Welcome to the latest edition of JT&N's PRC Insurance News Alert, reporting recent regulatory developments affecting the PRC insurance sector. We welcome your comments, questions and feedback. The preceding JT&N PRC Insurance News Alert was published in January, 2016. To receive a back issue or to contact us please email: jtninsurance@jtn.com
1. B2V Tax Reform Expansion to Financial Industry Expected in May, 2016
On March 5, 2016, Premier Li Keqiang announced in the 2016 Government Work Report that the “Business Tax to Value Added Tax Reform” (the “B2V Reform”) will be expanded to encompass all industries, including the financial industry, commencing on May 1, 2016, and forecast that “the tax burden of all industries would be reduced rather than increased.” On March 18, 2016, the State Council further announced that the Value Added Tax rate will be set at 6% for the financial and consumer services industries and 11% for the construction and real estate industries.
The B2V Tax Reform was originally launched in November, 2011, in the Circular on the Pilot Program for the Transmission from Business Tax to Value-Added Tax, which excluded the financial industry, including the insurance industry. Prior to the B2V Reform, China’s indirect tax system included two principal components, business tax and value added tax. Pursuant to this reform, the business tax component is being eliminated. In light of the approaching May 1 implementation date, it is expected that implementing guidance will be released soon.
2. U.S.-China Bilateral Trade Dialogue Calendar Update
The U.S.-China bilateral trade dialogue is an important tool for promoting enhancements in the PRC business context for U.S. and other foreign invested enterprises. This encompasses reducing barriers to market access as well as influencing PRC law, policy and practices and their practical impact on market participants, and for leveling the playing field as between foreign and domestic market participants. The 2016 calendar, while still fluid, will include several major events and an array of related milestones that will provide significant opportunities for contributing to the force and substance of U.S. negotiating positions.
This year, the principal planned events include:
U.S.-China Strategic and Economic Dialogue (“S&ED”) (China, late spring or early summer)
U.S.-China Joint Commission on Commerce and Trade (the “JCCT”) (U.S., late fall or early winter)
U.S.-China Bilateral Investment Treaty talks (“BIT”) (at various times throughout the year)
U.S.-China bilateral insurance dialogue (location and timing to be determined
In addition to the above bilateral events, the G20 summit and the related Business 20 summit (a component of the G20 framework involving eminent business leaders across regions and industries to express views of the business community as a whole), will be held in China in early September. U.S. companies interested in influencing the China regulatory picture may impact the process in a number of ways, including: preparation of company-specific issue papers; providing inputs to insurance industry issue lists; and face-to-face dialogue with U.S. interlocutors in Washington D.C. and in China. Companies of other jurisdictions may avail themselves of respective national bilateral or multilateral channels of dialogue.
3. Draft Revisions to the “Anti-Unfair Competition Law” Published for Public Comment
On February 25, 2016, the State Council Legislative Affairs Office published for public comment draft revisions to the PRC Anti-Unfair Competition Law (“AUCL”), originally promulgated by the Standing Committee of the National People’s Congress on September 2, 1993 and effective December 1, 1993. The public comment period ends March 25, 2016. These draft Revisions are a noteworthy milestone, representing the first since the law was originally promulgated more than two decades earlier. The draft Revisions introduce a number of changes, including new definitions, strengthened enforcement measures and tougher sanctions to regulate against unfair competition, including commercial bribery and infringement against trade secrets.
4. Draft Amendments to “Measures Against Unlicensed Business” Released
On February 1, 2016, the Legislative Affairs Office of the State Council of China released for public comment draft amendments to the “Measures Against Unlicensed Business Operation,” with a public comment period that closed on March 10, 2016. The principal effect of these draft Amendments is to update the Measures to reflect recent liberalization vis-à-vis business licensing.
