May 11, 2018

CBIRC Issues Consultation Draft on Regulations on Insurance Company Related Party Transactions

On 3 May 2018, the China Banking & Insurance Regulatory Commission (CBIRC) issued a consultation draft paper on 'Regulations Governing Insurance Company Related Party Transactions' (Consultation Draft), seeking comment and feedback from the general public. The Consultation Draft sets out draft measures, concerning related party transactions (RPT) for insurance companies (Insurers) in the following areas of controls, reporting, disclosure and supervision:

  1. Who is a Related Party? The Consultation Draft clarifies definitions of corporations, natural persons and organisations which may be related parties of an Insurer.
  2. The Consultation Draft distinguishes between two types of RPT – ‘material’ RPTs and ‘common’ RPTs. Using these distinctions, the Consultation Draft assesses RPTs in various areas, including equity investment; asset management; insurance business operations; transfer of beneficial interests & rights; provision of services; and other areas designated by regulators.
  3. In terms of determining the monetary value of various types of RPT, the Consultation Draft specifies clearly the calculations and methodology to be used in making such determinations, including the need for case-by-case dynamic management and adjustment.
  4. In terms of allowable RPT ratios, the Consultation Draft stipulates that RPT’s in the area of an Insurer’s asset management operations should comply with three key ratios.
  5. In terms of an Insurer’s internal controls governing RPTs, the Consultation Draft provides very detailed criteria and requirements for how an Insurer’s dynamic controls and risk management should operate in this area.
  6. In terms of reporting and disclosure of RPTs, the Consultation Draft sets out highly detailed requirements concerning the content of RPT reports and filings; how/when RPT approval applications are required; and the time limits applying to all of this.
  7. In terms of supervision and regulation of RPTs, the Consultation Draft utilises the ‘dual punishment’ approach. (i) Breaching Insurers may be fined, suffer restriction of business operations, be forced to stop writing new business, or have operating licences cancelled. (ii) Responsible Officers of Breaching Insurers may face formal warnings, fines, cancellation of fit & proper criteria, and prohibition from working in the insurance sector.
  8. In terms of shareholders or controllers of Insurers who abuse their position to give effect to RPTs which damage an Insurer’s interests, the regulator may curtail or cancel normally enjoyed shareholder rights; demand rectification; or demand divestment of shareholdings.
  9. The regulations set out in the Consultation Draft will come into legal effect, subject to consultation feedback, on 1 June 2016.