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JT&N's PRC Insurance News Alert (May, 2016)

2016-05-31/ARTICLES/

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 March, 2016. To receive a back issue or to contact us please email: jtninsurance@jtn.com

1. Value Added Tax Reform Expanded as of May 1, 2016

On March 23, 2016, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly promulgated the “Circular on the Launch of the Value Added Tax (“VAT”) in Replacement of the Business Tax Pilot Program” announcing that, effective May 1, 2016, all industries which were charged business tax prior to May 1, 2016 are now required to pay VAT.  Specifically, taxpayers in the construction, real estate, financial and consumer services industries have been affected.  The VAT rate is set at 6% for the financial and consumer services industries, and 11% for the construction and real estate industries.
 
The Circular does not address certain concerns relevant to the insurance industry.  For example, under this new VAT scheme, premiums received by an insurer are subject to a 6% tax.  However, the Circular does not provide a mechanism for an insurer to claim an input tax credit to offset output tax in handling claims.  Additionally, further uncertainties exist with respect to VAT treatment for reinsurance transactions, insurance company gains on investment, and commissions. 

2. Draft Market Access Negative List Released

On March 2, 2016, the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) jointly published the “Draft Market Access Negative List (Pilot Version)” (the “M.A. Negative List”) for implementation in the provinces and municipalities of Fujian, Guangdong, Shanghai and Tianjin.  By way of background, the PRC Negative List system consists of two types of Negative Lists: (i) an M.A. Negative List, which is generally applicable to all investors, both foreign and domestic, and (ii) a Foreign Investment Negative List (“F.I. Negative List”) which, as its name implies, specifically applies to foreign investors.  Historically, investment projects have been reviewed by relevant governmental authorities on a case-by-case basis.  But pursuant to a “negative lists” framework, generally speaking, any investment activities are permitted unless they are otherwise prohibited or restricted under the applicable lists.   For a foreign investor, the M.A. Negative List should be read in conjunction with the F.I. Negative List as investment by a foreign investor may be restricted or prohibited by either list. 

The new M.A. Negative List includes a total of 328 items, some of which are subject to governmental review and approval (identified as “Restricted”), while others are prohibited (identified as “Prohibited”).  Insurance is a restricted item on the M.A. Negative List, which means that investment is permitted as long as the investor meets applicable regulatory requirements.  To date, the PRC Negative List system has not been implemented on a nationwide basis.  On April 8, 2015, the State Council published the “Special Administrative Measures for Foreign Investments in Free Trade Zones,” which approved the F.I. Negative list in free trade zones.  The above noted M.A. Negative List, on the other hand, will first be piloted in Fujian, Guangdong, Shanghai and Tianjin.  The governments of the pilot provinces and municipalities are charged with the responsibility to prepare plans to implement the M.A. Negative List and submit them to the State Council for approval.  According to the “Opinion of Implementing Market Access Negative List System,” which was promulgated by the State Council on October 2, 2015, a nationwide M.A. Negative List system will be implemented in 2018.

3. Amendment to SAIC Registration Rules

On April 29, 2016, the State Administration for Industry and Commerce (“SAIC”) promulgated the “Decision on Repealing and Amending Certain Rules,” which became effective on the same day.  SAIC acts as, among other things, a corporate registration authority in the PRC.  Foreign and foreign invested enterprises are affected by the amendments to several rules governing SAIC registration, including (i) the “Implementation Measures for Enterprise Legal Person Registration,” (ii) the “Registration Measures for Foreign Enterprises Operating in the PRC,” (iii) the “Measures for Delegation of Foreign Invested Enterprises Registration,” and (iv) the “Registration Measures for Equity Pledges.” The new Decision primarily concerns foreign and foreign invested enterprises.  For example, procedures for registering a pledge on the equity of a foreign-invested enterprise have been simplified.  Previously, a foreign investment approval authority (primarily MOFCOM or the cognizant industry regulator, as applicable) must approve a pledge before such pledge was registered with SAIC.  Now, however, any party may register a pledge on the equity of a foreign-invested enterprise directly with SAIC.