Pursuant to PRC law, the operation of a business is illegal without a business license validly issued by the State Administration of Industry and Commerce (“SAIC”), together with other governmental approvals and permits required by law, as applicable. When the Measures were originally promulgated in 2003, SAIC was prohibited from issuing a business license unless the applicant first had obtained all legally required approvals and permits. As a consequence of recent liberalization, more and more businesses have become eligible to receive a business license without the precondition of first obtaining all relevant governmental approvals and permits. The draft Amendments would update the Measures to align with this reform process. In addition to revising the title of the Measures to “Measures against Unlicensed and Unapproved Business Operation,” it now distinguishes different treatments for “unlicensed business operation” (business operation without obtaining business license) and “unapproved business operation” (business operation without other governmental approvals and permits).
5. “Basic Medical Care Programs for Rural and Urban Residents Consolidation Opinion” Released
On January 3, 2016, the State Council released the Opinion on Consolidation of Basic Medical Insurance Programs of Rural and Urban Residents, which instructs government administrations at central and local levels to consolidate two of the three major basic health insurance programs in China. Currently, China employs a total of three major health insurance programs: the New Rural Cooperate Medical Scheme (“NRCMS”), which targets rural residents; the Urban Employees Basic Medical Insurance (“UE-BMI”), which targets urban residents who are employed; and Urban Residents Basic Medical Insurance (“UR-BMI”), which targets urban residents who are not covered by UE-BMI, including children, students, the elderly and the disabled. Each of the three programs is distinct with regard to source of funding, scope of coverage and payment standard. The Opinion proposes to consolidate the NRCMS and the UR-BMI into a single Urban and Rural Resident Basic Medical Insurance (“U&R-BMI”) program, covering both urban and rural residents under NRCMS and UR-BMI programs. The Opinion requires local government to formulate a reform timeline and work plan prior to the end of June, 2016, and to formulate specific implementation measures prior to the end of December, 2016.
6. Draft Amendment to Insurance Funds Usage Rule Open for Comment
On March 8, 2016, the China Insurance Regulatory Commission (“CIRC”) released for public comment a draft amendment to the Measures for Administration of Insurance Fund Usage, with a public comment period that opens until March 31, 2016. The Measures govern the investment and usage of insurance funds, including capital, additional paid-in capital, undistributed profits, reserves and other funds of insurance companies. The draft Amendment has multiple aspects.
First, at least in part, the substance of the draft Amendment suggests that CIRC will continue to liberalize insurance fund investment. For example, one established condition for an insurance fund to invest in a securities investment fund is that the net asset of the fund manager of such securities investment fund must exceed RMB100 million for three consecutive years, implying a three year seasoning requirement for such managers. Under the draft Amendment, the net asset requirement is removed and the seasoning requirement is only one year. The likely effect of this relaxation is to provide insurance companies with greater options in selection of securities investment funds.
Second, the draft Amendment may also be understood as updating the Measures to accord with CIRC’s current regulatory practices. For example, the draft Amendment removes the prohibition of venture capital fund investment. In fact, CIRC has allowed such investments since December, 2014, pursuant to the Circular on Venture Capital Investment by Insurance Funds.
Third, CIRC is also taking the opportunity to strengthen oversight over the risk management of insurance fund investment. For example, under the current Measures, CIRC review and approval is required in the case of a “major equity investment” by an insurance company in a target enterprise. Pursuant to the draft Amendment, the CIRC review and approval requirement is extended to insurance company investments that do not yield a controlling interest. However, the draft Amendment is silent with regard to the precise criteria, e.g., percentage of equity ownership or amount of investment, which would trigger the CIRC approval requirement, but notes that such criteria will be adopted by CIRC separately.
