China's commitment to comply with the World Trade Organization (WTO) requirements has prompted reforms in the insurance industry having taken place since its accession. In 2000, the Asian Development Bank (ADB) was invited by the Chinese government to assist China Insurance Regulatory Commission (CIRC) in strengthening its regulatory capacity. In 2001, the ADB completed a report "Capacity Building for the Insurance Sector Regulatory and Supervising System." The report contained a series of recommendations that, according to the ADB, if implemented, were expected to transform the supervisory system of the CIRC into a sound prudential regulatory arrangement, fully compatible with best practices for developing markets, including standards of the International Association of Insurance Supervisors (IAIS) issued in 2000. In 2002, China adopted the recommendations of the report and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

General Overview

According to a 2003 report prepared by the Asian Development Bank (ADB), China's commitment to comply with the World Trade Organization (WTO) requirements has prompted reforms in the insurance industry having taken place since its accession. In 2000, the ADB was invited by Chinese government to assist China Insurance Regulatory Commission (CIRC) to strengthen its regulatory framework and institutional capabilities. At the time, constraints faced by the PRC insurance sector included poor asset quality and financial position of insurance companies; weak regulatory and supervisory framework and enforcement mechanism; low management and professional standards; low standards of accounting and risk management; and the limited investment options available for insurance companies. The PRC's accession to the WTO has provided a good opportunity to strengthen competitiveness of the insurance sector for reducing debt risk, improving financial management, improving prudential supervision, strengthening capital positions, and generally improving efficiency through greater competition. (ADB 2003, Forward)

In 2001, the ADB completed a report "Capacity Building for the Insurance Sector Regulatory and Supervising System." The report contained a series of recommendations that, according to the ADB, if implemented, were expected to transform the supervisory system of the CIRC into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). The report advocates the development of a strong, risk-based insurance industry, mobilizing long-term contractual savings, and facilitating the ongoing social security reform process in the PRC by (i) strengthening the legal and regulatory framework and operational guidelines; (ii) upgrading the capabilities of the CIRC as the regulator and supervisor of the insurance sector; (iii) establishing an internal solvency rating system; (iv) developing professional and management standards; and (v) improving the financial fitness of insurance companies. (ADB 2003, Forward, p. xv; AAR 2003)

Recommendations of the report were subsequently adopted and the Insurance Law was amended in 2002 along with the issuance of revised/new implementation regulations and procedures. The regulations relate to prudential supervision, targeting fraud, control of agents, brokers, abuse of power of supervisory personnel etc. The report further helped in capacity building of the CIRC as well as strengthening the CIRC's role in educating the insurance policy holders and the general public about insurance and the need for transparent regulatory framework. The ADB stated its intent to continue to work with the Chinese Government and the market participants to ensure implementation of new amendments of the Insurance Law and associated regulations. (ADB 2003a, Forward)

According to an update on China's insurance industry published in February 2007 by Allens Arthur Robinson (AAR), the amendments to the PRC's Insurance Law are in the process of being reviewed by the State Council and may be submitted to the Standing Committee of the National People's Congress in the first half of 2007. It is expected that the proposed amendments may be passed by the PRC's legislature towards the end of 2007. These amendments will mark the first major revisions to the PRC's Insurance Law since 2002. Major amendments reportedly incorporated in the latest draft include: (1) permitting PRC insurers to expand the use of their assets particularly to include general investment in securities and real estate projects in China; and (2) enlarging the business scope of insurance companies to include management of annuity funds on trust and other businesses associated with insurance. These measures represent the PRC Government's trend towards removing barriers to the diversification of investment channels and business activity for its major financial institutions. This step might be regarded as a competitive necessity since China's insurers will be operating in a sector likely to be shared with international players entering the domestic market as China fulfils its commitments to the WTO to remove trade barriers. (AAR 2007)

The Insurance Law of 1995 (updated in 2002) provides a broad legal framework, which was intended to foster growth by providing rules relating to the formation and operation of insurance companies on the mainland. The Insurance Law focuses on two prime areas: contract and regulatory control. The contract aspect of the law details the rights and privileges of the consumer and insurer. The regulatory control aspect details the powers, responsibilities and accountability of insurers and industry bodies. The 2002 amendments to the Insurance Law represented a shift to more market-oriented and policy-based regulation. For example, companies can write their own clauses and decide premiums, whereas in the past the CIRC dictated these conditions. The amendments enabled the CIRC to monitor the solvency capability of companies according to set standards, and provide better protection for the insured by placing legal obligations on companies to train and administer their agents. To complement and provide detail for the Insurance Law, various regulations have been promulgated, including rules for the absorption of foreign equity by domestic companies, insurance brokers, insurance agents and foreign-invested insurance companies. (AAR 2003)

