The opening-up of the Chinese insurance asset management market
Tuesday 14 March 2023
Harrison (Hui) Jia Hui
DeHeng Law Offices, Beijing
jiahui@dehenglaw.com
Ranran Fu
DeHeng Law Offices, Beijing
furr@dehenglaw.com
Yisheng Yu
DeHeng Law Offices, Beijing
yuys@dehenglaw.com
Label: /opening-up-the-Chinese-insurance-asset-management-market
Synopsis: On 21 July 2021, Allianz (China) Insurance Holding Company Limited obtained the approval of business commencement from China Banking and Insurance Regulatory Commission (CBIRC), becoming the first wholly foreign-owned insurance asset management company approved for business commencement in China.
The opening-up of the Chinese insurance asset management market
Harrison (Hui) Jia Hui
DeHeng Law Offices, Beijing
jiahui@dehenglaw.com
Ranran Fu
DeHeng Law Offices, Beijing
furr@dehenglaw.com
Yisheng Yu
DeHeng Law Offices, Beijing
yuys@dehenglaw.com
Introduction
On 21 July 2021, Allianz (China) Insurance Holding Company Limited (hereinafter referred to as ‘Allianz Asset Management’) obtained the approval of business commencement from China Banking and Insurance Regulatory Commission (CBIRC), becoming the first wholly foreign-owned insurance asset management company approved for business commencement in China. The approval of Allianz Asset Management marks the further opening of the insurance asset management market to foreign investment. Prior to the approval of Allianz Asset Management, ICBC-AXA Asset Management Company Limited, Bocommlife Asset Management Co Ltd, CITIC Prudential Asset Management Co Ltd, and Cigna & CMB Asset Management Company Limited had been approved and started operation successively. The introduction and entry of Sino-foreign joint ventures and wholly foreign-owned insurance asset management companies will bring a more profound impact on the Chinese insurance asset management market.
The opening-up of the insurance asset management market to foreign investment
The opening-up of the insurance industry is needed for the healthy development of the Chinese insurance industry. Since 2018, China’s insurance industry has been gradually opening. In line with the trend of opening-up China’s insurance industry, China’s insurance asset management market has also won the favour of foreign capital. On 21 April 2004, the Interim Provisions on the Administration of Insurance Assets Management Companies (‘2004 Interim Provisions’) was promulgated and implemented, which requires that the total shares held by a domestic insurance company in an insurance asset management company (IAMC) shall not be less than 75 per cent and thus opened the policy window for the establishment of Sino-foreign joint venture IAMCs.
On 10 April 2018, Chinese President Xi Jinping, in a speech at the 2018 Boao Forum, announced China’s decision to take a series of major new measures in expanding opening. In April 2018, CBIRC issued the CBIRC Accelerates Implementing Opening-up Initiatives for Banking and Insurance Sectors. In May 2019, CBIRC proposed 12 new opening-up policies and measures for the banking and insurance industries, including such measures as: allowing overseas financial institutions to invest in equity in Sino-foreign joint venture insurance companies in China; cancelling the requirements for foreign insurance brokerage companies to operate insurance brokerage business in China for no less than 30 years and with total assets of no less than USD 200m; allowing foreign insurance group companies to invest and establish insurance institutions in China; and allowing domestic entities of foreign-funded insurance group companies to establish insurance institutions based on the same qualification requirements of Chinese insurance group companies.
In July 2019, the Financial Stability and Development Committee under the State Council issued the Measures for Further Opening Up the Financial Industry and introduced 11 new policies and measures, including the relaxation of access conditions for overseas insurance companies, and the transition period of raising the limit of foreign equity restrictions in life insurance field from 51 to 100 per cent was advanced to the year 2020. In October 2019, the Decision of the State Council on Revising the Administrative Regulations of the People’s Republic of China on Foreign-invested Insurance Companies and the Administrative Regulations of the People’s Republic of China on Foreign-invested Banks were officially announced. Two months later (in December 2019), the CBIRC revised and issued the Implementing Rules for the Administrative Regulations of the People’s Republic of China on Foreign-funded Insurance Companies, further implementing the requirements of the latest opening-up measures for the insurance industry.