7. Revised Qualification Test Requirements Released and Effective as of January 18, 2016
On January 18, 2016, CIRC released the Measures for Qualification Tests for Directors, Supervisors and Senior Officers of Insurance Institutions, which became effective upon release. Any prospective member of the board of directors, board of supervisors or senior officers (including, any general manager, deputy general manager, assistant general manager, secretary of the board of directors, chief compliance officer, chief actuary, chief financial officer, chief audit officer, insurance asset management companies’ chief risk officer, or chief representative of a foreign insurance institution) of an insurance institution (including life, property and casualty insurance companies, reinsurance companies, insurance asset management companies, insurance group companies, etc.) must first pass a qualification test before applying to CIRC for approval of an individual’s qualifications for such position. According to the Measures, the test is a closed-book exam which consists of single- and/or multiple-choice and true-or-false questions, as well as essay and case analysis questions. Non-Chinese test-takers with limited Chinese language proficiency are permitted additional time to complete the examination; however, the amount of additional allotted time is unspecified, and such test-takers also may be accompanied by a translator. Any test-taker must obtain a score of 60% or above in order to pass the test. Successful test-takers must subsequently apply to CIRC within one year for approval of their qualifications, after which the score will become invalid. For those whose qualifications have already been approved by CIRC, the test is generally to be waived in connection with transfers between similar positions, subject to certain limitations. Generally the test is to be held every two months. Any person who fails the test on the first attempt may apply for a make-up exam, but will be limited to a maximum of two make-up exams within a single year.
8. Revised CIRC Fee Structure Published
On January 25, 2016, CIRC issued the Circular on Adjustment of the Supervision Fees of Insurance Industry and Other Relevant Matters, which became effective as of January 1, 2014, superseding the Circular on Adjustment of the Supervision Fees of Insurance Business and Other Relevant Matters, which was released on January 29, 2012.
By way of background, CIRC charges supervised insurance institutions (including commercial insurance companies, insurance asset management companies, insurance intermediaries and representative offices) an annual regulatory fee (the “Supervision Fee”). Previously, this Supervision Fee only consisted of a single “Business Supervision Fee.” However, according to the new Circular, the new Supervision Fee now comprises both (i) an “Institution Supervision Fee” and (ii) a “Business Supervision Fee.” For insurance companies, the amount of the annual Institution Supervision Fee is to be determined according to the registered capital of the company (and for the branches of foreign insurance companies, the operation fund), subject to a cap and/or floor specified in the Circular. For example, the rate for an insurance holding company is 0.4‰ of its registered capital, with a cap of RMB 2 million.
However, it should be noted that the applicable Institution Supervision Fee will be reduced by 50% for insurance companies and professional insurance intermediaries within the first three years of business operation. For CIRC regulated representative offices, CIRC will continue to charge a flat fee of RMB 20,000, although it is now identified as an Institution Supervision Fee rather than a Business Supervision Fee. The Business Supervision Fee has been reduced as compared with the prior scheme. The new supervision fee scheme applies retroactively to the 2014 and 2015 Supervision Fees. Depending on the specific circumstances, the net impact for different insurance institutions will vary from company to company. But the new Circular expressly provides that if the total Supervision Fee payable by a company for 2014 and 2015 under the new framework is actually higher than before, such insurance institutions are not obligated to pay the difference.
9. CIRC Streamlines Approval Process by Reducing Certain Professional Service Requirements
On March 3, 2016, CIRC issued the Circular on Cancellation of Certain Professional Service Requirements in Administrative Reviews and Approvals. According to the Circular, certain services, such as capital verification reports, audit reports, document notarization, legal opinions and accountants’ opinions, are no longer required for the purposes of CIRC’s licensing and administration of insurance enterprises in connection with, among other things, establishment of any insurance agency, brokerage or public adjustment company; mergers or acquisitions involving an insurance company or insurance asset management company; and/or qualification approval of any senior officer or a member of the board of directors or the board of supervisors.
10. Property & Casualty (“P&C”) Insurance Product Filing Reform
On February 25, 2016, CIRC published the Circular on Product Self-Registration Reform of P&C Insurance Companies, announcing a plan aimed at streamlining China’s P&C insurance product filing procedures, and providing that more detailed plans and guidelines will be released prior to the end of May, 2016. The online reporting platform itself and the related database are expected to be launched prior to the end of July, 2016. The formal implementation date is yet to be announced.
