For a long time, China has been recognized as one of the largest car markets in the world. Motor insurance already accounts for more than 70 per cent of the total non-life insurance premiums in China. However, existing legislative restrictions in the Chinese auto insurance market have effectively blocked foreign invested insurers (insurers incorporated in China by foreign insurers with foreign ownership being 25 per cent or more) from tapping into this market. This legal hurdle is expected to be lifted shortly once the State Council gives its approval to a recent proposal submitted by China Insurance Regulatory Commission (CIRC).
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The current legal hurdle
Pursuance to Measures on Compulsory Motor Vehicle Accident Liability Insurance (《机动车交通事故责 任强制保险条例》), only domestic Chinese property and casualty insurance companies, approved by CIRC, are qualified to carry out the business of offering compulsory motor third party liability (MTPL) insurance. Foreign invested insurers are prohibited from entering into this market though they may underwrite optional commercial auto insurance. The prohibition on foreign invested insurers’ access to MTPL business limits their ability to develop downstream commercial networks capable of reaching individual clients, since the majority of clients would not normally use two insurers (one for compulsory insurance and one for vehicle insurance) to cover the same vehicle.
In practice, we have seen several alternative structures that were developed for foreign invested insurers to become indirectly involved in the MTPL business. One commonly used structure is through strategic cooperation between Chinese insurers who are qualified to underwrite MTPL insurance policies and foreign invested insurers. Under this cooperation model, Chinese insurers are only responsible for the issuance of MTPL insurance policies while foreign invested insurers will act as the client facing primary contact, carrying out the sales of the MTPL and other optional policies, providing after sale services, settling claims etc.
Another often used structure is for foreign insurers to acquire a minority equity stake of less than 25 per cent in Chinese non-life insurers which are qualified to carry out MTPL business so that the foreign insurers may earn dividends generated from such non-life Chinese insurers’ MTPL business. However, as foreign invested insurers are not permitted to conduct MTPL business, foreign insurers under this shareholding structure may not acquire more than a 25 per cent equity stake in Chinese non-life insurers, otherwise such insurers will be considered as foreign invested insurers which will then trigger the prohibition under the current legal regime.
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Recently, CIRC submitted a proposal to the State Council to allow foreign invested insurers to sell MTPL insurance. According to CIRC’s proposal, foreign invested insurers that wish to engage in MTPL insurance business will be required to meet certain criteria such as profitability, solvency, size of parent companies, etc. This is the first time that Chinese insurance regulators seem likely to open the MTPL insurance market to foreign invested insurers but the exact timing remains uncertain. The underlying reason for the potential liberalization of MTPL business is generally considered to be that CIRC is seeking to tap foreign expertise to help reverse chronic losses in auto insurance and improve the service so as to better protect victims of traffic accidents. This move also gives a positive signal that CIRC respects the lobbying efforts of foreign insurers and their chambers of commerce.
It is anticipated that once the MTPL business is opened to foreign investments, most existing foreign invested insurers will immediately apply to CIRC to carry out this high-profit business. More foreign insurers are expected to consider setting up non-life entities in China to enter into the MTPL market, though they may have to meet high entry thresholds such as a minimum 30-year insurance business history, a 2-year representative office already established in mainland China, total assets in an amount of no less than USD 5 billion etc.
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