In response to the requirement of further opening-up the insurance industry, CBIRC released the Administrative Provisions on Insurance Asset Management Companies (the ‘2022 Provisions’) on 5 August 2022. Some restrictions in the 2004 Interim Provisions are deleted in the 2022 Provisions, including the shareholding ratio limit imposed on an overseas insurance group in investing in IAMCs. The 2022 Provisions stipulates that the total shareholding ratio of domestic and overseas insurance group (holding) companies and insurance companies exceeds 50 per cent and overseas entities shall not be treated differently, implying the comprehensive opening-up of China’s insurance asset management industry.
Key regulatory points of the new administrative provisions on insurance asset management companies
The 2022 Provisions consists of seven chapters and 85 articles, including sections on: the general provisions; establishment; change and termination; corporate governance; business rules; risk management; supervision and regulation; and supplementary provisions. After the promulgation of the 2022 Provisions, the 2004 Interim Provisions, the Circular on Adjusting the Interim Provisions on the Administration of IAMCs (‘Circular No 19’, and the Circular on Issues Concerning the IAMCs (‘Circular No 90’) were repealed simultaneously.
Establishment of IAMCs and subsidiaries
Cancelling the restrictions on foreign ownership in equity and reducing the requirements on the overall shareholding ratio of insurance companies:
The 2022 Provisions directly specify that overseas insurance group (holding) companies may be a shareholder of IAMCs. In terms of the supervision of equity structure, the 2022 Provisions no longer limits the upper limit of the shareholding ratio of foreign shareholders.
Unifying the qualifications of shareholders and adjusting the qualification requirements for founders:
Regarding the qualifications of shareholders, it requires a unified shareholder qualification for both domestic and foreign shareholders in the 2022 Provisions, adding that shareholders are required to have good governance institutions, internal control mechanisms and good social reputation, credit records and tax payment records. At the same time, there are new requirements on shareholders in acquiring shares with legal self-owned fund other than debts and entrusted funds in order to avoid and prevent the frequent occurrence of illegal capital contribution by shareholders.
The 2022 Provisions introduce the conditions of the ‘main sponsors’ who shall meet the requirements of (inter alia) years of operation, no record of major violation of laws and regulations, and good financial conditions, in addition to the unified shareholder qualification standards applicable to domestic and foreign shareholders. Furthermore, the minimum requirements for the total assets of shareholders are revised from ‘the total assets of the insurance group (holding) company shall not be less than RMB15 billion’ required in Circular No19 to ‘the total assets of the main sponsor and other insurance company shareholders of the IAMC at the end of the latest year are not less than CNY50 billion or the equivalent value in a freely convertible currency’ [emphasis added] as stipulated in the 2022 Provisions. The solvency adequacy requirement remains 150 per cent; however, specific time requirements for the assessment of the solvency are set out (ie, ‘comprehensive solvency adequacy ratio in the latest four quarters shall not be less than 150%’).
Clarifying the relevant requirements for the establishment of subsidiaries:
In Circular No19 and Circular No 90, it is proposed that IAMCs insurance information company may establish subsidiaries in accordance with the relevant provisions, but did not specify the types, conditions and supervisory regulations. No relevant requirements about the establishment of subsidiaries of IAMCs are mentioned in the 2004 Interim Provisions, while Article 22 of the 2022 Provisions specifies the scope of subsidiaries that IAMCs may establish, namely, wealth management, publicly offered funds, privately offered funds, real estate, infrastructure, and other subsidiaries engaged in asset management business or asset management-related business, and specifies the specific conditions for IAMCs to apply for establishing subsidiaries.
Corporate governance
Based on the regulatory requirements of the CBIRC on the governance of insurance companies, the 2022 Provisions adds a new chapter specifically stipulating the corporate governance of IAMCs, providing for the general requirements on corporate governance, shareholders’ obligations, shareholders’ meetings, and separation of:
IAMCs are required to establish an effective risk isolation mechanism with shareholders and strictly regulate the exercise of shareholders’ rights.
Under the 2022 Provisions, the prohibitive acts of insurance asset management companies stipulated in the 2004 Interim Provisions will be changed into the prohibitive acts of shareholders and actual controllers of IAMCs. It sets key requirements for shareholders’ illegal acts, such as false capital contribution, withdrawal of capital contribution, possession or transfer of assets of IAMCs, concealment of affiliation by shareholders, and damage to the interests of related parties by taking advantage of the status of shareholders, which embodies the importance that the CBIRC attaches to the supervision of shareholders’ behaviours in terms of corporate governance.