Currently, most commercial P&C insurance products are required to be filed by P&C companies directly with CIRC for registration (as opposed to approval) (“Filing Products”). According to the Circular, P&C insurance companies are to upload relevant documents and information regarding the Filing Products to an online product reporting platform, which will automatically process every Filing Product submission and complete the registration process on a real-time basis. When this step is successfully completed, the subject Filing Product will be formally registered, and the Filing Product may be offered for sale. The China Insurance Association of will be responsible for hosting and maintaining the reporting platform, and will also be responsible for communicating the relevant Filing Product data to CIRC. P&C insurance companies will no longer be required to directly file documents regarding Filing Products with CIRC for registration. CIRC will review a certain portion of the products registered via the online platform, de-register products it regards unqualified and, potentially, may impose penalties on any P&C insurance company determined at fault for incompliant online filings.
11. Internet Platform Credit Products Rule Released and Effective as of January 19, 2016
On January 19, 2016, CIRC released the Circular on Enhancement of the Administration of Internet Platform Credit Insurance Business, which became effective upon release. In light of the growth in China’s person-to-person lending business, a number of insurance companies have begun to offer credit insurance via Internet lending platforms (“Internet Platform Credit Products”). Internet Platform Credit Products mitigate the creditor’s risk of credit default and enhance the debtor’s credit. The Circular instructs insurance companies to comply with C-ROSS regulatory rules in offering Internet Platform Credit Products. With regard to the lending platforms, the Circular forbids insurance companies from working with platforms that provide credit enhancement services, establish cash pools, or commit illegal fundraising. With regard to the qualification of policyholders, the Circular instructs insurance companies to conduct financial background checks and prudentially select clients. With regard to risk management, the Circular requires insurance companies to diversify their risk by limiting the maximum liability for each loan and the total loans of a single policyholder. CIRC also instructs insurance companies to establish robust risk control mechanisms and procedures. Additionally, the Circular requires all insurance companies (including those which do not offer such products) to file a quarterly statistical report regarding the Internet Platform Credit Products.
12. Liability Insurance Statistics Rule Released
On January 21, 2016, CIRC released the Rule Regarding Liability Insurance Statistics (For Trial Implementation), which will take effect on May 1, 2016. This Rule instructs P&C insurance companies to submit a statistical report regarding their liability insurance business to a CIRC online platform on a monthly basis. The platform will be tested in the first part of April, 2016. In order to complete the test, all P&C insurance companies will be required to log-in to CIRC’s new system and submit March 2016 statistical data. The March 2016 data is to be eliminated after completion of the test. Thereafter, P&C insurance companies will be required to periodically prepare and submit formal statistical reports commencing in May, 2016. The initial report submission due in May will be unique, and will comprise two parts: (i) a consolidated report that aggregates liability insurance statistical data from January 1 to April 30, 2016 and (ii) separate liability insurance statistical reports for each individual month (i.e., January, February and March, 2016), all of which must be submitted in May. Afterwards, only monthly reports reflecting the prior month’s data will be required.
13. List of Tax-Preferential Health Insurance Underwriters Released
On February 14, 2016, CIRC released the List of Insurance Companies Permitted to Underwrite Health Insurance Qualified for Preferential Individual Income Taxation. According to the List, only three insurance companies are currently permitted to write tax-preferential health policies, i.e., PICC Health Insurance Company Ltd., Sunshine Life Insurance Co., Ltd. and Taikang Pension & Insurance Co., Ltd. Pursuant to a pilot program that commenced on January 1, 2016, qualified policyholders of tax-preferential health policies may claim an individual income tax deduction against taxable income in an amount equal to their paid insurance premium, up to a cap of RMB 2,400 per year. This pilot program encompasses thirty-one cities including Beijing, Shanghai, Tianjin and Chongqing, as well as most of the provincial capitals and certain other selected cities. CIRC noted that it will continue to review applications and update the List from time-to-time.
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