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May 2019

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Special Feature on Regulation: Regulators in action

Source: Asia Insurance Review | Nov 2015

This update, brought to you by PwC, gives a roundup of key regulatory activities around the region in the recent few months.
 
 
Family members of cadres barred from insurance business
The China Insurance Regulatory Commission (CIRC) has issued a regulation barring the spouses and children of leading cadres from carrying out insurance business. The prohibition also extends to the spouses of the children. 
 
   In addition, leading cadres who hold senior positions in insurance organisations are not to use their authority or influence to seek commercial business opportunities in the insurance industry or introduce unfair competition. 
 
   Another regulation governing exchanges between regulatory officials and those they supervise was also announced. The moves are seen as part of the anti-corruption drive of President Xi Jinping, who is also General Secretary of the Chinese Communist Party.
 
Regulator issues Internet insurance operating rules
Geographical operating limits will be lifted for insurance companies which conduct business over the Internet, according to a set of regulations on e-insurance issued by the CIRC.
 
   The rules mean that insurance companies do not have to set up operating units in provinces or municipalities in which they do not already have branches or subsidiaries. The geographical restrictions are removed for categories of business such as personal accident insurance; term life insurance and whole life insurance; home insurance; liability insurance and credit insurance; any insurance line for which it is easy to undertake sales, underwriting and compensation processes via the Internet; and other categories of insurance stipulated by CIRC.
 
   The guidelines titled “Interim Measures for the supervision of Internet insurance business” also stated that the Internet insurance business is to be operated only by the headquarters of an insurance company. The insurer needs to have the appropriate management capabilities and can meet customer demand for services across the country.
 
Insurance intermediaries and third-party Internet platforms
In addition, insurance intermediaries are included under the scope of the regulations, according to local media reports. Individuals are barred from operating Internet insurance sales services.
 
   Third-party Internet platforms, on which insurance companies carry out e-insurance business, must meet several criteria: they must not have faced heavy penalties imposed by Internet industry authorities, industry and commerce administration departments or other government departments over the past two years or been blacklisted by CIRC.
 
   Among other things, the regulations stress that insurance premium payments must be credited directly into the insurance company’s bank account designated for the collection of premiums. Third-party network platforms are barred from collecting insurance premiums on behalf of insurers. Fees or commissions owed by insurers to intermediaries and third-party Internet platforms are to be settled by the insurance companies’ head offices.
 
   The regulations for Internet finance also spell out the roles to be played by the different regulators. CIRC oversees insurance while the People’s Bank of China will oversee online payments; the securities regulator will be responsible for crowd-funding and online sales of funds and the banking regulator will supervise platforms that directly link borrowers and lenders known as peer-to-peer lending.
 
Life insurance pricing fully liberalised
The CIRC has fully liberalised the pricing mechanism for life insurance products with to the aim of encouraging more market-driven competition among insurers.
 
   The new policy will allow insurers to set up their own interest rate for dividend-paying life insurance products, which previously was capped by the regulator at around 2.5%, reported China Daily.
 
   This latest move marks the completion of the pricing reform of the country’s life insurance products. The regulator has already liberalised interest rates for term and universal life insurance products.
 
   Mr Wang Zhichao, Deputy Director of the Life Insurance Department at CIRC, said that the latest interest rate reform will likely reduce premiums for dividend-paying life insurance by more than 15% and will substantially boost the attraction of such products for customers. 
 
   Products that offer interest rates higher than 3.5% will remain subject to regulatory approval, according to the CIRC.
 
 
Hong Kong 
Insurance Authority to be set up by next year
Hong Kong lawmakers have passed the Insurance Companies (Amendment) Bill 2014, that among other things, will lead to the establishment of the Independent Insurance Authority (IIA) sometime next year.
 
   The Secretary for Financial Services and the Treasury, Professor KC Chan, said that the Ordinance will be brought into force in three stages. These are:
1. A Provisional Insurance Authority (PIA) is expected to be set up by the end of this year to facilitate the transition from the existing Office of the Commissioner of Insurance (OCI). The PIA will be given certain administrative powers to undertake key preparatory work, such as recruitment of senior executives. In the interim, the self-regulatory system for insurance brokers and insurance agents will continue.
2. The IIA will take over the work of the OCI, starting approximately one year after the PIA is set up. The IIA will carry out preparatory work for regulating insurance intermediaries, including subsidiary legislation, codes of conduct for insurance intermediaries, and regulatory guidelines. It is expected that there will be public consultations.
3. A statutory licensing regime will be introduced for insurance intermediaries to replace the existing self-regulatory regime.
 
   It is expected that the three-stage process will take two to three years to complete.
 