The CIRC was established on November 18, 1998, and is authorized by the State Council to conduct administration, supervision and regulation of the Chinese insurance market, and to ensure that the insurance industry operates stably in compliance with law. In 2003, the State Council upgraded the CIRC from a semi-ministerial institution to a ministerial institution directly under the State Council, and to expand the size of the CIRC in terms of staff, internal setup, and local offices. (CIRC website)

China's insurance industry was nationalized in the 1950s and virtually closed for a decade during the Cultural Revolution. When it reopened in 1978, the state-owned People's Insurance Company of China (PICC) monopolized the industry. The PICC's dominance began to break down in 1988 when two domestic insurance companies, Ping An Insurance Company of China Ltd (PAIC) and China Pacific Insurance Company (CPIC) were granted regional licenses. In 1990, China's Government, keen to participate in the General Agreement on Tariffs and Trade (GATT) announced it would open its insurance market to foreigners. AIG was the first to benefit, with a license issued in 1992. From then on, foreign insurers continued to be licensed in limited numbers; however, the process of getting a license was slow, and foreign insurers were permitted only to establish branches or joint ventures in specific regions. (AAR 2003)

Since its WTO entry, China's insurance industry has experienced significant changes. It has gone from being a predominantly closed market in the early 1990s, to one in which, as of 2003, foreign insurers accounted for more than half of all insurance companies. The market has grown significantly, encouraged by legislative reform, restructuring of the social security system, high levels of saving and low penetration rates. However, in comparison to Western countries, the actual market size remains small and underdeveloped, not only in terms of size but also in terms of products offered and basic infrastructure, with many places in China not even having insurance institutions. (AAR 2003)

The CIRC is a member of the International Association of Insurance Supervisors (IAIS). (IAIS website)

The Principles

ICP 1 Conditions for effective insurance supervision

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 2 Supervisory objectives

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 3 Supervisory authority

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

The CIRC was established on November 18, 1998, and is authorized by the State Council to conduct administration, supervision and regulation of the Chinese insurance market, and to ensure that the insurance industry operates stably in compliance with law. In 2003, the State Council upgraded the CIRC from a semi-ministerial institution to a ministerial institution directly under the State Council, and to expand the size of the CIRC in terms of staff, internal setup, and local offices. (CIRC website)

ICP 4 Supervisory process

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 5 Supervisory cooperation and information sharing

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

China Insurance Regulatory Commission, People's Bank of China, banking and securities regulatory institutions exercise a working system of division of labor based on co-operation, exchange of information and co-ordination of relevant policies. (CIIC website)

Hong Kong and the Mainland entered on November 26, 2004 into a Cooperative Agreement on insurance supervision to strengthen future cooperation of insurance regulators in the two places. The Agreement seeks to promote efficient, fair and stable insurance markets in both Hong Kong and the Mainland. Mutual assistance is provided in areas of administration and enforcement of the various requirements relating to the insurance business. These include development of new regulatory requirements for the conduct of insurance business and the continuous monitoring of insurance companies to ensure compliance with relevant supervisory requirements. (Gov. of HK 2004)

ICP 6 Licensing

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

As indicated on the CIRC website, the CIRC promulgated Implementation Measures on Administrative Licensing of the CIRC in 2004, which specified standardized and transparent insurance administrative licensing procedures. The CIRC has cancelled three batches of items for administrative examination and approval. Altogether, 108 items have been cancelled including the 22 items in the third batch. (CIRC website)

The Regulations of the People's Republic of China on Administration of Foreign-Invested Insurance Companies set out the criteria for foreign insurers seeking to operate in China and empower the CIRC to supervise, administer and grant licenses for insurance companies. (AAR 2003)

ICP 7 Suitability of persons

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

According to an update on China insurance industry published in February 2007 by Allens Arthur Robinson (AAR), the draft Administrative Rules on Economic Liability Audit of Directors and Senior Management Personnel of Insurance Companies (the Draft Audit Rules), issued by CIRC for consultation in December 2006, aim to reduce corporate governance risks among PRC insurers through audits of directors and senior management. The Draft Audit Rules outline an audit-based evaluation of directors and senior management personnel of insurance companies by reference to the insurer's: (1) financial liabilities and performance; (2) operational results; and (3) record of compliance with laws and regulations. (AAR 2007)

