Doing Business with China

American International Group (AIG) was the first foreign insurance firm permitted to operate in China, in 1992. According to Xiaoping Wu, vice chairman of CIRC, 34 foreign insurance companies have been granted permission to operate some form of insurance business in China, while 112 foreign firms from 19 countries have set up 199 representative offices and are waiting for permission to establish their own insurance operations in China. The operation area was restricted to Shanghai and Guangzhou; now they are permitted to spread across coastal cities as far north as Dalian and some are permitted to penetrate inland cities such as Wuhan, Chongqing and Chengdu. In 2001, foreign insurance firms achieved a total premium revenue of US$39.02 billion.

Despite the restrictions, foreign insurance firms have experienced rapid growth. In 2001, they registered revenue of US$0.4 billion. In Shanghai, they have already seized a market share of 14.4 per cent of the life insurance market and 6.7 per cent of the property insurance market and in Guangzhou 11.8 per cent and 1.5 per cent respectively.

According to the Administrative Rules on Foreign Invested Insurance Companies (2001), foreign insurance firms can apply to CIRC for permission to set up either joint ventures or wholly owned entities in China. However, they must meet the following criteria:

• At least 30 years ' history in the insurance market;

• Having had a representative office in China for at least two years;

• A minimum total asset base of US$5 billion at the year end before application;

• Their home country has a complete regulatory system over the insurance industry;

• Permission from home country regulatory body.

The following documents are required to be filed with CIRC:

• Application letter (to be countersigned by the Chinese partner in the case of a joint venture);

• Business licence and certificate for indemnity capability issued by the home country regulatory bodies;

• Articles of association and annual reports for the past three years;

• Application materials by Chinese party in the case of joint venture;

• Feasibility study and business plan;

• List of names and profiles of all persons responsible for the new entity;

• Other materials as requested by CIRC.

CIRC shall notify the applicant within six months from the date of full application after the due diligence review. Upon notification of initial approval, the applicant is given one year to prepare for the establishment of the insurance entity in China. Along with the completed standard application form, the applicant shall file the following documents with CIRC for approval:

• Summary report;

• Articles of association for the new entity;

• List of shareholders and intended capital contribution by each party;

• Certificate of capital contribution by official organisations;

• Power of attorney to nominated managers and introduction of their professional background;

• Business plan for the following three years;

• Intended insurance clauses, rate of premium and statement of liability reserve fund;

• Intended premises, facilities for business operation;

• Guarantee letter against liabilities of the subsidiary from parent company;

• Joint venture contract in the case of joint venture arrangement.

CIRC shall make a final decision within 60 days of the official application. If approved, a business licence to engage in insurance shall be issued. The business licence specifies the scope and geographical areas of business activities together with the target market segments to be served by the insurance entity.

In addition, new insurance entities set up in China are subject to the following restrictions:

• They are required to have a minimum paid-up registered capital of RMB200 million or equivalent. CIRC shall reserve the option to raise the bar for the requirement over the registered capital. After the business is established, 20 per cent of the registered capital will be deposited into an escrow account in China designated by CIRC as a warranty fund.

• They must arrange for 30 per cent of their business to be reinsured with designated Chinese insurance firms.

• A single entity is not permitted to engage in both property and life insurance.

• The currency unit of the account shall be in the Chinese local currency.

In spite of the difficulties in obtaining approval, foreign insurance firms do enjoy certain preferential treatments in China. For instance, while Chinese domestic firms have to pay income tax at a rate of 33 per cent, foreign firms pay only 15 per cent. In addition, foreign firms are permitted to engage in the stock market and purchase corporate bonds .

According to the Agreement reached between China and the USA as well as its commitment as a member of WTO, China will fully open its insurance market within the next five years. In the meantime, China is taking full advantage of the five years transitional period granted through the WTO negotiation to hold the pace of market liberalization. According to a recent paper published in the People's Daily , China intends to restrain the market share occupied by foreign insurance firms to 5 per cent within the next five-year transitional period and 10 per cent within the following 10 years.

In November 2001, the Fortis Group, a Benelux based giant with a market capitalization of 37.7 billion euros, invested US$88 million in 24.7 per cent of the equity interest in the TaiPing Life Insurance Company held by CIG and its subsidiary China Insurance International Holding Company(CIIH), thus became the first foreign company with the largest equity position in Chinese insurance companies.