4. Draft Insurance Companies NEEQ Quotation Rule

On April 14, 2016, CIRC released for public comment the draft “Circular on Insurance Companies’ Quotation on China’s National Equities Exchange and Quotations” (“NEEQ”), with a public comment period that closed on April 24, 2016.  NEEQ, also known as the “New Third Board,” was launched in Beijing in 2012 as an OTC market.  Currently, more than 6,000 companies are quoted and traded there.  The draft Rule permits an insurance company to be publicly quoted and have its shares traded on NEEQ after obtaining CIRC approval.  Only an insurance company that satisfies prudential requirements prescribed by CIRC and has no record of material violations of laws and regulations within a three-year period preceding the date of application is eligible to apply for NEEQ quotation. 
 
In the case of a NEEQ quoted insurance company, a shareholder must apply to CIRC to affirm its qualifications within fifteen calendar days after its equity interest in the insurance company reaches a threshold of 5% via equity trade on NEEQ.  In such circumstances, if CIRC should determine that the qualifications of such shareholder are insufficient, CIRC may order the shareholder to divest its equity interest in the company.

5. Draft Interpretations of the PRC Company Law by Chinas Supreme Peoples Court

On April 12, 2016, China’s Supreme People’s Court released for public comment its draft Interpretations of the PRC Company Law (Part Four), with a public comment period that closed on May 13, 2016.  The Supreme People’s Court is the highest court in China and its interpretations of the law, generally speaking, are binding upon all lower courts.  The draft Interpretations primarily provide guidance with respect to the following topics: 

  • disputes regarding the legal effect of the resolutions of a board of directors or a shareholders’ meeting;

  • disputes regarding a shareholder’s information rights;

  • disputes regarding a shareholder’s rights to request dividends;

  • disputes regarding a shareholder’s preemptive rights; and

  • derivative suits.

6. Insurance System Informatization WTO TBT Notification Filed

On April 19, 2016, the WTO Committee on Technical Barriers to Trade (the “TBT Committee”) circulated China’s notification regarding the proposed “Provisions on Insurance System Informatization (Draft for Comments),” which was filed by the PRC government pursuant to the Agreement on Technical Barriers to Trade (the “TBT Agreement”).  The TBT Agreement is a multilateral agreement administered by the WTO that aims to ensure that technical regulations, standards, and conformity assessment procedures are non-discriminatory and do not create unnecessary obstacles to trade.  Pursuant to the TBT Agreement, before adopting a technical standard, a member state is obligated to notify the other member states through the TBT Committee and allow a period of at least sixty days for comments.  According to China’s Notification, the draft Provisions are expected to be adopted after sixty days from the circulation and become effective after six months from the adoption.
 
If adopted, the draft Provisions would regulate the use of information technology in the insurance sector, superseding the “Guidance on Administration of Informatization Work in Insurance Companies (for Trial Implementation),” which was issued by CIRC on December 29, 2009.  The draft Provisions propose a number of significant changes to insurance industry informatization regulation, including broadened applicability, new corporate governance obligations, reporting requirements, and technology standards, as well as mandating the establishment of a senior-level “Chief Information Officer” to oversee company informatization plans and operations. 
 
CIRC originally released for public comment an earlier version of the draft Provisions on October 9, 2015.  Compared with that earlier version, the version filed to the TBT Committee removed several provisions, including a provision that would require insurance institutions to adopt domestic algorithms.  However, the majority of the provisions remain unchanged, including the provisions regarding “secure and controllable” device and software (Article 54), and data center location (Article 31).