Further, the Draft Audit Rules contemplate that an audit will be conducted on directors and senior management at no less than three year intervals, although CIRC may demand a specific audit if it has reason to consider there has been a serious breach of the law, inadequate solvency ratios or unusual financial results. The Draft Rules focus on the audit process itself and not the consequences of the process. If the audit discloses serious neglect of duty by the directors and senior management, other laws within the insurance sector open the possibility for CIRC to impose administrative sanctions on the relevant individuals or they may be exposed to civil or criminal liability. CIRC proposes that the Draft Audit Rules, once implemented, will enhance its ability to exercise an oversight function in respect of corporate governance of insurance companies. (AAR 2007)

ICP 8 Changes in control and portfolio transfers

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 9 Corporate governance

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

According to an update on China insurance industry published in February 207 by Allens Arthur Robinson (AAR), the draft Administrative Rules on Economic Liability Audit of Directors and Senior Management Personnel of Insurance Companies (the Draft Audit Rules), issued by the CIRC for consultation in December 2006, aim to reduce corporate governance risks among PRC insurers through audits of directors and senior management. The Draft Audit Rules outline an audit-based evaluation of directors and senior management personnel of insurance companies by reference to the insurer's: (1) financial liabilities and performance; (2) operational results; and (3) record of compliance with laws and regulations. (AAR 2007)

Further, the Draft Audit Rules contemplate that an audit will be conducted on directors and senior management at no less than three year intervals, although the CIRC may demand a specific audit if it has reason to consider there has been a serious breach of the law, inadequate solvency ratios or unusual financial results. The Draft Rules focus on the audit process itself and not the consequences of the process. If the audit discloses serious neglect of duty by the directors and senior management, other laws within the insurance sector open the possibility for the CIRC to impose administrative sanctions on the relevant individuals or they may be exposed to civil or criminal liability. The CIRC proposes that the Draft Audit Rules, once implemented, will enhance its ability to exercise an oversight function in respect of corporate governance of insurance companies. (AAR 2007)

ICP 10 Internal control

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 11 Market analysis

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 12 Reporting to supervisors and off-site monitoring

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

According to the Chinese Institute of Certified Public Accountants (CICPA), the CIRC does not regulate the audit profession directly and is not responsible for accounting and auditing standards setting. However, the CIRC holds the responsibility of supervising and inspecting the implementation of the accounting and reporting standard by insurance companies, insurance asset managing companies and insurance intermediary institutes. (CICPA 2004)

ICP 13 On-site inspection

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 14 Preventive and corrective measures

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 15 Enforcement or sanctions

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

The CIRC is responsible for investigating and meting out punishment against unfair competition and illegal conduct of insurance institutions and individuals as well as the operations of non-insurance institutions and disguised insurance operations. (CIIC website)

ICP 16 Winding-up & exit from the market

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 17 Group-wide supervision

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 18 Risk assessment and management

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 19 Insurance activity

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 20 Liabilities

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 21 Investments

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

As stated on the CIRC website, to implement Several Opinions of the State Council on Promoting Opening-up and Stable Development of Capital Market, the CIRC has permitted direct investment of insurance funds in the stock market, allowed foreign-exchange insurance funds to be invested overseas, allowed insurance companies to invest in subordinated debts issued by banks and convertible corporate bonds, and permitted foreign-invested insurance companies to enter into deposit agreement with banks. The broadening of insurance fund management channels helps insurance companies to improve the matching of assets and liabilities, to spread investment risks and to raise investment returns. (CIRC website)

According to an update on China insurance industry published in February 2007 by Allens Arthur Robinson (AAR), on October 26, 2006, the CIRC issued the Circular on the Investment in Equity Interests of Commercial Banks by Insurance Institutions, which permits PRC insurance companies to make equity investments in unlisted PRC domestic commercial banks. The Circular sets out the parameters for investing in commercial banks by insurance companies, including an in-principle restriction on material investment in more than two banks (a 'material' investment, for these purposes, is a reference to five per cent or more of the equity in the relevant bank). Insurers have been permitted to own shares of listed PRC banks since 2004 (as evidenced, for example, by China Life Insurance Company's investments in the Bank of China and China Construction Bank). (AAR 2007)

Further, on December 21, 2006, the draft Rules on Offshore Investments of Insurance Funds were released by the CIRC. Chinese insurance companies have long been subject to stringent controls on their offshore investment activities. The Offshore Investment Rules, however, alter this position by permitting offshore investment by PRC insurance companies in the following types of financial products: (1) money market products, including commercial bills, certificates of deposit and money market funds; (2) fixed return products, including bank deposits, structured deposits, bonds, convertible bonds, securitisation products and trust products; (3) equities, including shares and equity products; (4) other products approved by the CIRC. (AAR 2007)

