China toughens insurer ownership management to defuse risks

BEIJING - A revised regulation on investment in insurance companies will come into effect on April 10, a proactive approach by the Chinese government to financial risk.

Comprising 94 articles in nine sections, the revised Ownership Management Method for Insurers is wider in scope and more specific in its stipulations than the 2010 version.

The instrument has been revised to cover more possible challenges facing the industry, according to He Xiaofeng, director of the Development and Reform Department of the China Insurance Regulatory Commission (CIRC).

A CIRC statement explained that the new regulation puts potential investors in insurers through tighter scrutiny, including review of qualifications, background checks and business track records.

A negative list will prevent problematic investors entering the insurance industry as well as improper transfer of interests.

The regulation also divides shareholders to categories including financial investors, strategic investors and controlling investors, and sets clear requirements on the isolation of risk, connected transactions and information disclosure.

The upper limit of ownership by a single shareholder has been reduced from 51 percent to one-third.

"If shares are too concentrated, checks and balances will be difficult, while minority shareholders' interests can easily be ignored," said He Xiaofeng.

If ownership is too scattered, a company may face the danger of insider control while shareholders may prefer to be free riders, which will restrict the company's development, he explained.

Cao Xiaoying, deputy chief of the Institutional Management Bureau of the CIRC Development and Reform Department, said that in principle, no retroactive adjustment will be required by most existing insurers, but for those with risky ownership structure, specific guidance will be granted.

All new insurers must follow the regulation, Cao said.

The CIRC also requires a check of the authenticity of the investment by any shareholder. The source of an investment must be confirmed to prevent the use of non-equity funds.

Investors attempting to invest in an insurer with non-equity funds will be required to transfer their ownership, risk losing their administrative licenses or be restricted from investing in the sector.

Although China's insurance industry has advanced in its overall competence, a few insurers are running their business recklessly.

The typical problems identified by the CIRC include complex ownership structure, actual controllers gaining mastery in corporate governance, fraudulent investment, misusing insurance premium as investment or running an insurer as a financing vehicle.

Further documents will be released on subjects including management of independent directors and corporate governance.