 
India
New investment rules proposed for insurance funds
The Insurance Regulatory & Development Authority of India (IRDAI) proposes to bar insurance companies from placing fixed deposits (FDs) or certificates of deposit (CDs) with promoter banks. It also plans to limit life insurers’ fixed-income investments in other banks at 3% of investment assets and 10% for general insurers.
 
   At present, life insurers are allowed to invest in deposits of promoter banks with a cap of 5% of investible funds.
IRDAI had tried previously to ban FD placements by insurers with their promoter banks, but shelved the decision following lobbying by insurers.
 
   In the current draft, the regulator has attempted to sweeten the proposal with a provision to allow insurers to consider immovable property at which they conduct business as investment assets instead of fixed assets.
 
   IRDAI also told insurers to include Chief Risk Officers as permanent members of their investment committees to improve compliance.
 
   In addition, the regulator proposes to require that a minimum of 25% of unit-linked investment funds be invested in central government securities. At present, insurers can invest such funds in securities of their choosing. This move could lead to lower investment returns for insurers. The view of the regulator is that insurance is a long-term product and revenue from the sale of these plans should be used to fund long-term initiatives of the government, such as infrastructure development.
 
Upfront commissions to distributors to be banned
The insurance regulator is looking to scrap upfront commissions that some insurance companies pay to distributors, such as banks. The regulator wants to crack down on commissions that take a big chunk out of initial premiums, mostly without the customer’s knowledge. Such commissions can at times be as much as 25-30% of the first payments on policies.
 
   Under proposed new rules, the IRDAI seeks to restrict the expenses that an insurance company can charge. It is proposing a structure for the allocation of expenses for various segments, reported The Economic Times. 
 
   It said that no insurer should spend more than an aggregate of 10% of all first-year premiums and 4% of all renewal premiums on policies granting deferred annuities for more than one premium; 5% of premiums received during the year on single-premium annuity products and 1/20th of 1% of the average of the total sums assured by policies excluding single-premium policies.
 
Banks to be made liable for mis-selling of policies
The Indian insurance regulator is set to make corporate agents, including banks and their employees, liable for all insurance policies they sell. This means that for the first time since they began selling insurance policies in 2002, banks will be held accountable for any mis-selling.
 
   Mr T S Vijayan, Chairman of IRDAI, said that the regulator would consider corporate agents an intermediary. At present, corporate agents are considered entities working on behalf of an insurance company as a distributor of the latter’s products and are not held liable for what they sell.
 
   However, under the insurance law amended in March, an “insurance intermediary” refers to insurance brokers, reinsurance brokers, insurance consultants, corporate agents, third-party administrator, surveyors, loss assessors and other such entities.
 
   In addition, in order to stop the mis-selling of insurance products by banks, IRDAI has asked corporate agents to maintain a database to which access should be made available to the regulator, reported the Business Standard.
IRDAI will also seek certificates from the chief executive and the chief financial officer of corporate agents (including banks), stating that there has been no forced selling of insurance products to customers.
 
 
South Korea
Insurance, banking, securities services under one roof
South Korea’s financial regulator has said that it will allow financial holding companies to operate comprehensive financial branches where they can provide insurance, banking and securities services under the same roof. 
 
   The Financial Services Commission (FSC) said that these outlets will help customers obtain various financial services conveniently by removing the barriers between financial sectors, reported The Korea Times. The move would also promote competition.
 
   The FSC said that it will limit the number of the complex branches to three for each financial holding company in a pilot scheme to minimise any negative impact on the market. The regulator will decide on the expansion of such branches after examining the pilot cases.
 
 
Pakistan
Insurers’ minimum capital hiked by US$1.9 mln
The Securities and Exchange Commission of Pakistan (SECP) has increased the minimum paid-up capital requirement for insurance companies by PKR200 million (US$1.92 million) to improve the capacity of local insurers to underwrite and retain larger risks.
 
   The financial regulatory agency have amended the rules, under which the baseline paid-up capital requirement for non-life and life insurance companies are now increased to PKR500 million and PKR700 million respectively, according to local media reports.
 
   The new capital requirements would be applied in a phased manner. The existing insurance companies would be allowed a period of two years till 31 December 2017 to meet the new requirements.
 
   At the time of the enactment of the Insurance Ordinance 2000, the minimum paid-up capital requirements for non-life and life insurance companies were PKR80 million and PKR150 million respectively. In 2007, the paid-up capital requirements for non-life and life insurance companies were increased to PKR300 million and PKR500 million respectively.
 
   In 2012, the SECP had formed an Insurance Industry Reforms Committee to evaluate the challenges faced by the insurance industry of Pakistan and also to recommend appropriate regulatory reforms that best suit the growth of the industry. The committee had proposed increasing the minimum paid-up capital requirements for insurance companies.
 
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