2017 will be a turning point for the Chinese insurance industry as the insurance regulator CIRC is issuing several new regulations to plug gaps in corporate governance and to rein in the investment activities of insurers.
Among several steps taken, CIRC has drafted rules to slash the maximum stake held by a single shareholder in an insurance company to 33% from the current ceiling of 51%. A single investor will also not be allowed to be the controlling shareholder of more than one insurance company in the same insurance sector.
The move to restrict shareholdings in insurers is to ensure that insurance companies would not be exploited as ‘ATM’s by controlling shareholders.
Analysts say however that the 33% ceiling is unlikely to apply to large state-owned insurers nor foreign insurance joint ventures, in which the overseas partners are allowed to hold a stake of up to 50%.
CIRC has also issued draft rules that would forbid insurers to use wealth management funds to invest in themselves.
Strengthening insurers’ corporate constitution
CIRC will issue guidelines soon too on insurance companies’ charter. Its draft guidelines on the subject aim to safeguard shareholders’ voting rights on matters such as nominating directors.
The rules would also require insurers to stipulate the authority needed in major investment and divestment decisions. Insurers too have to set out in their constitution the mechanisms that would be in place to rectify any lapses in corporate governance or failure in operations.
CIRC will make it tougher to secure new insurance licences. CIRC has also stipulated that new life insurance companies which started operations on 1 January or thereafter are only allowed to sell traditional life insurance products in their first year. After the year is up, the insurers will be allowed to gradually offer other types of life insurance products according to their management capability.
Meanwhile, the regulator has issued price setting rules for property insurers. The primary goal behind the regulations, that take effect from 1 February, is to reduce pricing risk, with CIRC pointing out that an insurer’s solvency position, its reserves and premium rates are inter-related.
CIRC said that pricing practices in many insurers are unscientific while control over the pricing process is not strict and the resultant premium rates determined are not reasonable.