ICP 22 Derivatives and similar commitments

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 23 Capital adequacy and solvency

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

As stated on the CIRC website, after the promulgation of Measures on Administration of Reserves for Non-life Insurance Business of Insurance Companies (Tentative), more prudential and standardized requirements for liabilities reserving have been implemented. The promulgation of Rules of Solvency Reporting of Insurance Companies made the solvency assessment of insurance companies more scientific and accurate. A quarterly solvency report system and a specialized financial analysis system have been established. Besides, the Regulatory Opinions issued to insolvent companies, asking them to rectify by the prescribed time made the supervision of solvency adequacy stronger and more effective. (CIRC website)

ICP 24 Intermediaries

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

The 2002 amendments to the Insurance Law enable CIRC to provide better protection for the insured by placing legal obligations on companies to train and administer their agents. (AAR 2003)

ICP 25 Consumer protection

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

According to an update on China insurance industry published in May 2005 by Allens Arthur Robinson (AAR), in January 2005, the CIRC announced the establishment of an Insurance Protection Fund (IPF), which is designed to protect policyholders in the case of an insurer's bankruptcy. The Measures for the Administration of Insurance Protection Fund came into effect on January 1, 2005 and apply to all insurers, including foreign and Sino-foreign insurers. The purpose of the Measures is the regulation of the payment, management and use of the IPF, which is established to guarantee the interests of policyholders by 'effectively dissolving' financial risk and maintaining financial stability. The Measures are issued under Article 97 of the Insurance Law of the People's Republic of China. Article 97 provides that, in order to protect the interests of insured and to support the steady and safe operations of insurance companies, insurance companies shall participate in an insurance protection fund according to the provisions issued by the CIRC. (AAR 2005)

Any insurance company violating the Measures can be ordered to comply fully with the Measures and to pay a fine of between 50,000 and 300,000 yuan. Where the circumstances of the violation are considered serious: (1) the scope of the relevant insurer's business may be restricted; (2) the relevant insurer may be ordered not to take on new business; or (3) the insurer's operation license may be revoked. Senior management and other personnel found responsible for violating the Measures: (1) will be given warnings or be dismissed; and (2) may be fined between 20,000 and 100,000 yuan. (AAR 2005)

ICP 26 Information, disclosure & transparency towards the market

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 27 Fraud

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

II

In 2002, China adopted the recommendations of the Asian Development Bank (ADB) report "Capacity Building for the Insurance Sector Regulatory and Supervising System" and amended the Insurance Law of 1995 along with the issuance of revised/new implementation regulations and procedures. The adoption of the ADB recommendations was expected to transform the supervisory system of the Chinese Insurance Regulatory Commission (CIRC) into a sound prudential regulatory arrangement, fully compatible with best practice for developing markets, including standards of the International Association of Insurance Supervisors (IAIS). (ADB 2003, Forward) However, the IAIS further revised its principles in 2003 and there is no information publicly available as to China's compliance with the new Insurance Core Principles (ICPs).

On October 31, 2006, the National People's Congress passed a new Anti-Money Laundering (AML) Law, which came into effect January 1, 2007. This new law broadens the scope of existing anti-money laundering regulations to include any institution involved in money laundering. It mandates that financial and some non financial institutions maintain records on accounts and transactions, and that they report large and suspicious transactions. "Financial institutions" refers to policy banks, commercial banks, credit cooperative societies, postal savings institutions, trust companies, securities companies, futures brokerages, insurance companies and other entities that the regulatory authority in charge of anti-money laundering has designated. The law more firmly establishes the Central Bank's authority over national anti-money laundering efforts. The law also increases the number of predicate offenses for money laundering, to include fraud, bribery, and embezzlement. (U.S. DoS 2007; Heller Ehrman LLP 2007, pp.1-2)

On April 12, 2006, the People's Bank of China (PBC) proposed a series of measures aimed at curbing money laundering in the insurance, banking and securities sectors. The proposed regulations, which were circulated for comment until May 8, 2006, would require institutions to report all "block transactions" - defined as transactions worth more than 50,000 RMB (approximately $6,241) or $10,000 per day-to the PBC's anti-money laundering center for review. The proposal would also define the following as "block transactions": noncash transactions of more than 200,000 RMB or $100,000 per day and transactions between institutional accounts amounting to more than 1 million RMB or $500,000 per day. However, as of 2007, the status of these proposed regulations is unclear. (U.S. DoS 2007)