Development and Regulation of China's Insurance Market

Bingzheng Chen

Sharon Tennyson

Maoqi Wang

Haizhen Zhou

中国保险与风险管理研究中心China Center for Insurance and Risk Management

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

Content• 1. Introduction• 2. China’s Insurance Market

•2.1 Market Size and Development•2.2 Insurance Market Structure

• 3. China’s Insurance Regulatory System• 4. Evolution of Insurance Regulation and Supervision

•4.1 Capital utilization regulations•4.2 Solvency Regulation•4.3 The Insurance Protection Fund•4.4 Market Surveillance•4.5 Disclosure and Consumer Protection

• 5. New Perspectives of Insurance Regulation in China

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

Introduction

• A fast-developing market• An opening, modernizing regulatory system• A special Political-Economic Scheme

• Why is China regulating Insurance Industry like this?

• How should we study China’s Insurance Regulation

• What is the future of China’s Insurance Regulation

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

China’s Insurance Market

• Rapid Growth Ratenominal insurance premiums increased from 460 million yuan in 1980 to 1.45 trillion yuan in 2010, an average annual premium growth rate of over 30%, compared to a nominal GDP growth rate of 16%.

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Annual Insurance Premiums, yuan, billion GDP Growth, nominal, % Premium Growth Rate, nominal, %

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

China’s Insurance Market

• Still Un-DevelopedChina ranked 61st in insurance density and 39th in insurance penetration among world economies in 2010.

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Insurance Market of Each Country

China

X: insurance densityY: insurance penetrationSize: insurance premium

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

China’s Insurance Market

• Relatively Concentrated In 2010 the non-life insurance HHI was 1850 and the HHI for life insurance was 1800. U.S. Department of Justice merger guidelines categorize markets with HHI greater than 1800 as “concentrated” (DOJ/FTC 1997).

YearInsurance Companies

Provincial Subsidiaries

BranchesHHI of China’s Non-life Insurance Market

HHI of China’s Life Insurance Market

2001 36 - - 5700 4150

2004 60 - - 3900 3200

2007 102 941 57191 2400 2400

2010 126 1294 68061 1850 1800

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

China’s Insurance Regulatory System

People's Bank of China

People's Bank of China-Insurance Division

China Insurance Regulatory Committee

The Insurance Law of People's Republic of China

1995 199819791952

Ministry of Finance

People's Bank of China

The New Insurance Law of People's Republic of China

20091949

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

China’s Insurance Regulatory System

China Insurance Regulatory Commission

Branch Offices

Insurance CompaniesInsurance Intermediaries

Consumers

Legal Supervision Social Monitoring Self-discipline

Branch Offices

Branch Offices

Branch Offices

The National People's Congress

Government

Regulator

Market Players

The State Council

Mechanism

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

Evolution of Insurance Regulation and Supervision• 4.1 Capital utilization regulations

“Insurance Law” 1995 Only in bank deposits, government bonds, financial bonds and other funds stipulated by the State Council

“Temporary Regulations on the Securities Investment Fund of Insurance Companies ”

1999 Could in security funds, but the proportion and qualification of these investment should be approved by the CIRC.

“Temporary Regulations on Securities Investment of Insurance Institutes”

2004 Could invest in securities through market subscription and the secondary market transactions.

“Administrative Measures on Indirect Investment in Infrastructure Projects Pilot of Insurance Capital”

2006Infrastructure projects. The balance of investment should not exceed5% the total assets in the last quarter of a life insurance company, while 2% for a property insurance company.

“Temporary Administrative Measures of Overseas Investment of Insurance Capital”

2007 Could make foreign investment with the foreign reserves of its own or purchased from banks.

the Second Revision of the “Insurance Law” 2009 Insurance companies could invest in real estate.

“Temporary Administrative Measures of Utilization of Insurance Capital”

2010

Security and security funds investment should not exceed 20%; the proportion of real estate investment should not exceed 10%; The sum of real estate related securities investment should not exceed 3%; the proportion of real estate and real estate related securities investment should not exceed 10%, etc.

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

Evolution of Insurance Regulation and Supervision• 4.2 Solvency Regulation

“Insurance Law” 1995only basic guidelines regarding minimum solvency requirements for insurance companies

Entry into WTO 2001

A ratio-based solvency monitoring system, specifying the calculation of ratios, and standards for recognizing assets. It also established measures for dealing with distressed or insolvent insurance companies

The Insurance Law modification 2002

Additional strengthening of this system by revising the solvency ratios and requiring insurers to submit a periodic report on solvency ratios

2008a dynamic risk-based solvency regulatory framework consistent with international standards.

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

Evolution of Insurance Regulation and Supervision• 4.3 The Insurance Protection Fund

2005

China established an insurance guaranty fund (the Insurance Protection Fund, IPF) in January 2005. The fund was initially managed by CIRC under the oversight of an IPF Council consisting of representatives of insurance companies, the Legislative Affairs Office of the State Council, Ministry of Finance, the People’s Bank of China and others.

2007 China Insurance Protection Fund Ltd. Co. was established.

2008established rules for the major business operations, governance structure, financing and information sharing activities of the Protection Fund management company.

2011

•Xinhua Life Insurance Company, CEO fraud problem, 22% percent of its shares, successful rescue action•China United Insurance Company, historical poor performance, 57%, not completed yet

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

Evolution of Insurance Regulation and Supervision

• The trend of regulatory evolution:• Modernized• Internationalized• Consumer-based

“the regulators used to be the coaches of the industry, who are concerned with building the market; but in the new era, insurance regulators should act more like judges, whose efforts should change from market construction to market supervision”

-- Dingfu Wu, former president of CIRC, 2010

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

New Perspectives of Insurance Reg. in China

1. How should we position China’s Insurance Regulator?

• Public Interest Theory (Social Planner)

• Private Interest Theory (Rent Seeking, Capture or special interest?)

2. Does the Regulator have Institutional Weakness?

• Limited Regulatory Capacity

• Limited Accountability

• Limited Commitment

• Limited Fiscal Efficiency

率先获得 AACSB和 EQUIS两大全球管理教育顶级认证的中国内地商学院The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation

Thank you!