Development and Regulation of China's Insurance Market Bingzheng Chen Bingzheng Chen Sharon Tennyson Maoqi Wang Haizhen Zhou 中国保险与风险管理研究中心 China Center for Insurance and Risk Management

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation Content 1. Introduction 2. China’s Insurance Market 2.1 Market Size and Development 2.2 Insurance Market Structure 3. China’s Insurance Regulatory System 4. Evolution of Insurance Regulation and Supervision 4.1 Capital utilization regulations 4.2 Solvency Regulation 4.3 The Insurance Protection Fund 4.4 Market Surveillance 4.5 Disclosure and Consumer Protection 5. New Perspectives of Insurance Regulation in China

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation Introduction A fast-developing market An opening, modernizing regulatory system A special Political-Economic Scheme Why is China regulating Insurance Industry like this? How should we study China’s Insurance Regulation What is the future of China’s Insurance Regulation

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation China’s Insurance Market Rapid Growth Rate nominal insurance premiums increased from 460 million yuan in 1980 to 1.45 trillion yuan in 2010, an average annual premium growth rate of over 30%, compared to a nominal GDP growth rate of 16%.

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation China’s Insurance Market Still Un-Developed China ranked 61 st in insurance density and 39 th in insurance penetration among world economies in 2010.

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation China’s Insurance Market Relatively Concentrated In 2010 the non-life insurance HHI was 1850 and the HHI for life insurance was U.S. Department of Justice merger guidelines categorize markets with HHI greater than 1800 as “concentrated” (DOJ/FTC 1997). Year Insurance Companies Provincial Subsidiaries Branches HHI of China’s Non-life Insurance Market HHI of China’s Life Insurance Market

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation China’s Insurance Regulatory System People's Bank of China People's Bank of China-Insurance Division China Insurance Regulatory Committee The Insurance Law of People's Republic of China Ministry of Finance People's Bank of China The New Insurance Law of People's Republic of China

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation China’s Insurance Regulatory System

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation Evolution of Insurance Regulation and Supervision 4.1 Capital utilization regulations “Insurance Law”1995 Only in bank deposits, government bonds, financial bonds and other funds stipulated by the State Council “Temporary Regulations on the Securities Investment Fund of Insurance Companies ” 1999 Could in security funds, but the proportion and qualification of these investment should be approved by the CIRC. “Temporary Regulations on Securities Investment of Insurance Institutes” 2004 Could invest in securities through market subscription and the secondary market transactions. “Administrative Measures on Indirect Investment in Infrastructure Projects Pilot of Insurance Capital” 2006 Infrastructure projects. The balance of investment should not exceed5% the total assets in the last quarter of a life insurance company, while 2% for a property insurance company. “Temporary Administrative Measures of Overseas Investment of Insurance Capital” 2007 Could make foreign investment with the foreign reserves of its own or purchased from banks. the Second Revision of the “Insurance Law” 2009Insurance companies could invest in real estate. “Temporary Administrative Measures of Utilization of Insurance Capital” 2010 Security and security funds investment should not exceed 20%; the proportion of real estate investment should not exceed 10%; The sum of real estate related securities investment should not exceed 3%; the proportion of real estate and real estate related securities investment should not exceed 10%, etc.

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation Evolution of Insurance Regulation and Supervision 4.2 Solvency Regulation “Insurance Law”1995 only basic guidelines regarding minimum solvency requirements for insurance companies Entry into WTO2001 A ratio-based solvency monitoring system, specifying the calculation of ratios, and standards for recognizing assets. It also established measures for dealing with distressed or insolvent insurance companies The Insurance Law modification 2002 Additional strengthening of this system by revising the solvency ratios and requiring insurers to submit a periodic report on solvency ratios 2008 a dynamic risk-based solvency regulatory framework consistent with international standards.

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation Evolution of Insurance Regulation and Supervision 4.3 The Insurance Protection Fund 2005 China established an insurance guaranty fund (the Insurance Protection Fund, IPF) in January The fund was initially managed by CIRC under the oversight of an IPF Council consisting of representatives of insurance companies, the Legislative Affairs Office of the State Council, Ministry of Finance, the People’s Bank of China and others. 2007China Insurance Protection Fund Ltd. Co. was established established rules for the major business operations, governance structure, financing and information sharing activities of the Protection Fund management company Xinhua Life Insurance Company, CEO fraud problem, 22% percent of its shares, successful rescue action China United Insurance Company, historical poor performance, 57%, not completed yet

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation Evolution of Insurance Regulation and Supervision The trend of regulatory evolution: Modernized Internationalized Consumer-based “the regulators used to be the coaches of the industry, who are concerned with building the market; but in the new era, insurance regulators should act more like judges, whose efforts should change from market construction to market supervision” -- Dingfu Wu, former president of CIRC, 2010

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation New Perspectives of Insurance Reg. in China 1. How should we position China’s Insurance Regulator? Public Interest Theory (Social Planner) Private Interest Theory (Rent Seeking, Capture or special interest?) 2. Does the Regulator have Institutional Weakness? Limited Regulatory Capacity Limited Accountability Limited Commitment Limited Fiscal Efficiency

率先获得 AACSB 和 EQUIS 两大全球管理教育顶级认证的中国内地商学院 The first school on the Chinese mainland to attain both AACSB and EQUIS accreditation