7. Draft Domain Name Administration Rule

On March 25, 2016, the Ministry of Industry and Information Technology (“MIIT”) released for public comment the “Measures for Internet Domain Name Administration” with a public comment period that closed on April 25, 2016.  If adopted, these draft Measures will supersede the “Measures for China Internet Domain Name Administration” which were promulgated by the Ministry of Information Industry (the MIIT predecessor) on November 5, 2004, and effective December 20, 2004.  One of the most discussed provisions is Article 37, which expressly provides that all Internet domain names that access the Internet from within the PRC must be registered through a PRC government-licensed service provider that has established a domestic presence in China.  MIIT clarified that the draft Measures would not affect websites that access the Internet from outside the PRC and would not affect the PRC business of foreign enterprises.  However, the precise meaning of this article remains subject to differing interpretations.

8. Insurance Company Compliance Rule Revised

On May 6, 2016, CIRC promulgated the “Circular on Improving Insurance Company Compliance Administration,” which will take effect on June 1, 2016, superseding the “Circular on the Application of Insurance Companies Compliance Administration Guidelines,” which was issued by CIRC on April 18, 2008.  The new Circular revises the qualification requirements for the Chief Compliance Officer.  Specifically, proficiency in Chinese is no longer stipulated, and the experience requirement has been relaxed to require an individual with more than two years of experience as a manager in a large or medium-sized enterprise, or as an officer in a governmental agency.  Other Chief Compliance Officer qualification requirements have been adjusted to conform with those stipulated in the “Provisions on the Qualifications of Directors, Supervisors and Senior Managers of Insurance Companies,” which were promulgated by CIRC on January 23, 2014.  CIRC originally released the draft of this new Circular on December 3, 2015.  In comparison with that draft, the promulgated version omits a provision that would require provincial branches to establish compliance departments.

9. Equity and Real Estate Investment Disclosure Rule Released

On May 4, 2016, CIRC promulgated the “Information Disclosure Standard No. 4: Large Investment in Unlisted Equity and Real Estate,” which became effective on the same day.  The new Rule applies to insurance companies, insurance holding companies and insurance asset management companies, as well as their respective non-insurance subsidiaries.  Pursuant to the new Rule, insurance institutions are obligated to make standard and detailed disclosures whenever their investment in an unlisted company or real estate project exceeds certain thresholds.  Disclosure obligations under this new Rule may be waived by CIRC under certain circumstances, such as if the disclosure is already made in accordance with listing rules or related transaction rules, or if state secrecy is involved.

10. Draft Equity Information Disclosure Rule Released

On May 5, 2016, CIRC released for public comment the draft “Circular on Improving Insurance Company Equity Information Disclosure,” with a comment period that closed on May 12, 2016.  The draft Circular governs information disclosure of (i) change in capital, (ii) change of shareholders whose shareholding exceeds 5%, and (iii) establishment of new insurance companies.  If promulgated, the new Circular would require insurance companies to disclose specified equity information on the form provided therein.

11. Draft Related Transaction Disclosure Rule

On May 5, 2016, CIRC released for public comment the draft “Circular on Improving Insurance Company Related Transaction Information Disclosure,” with a comment period that closed on May 8, 2016.  Pursuant to the draft Rule, certain prescribed related transactions must be disclosed on a trade-by-trade basis, while other related transactions could be disclosed periodically in consolidated reports.  The draft Rule also adjusts the standard for identification of a “Material Related Transaction” (“MRT”) described in the “Interim Measures for the Administration of Related Transactions of Insurance Companies,” which was promulgated by CIRC on April 6, 2007.  Pursuant to the draft Rule, MRTs are subject to relatively greater scrutiny both internally, within the insurance company, and externally by CIRC.  Compared with the current MRT standard, the new standard would be expanded to encompass a broader scope of related transactions.

12. Draft Measures on Domestic Systemically Important Insurers

On March 18, 2016, CIRC released for public comment the draft “Measures for the Supervision of Domestic Systemically Important Insurers” (“D-SII”), with a public comment period that closed on March 25, 2016.  A D-SII refers to an insurance company, insurance holding company, and/or a subsidiary that is identified by CIRC as being so significant that operational disruption could entail systemic risks to the PRC economy.  The draft Measures provide for enhanced supervision over D-SIIs with respect to corporate governance, risk management and other aspects.  For example, CIRC could impose increased capital requirements and otherwise require D-SIIs to operate with greater safety margins.  However, the Draft Measures do not prescribe standards for identification of a D-SII.