Business rules
Expanding business scope:
In terms of business scope, based on Circular No 19, the new regulations further expand the business of IAMCs from the business of insurance asset management products to asset securitisation, insurance private equity fund and other businesses, and add investment consulting, investment advisory, and professional services such as operation, accounting and risk management related to asset management business. Additionally, the new regulations classify ‘pension funds, corporate annuities, housing provident funds, and other institutional funds’ mentioned in Circular No 19 as ‘other funds’, including ‘basic pension insurance fund, social security fund, enterprise annuity fund and occupational annuity fund’.
Broadening the scope of use of self-owned funds[RH2] :
The 2004 Interim Provisions requires IAMCs to calculate the investment ratio of their self-owned funds and entrusted funds respectively in terms of investment channels and investment targets. The 2022 Provisions broadens the scope of the use of the self-owned funds of IAMCs, clearly stipulating that self-owned funds may be used for financial asset investment and equity investment related to asset management business and may purchase real estate for self-use. It also specifies the requirements on the proportion of holding-assets with relatively high liquidity, and clearly requiring that IAMCs shall not directly invest in listed stocks, futures and other derivatives.
Prohibiting channel business expressly:
The 2022 Provisions add the fourth paragraph of Article 57 of the prohibited behaviour of IAMCs, that is: ‘provide channel services to circumvent regulatory requirements in terms of investment scope, leverage constraints, etc.’, formally and explicitly prohibiting IAMCs from carrying out channel services. These provisions are also reflected in some other laws and regulations, for example: Article 22 of Guiding Opinions of the People’s Bank of China; the China Banking and Insurance Regulatory Commission; the China Securities Regulatory Commission and the State Administration of Foreign Exchange on Regulating the Asset Management Business of Financial Institutions; and Article 16 of Administrative Measures for the Entrusted Investment of Insurance Funds.
Sales management requirements:
The 2022 Provisions impose new sales management requirements on IAMCs, namely, IAMCs are required to ‘shall establish and perfect customer service standards, strengthen sales management, standardise the publicity and promotion of insurance asset management products and business, and shall not engage in unfair sales or unfair competition’, and ‘IAMCs shall perform their obligation of information disclosure in a timely manner in accordance with laws and regulations, relevant provisions of the CBIRC and the contract on insurance asset management products’, which have been effectively connected with the sales regulations in the Interim Measures for the Administration of Insurance Asset Management Products.
Risk management
Chapter V of the 2022 Provisions include the specific content of risk management of IAMCs. The risk management requirements can be divided into two categories. One is the overview requirements (ie, the risk management system and risk management requirements stipulated in Articles 63 and 64), clearly specifying that all institutions shall coordinate to establish a risk management organisational structure, and equip with corresponding departments and systems. The other category is risk management implementation requirements, which are specifically divided into seven aspects: subsidiary risk management; related-party transaction management; employee management; information management; emergency management; internal control audit supervision; and risk reserve, facilitating the multi-dimensional implementation of risk management requirements and the comprehensive formation of risk management system. The addition of this chapter reflects the regulatory trend of CBIRC in the risk management of insurance groups, insurance companies and insurance asset management companies in recent years.
Summary and outlook
The promulgation and implementation of the 2022 Provisions is a further improvement of the regulatory framework of China’s insurance asset management industry, which is conducive to enhancing the independence of IAMCs, improving the level of marketisation and specialisation, and promoting the high-quality development of the insurance asset management industry. It also puts forward new challenges and requirements for the compliance operation of IAMCs. The 2022 Provisions broadens the business scope of IAMCs, encourages IAMCs to explore new areas such as professional services related to asset management business, and promotes the diversified development of IAMCs based on professional asset management capabilities.
The 2022 Administrative Provisions no longer restricts the upper limit on the equity ratio of shares of IAMCs held by foreign insurance companies. On the one hand, it helps attract top-tier international insurance companies and asset management institutions to participate in the development of China’s insurance asset management industry, facilitating the absorption of relatively mature experience and business philosophy from abroad, thus promoting the utilisation level of domestic insurance funds to keep pace with the international market. On the other hand, the opening-up of the insurance asset management market will further intensify industry competition, and the competition for existing insurance funds will become more and more prominent.