and limited liability companies legally established and registered within China, and not publicly traded on any stock exchange. Controlling equity investments made in other enterprises should be limited to insurance companies, non-insurance financial enterprises and enterprises related to the insurance business.
- Various forms of investment must meet relevant requirements for the amount of investment as a proportion of total assets. For example, the total book balance of investments in stocks and equity funds must not be higher than 20% of total assets of a company at the end of the previous quarter.
- Insurance funds should not be used in some areas. For example, no deposits should be placed with non-banking financial institutions; no shares should be purchased which are subject to “special treatment” and “special treatment due to a warning that there is a risk of termination of listing” by a stock exchange; no investment can be made in corporate equity and real property which is inconsistent with national industrial policy; and no insurance funds may be used directly in real property development and construction or venture capital investments.
Model for the use of funds
The Measures stipulate that insurance group (holding) companies and insurance companies may invest on their own or appoint an insurance asset management institution to invest on their behalf, and should select a professional agency such as a qualified commercial bank as a third party to manage and monitor the use of insurance funds. On this basis, the Measures have established a tripartite collaborative check-and-balance model for the management and use of insurance funds, comprising trustors, trustees and custodians. The legal relationship between the three parties as well as the primary duties and obligations of them are clearly defined in the Measures.
Risk control and monitoring
The Measures have imposed detailed and stringent requirements on the organizational structure, responsibilities, process for the use of insurance funds, internal control such as risk control and CIRC’s external monitoring of the use of insurance funds in respect of insurance companies.
Complementary guidelines
On 31 July and 5 September, in order to enforce the relevant provisions of the Measures, CIRC published the Revisions to the Policy on Insurance Fund Investments Notice (Bao Jian Fa [2010] No. 66), the Equity Investments by Insurance Funds Interim Measures (Bao Jian Fa [2010] No. 79) and Investments in Real Property by Insurance Funds Interim Measures (Bao Jian Fa [2010] No. 80), which provide specific and precise guidelines on the use of insurance funds in relevant areas. There have been widespread concern and heated debates in the market as the Measures and these specific rules have been promulgated and enforced to regulate the possible direction of a large amount of insurance funds.
Business Law Digest is compiled with the assistance of Haiwen & Partners. The authors can be emailed at baochen@haiwen-law.com. Readers should not act on this information without seeking professional legal advice.