13. Bancassurance Licensing Rule Released

On April 25, 2016, CIRC promulgated the “Administrative Rule for the Part-time Insurance Agency Licensing of Banks,” which changes the PRC bancassurance licensing process.  Previously, in order to engage in the part-time insurance agency business, each bank branch must individually apply for a bancassurance license.  But under the new Rule, license applications are to be centralized at the bank headquarters level.  Commencing from June 1, 2016, a bank headquarters may apply for a part-time insurance agency license via an online system established by CIRC and, henceforth, bank branches will conduct part-time insurance agency business pursuant to authorizations issued by a licensed headquarters.  Bank headquarters are to report bank branch bancassurance authorizations to the relevant local CIRC bureau by means of the CIRC online system noted above.  The term of validity for a part-time insurance agency license will remain three years.
 
In terms of transitional requirements, banks whose headquarters have previously obtained part-time insurance agency licenses must register via CIRC’s online system prior to July 29, 2016 and, additionally, must require any branches maintaining part-time insurance agency licenses to return their licenses to CIRC.  Bank headquarters which are not licensed but which control licensed branches must also complete the above noted online application process. 
 
Of note, the new Rule also includes a provision (Article 15) governing the mutual representation between life and P&C insurance companies.  Within one fiscal year one life insurance company may represent only one P&C insurance company and one P&C insurance company may represent only one life insurance company.  This restriction, however, does not apply when subsidiaries of the same insurance group represent each other.

14. Supervision over Short/Mid-Term Life Products Enhanced

On March 7, 2016, CIRC promulgated the “Circular on Regulation on Short/Mid-Term Life Products” (“SMTL Products”), which took effect on March 21, 2016, superseding the “Circular on Regulating High-Cash Value Products,” which was promulgated by CIRC on January 29, 2014.  The term SMTL Product refers to a life insurance product (other than an investment-linked insurance product or variable annuity insurance product) with the following characteristics:

  • The total premium paid is less than the sum of policy cash value and cumulative survival benefits at the end of any of the preceding four policy years;

  • The duration of more than 60% of total policies issued (the “Expected Duration”) is expected to be less than five years.

According to the new Circular, insurance companies are prohibited from selling SMTL Products with an Expected Duration of less than one year, and are required to reduce the scale of any SMTL Product with an Expected Duration of less than three years, in accordance with the schedule prescribed by CIRC in the new Circular.

15. Residential Earthquake Insurance Implementation Plan Released

On May 11, 2016, CIRC and MOF jointly released the “Implementation Plan of Urban and Rural Residential Earthquake Insurance.”  Residential earthquake insurance insures urban and rural residential properties and indoor ancillary facilities against the risk of earthquakes and secondary disasters caused by earthquakes, such as tsunami, fire, and explosion.   Pursuant to the new Plan, the basic insured amount will be RMB 20,000 for a rural residential property and RMB 50,000 for an urban property.  The basic insured amount may be adjusted with reference to the property’s market value with a cap up to RMB 1,000,000.  Earthquake insurance will be primarily based on a model clause to be released by the Insurance Association of China.  In April 2015, the China Earthquake Insurance Consortium for Urban and Rural Residential Properties was established by forty-five P&C insurance companies and is expected to play an instrumental role in administration of the new PRC earthquake insurance system.


Attorney Advertising. This information is offered only for general informational and educational purposes. It is not offered as and does not constitute legal advice or legal opinion. This material is intended, but not promised or guaranteed to be current, complete or up-to-date. Communication of the information is not intended to create, and the receipt does not constitute, an attorney-client relationship. You should not act or rely on any information contained in this material without first seeking the advice of a qualified attorney. 

Copyright 2016 JT&N

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