2018 Review Thomas P. Fitzgerald Chairman Winston & Strawn LLP

2018 was another exciting year in China’s insurance industry as the Chinese government announced and implemented a number of key reforms that reorient the industry towards sustainable growth and further open it up for foreign investment. These developments mean more opportunities for established and new insurance companies and insurance intermediaries looking to expand or create a foothold there.

We are pleased to present the following report as an overview of the key legal developments which occurred during this time. I hope that you find this report useful. Please feel free to reach out to our China team should you have any questions or require any additional information. You will find their contact details at the end of this report.

Winston & Strawn, a leading expert in cross-border M&A, contentious, and regulatory work, established offices in Hong Kong in 2008 and in in 2009 in order to better serve our clients that operate in Asia. Our presence in Hong Kong and Mainland China has allowed us to broaden our services and extend the reach of our practices to include insurance expertise for the PRC.

Attorney advertising materials – © 2019 Winston & Strawn LLP Table of Contents

Introduction...... 1

Developments...... 1

Further Opening of the Market to Foreign Investment...... 2

HK-PRC Harmonization, Developments In and the Greater Bay Area Initiative...... 4

CIRC/CBIRC Industry Reforms ...... 5

Overhaul of Financial Regulatory Bodies...... 17

Looking Forward to 2019...... 19

Highlights of China’s Insurance Industry...... 21

Appendices 1-5...... 23

Key Contacts...... 33

About Winston...... 35

2018 China Insurance Review Introduction

China’s insurance industry has enjoyed robust growth announcements, but also began to follow through in in recent years. Total premium income, for example, many instances. Specifically, the Chinese government rose 27.5% in 2016 to reach RMB 3.1 trillion (USD 490 made a sustained and concerted effort to (i) modernize billion), the strongest growth the industry has enjoyed the insurance industry, (ii) address heightened pressure since 2008. As well, by the end of 2016, total insurance from the United States over trade and market access, industry assets stood at RMB 15.12 trillion (USD 2.39 and (iii) repair the damage caused by the deregulation trillion), a 22.3% increase from the start of the year. and malfeasance that occurred during Xiang Junbo’s five-and-a-half-year reign as Chairman of the CIRC. Premium growth slowed in 2017 and 2018, due in large part to China Insurance Regulatory Commission The main 2018 reforms include: (“CIRC”) and China Banking and Insurance Regulatory Commission (“CBIRC”) reforms aimed at universal life • a major liberalization of China’s rules governing foreign insurance. Nonetheless, the overall outlook for China investment into the insurance industry; is healthy and statistics for 2018 show that overall insurance premium income rose 3.92% from a year • the promulgation of requirements for collateral in earlier to RMB 3.8 trillion (USD 562.52 billion). Indeed, cross-border reinsurance transactions in the context of Group forecasts that premium income will post a framework agreement for China–Hong Kong mutual annual growth of over 10% in the coming two years. Total solvency recognition; insurance industry assets, as of the end of 2018, stood at RMB 18.33 trillion (USD 2.71 trillion), a 9.45% increase • the implementation of a wave of new regulations from the start of the year. meant to address excessive risk and to redirect the industry towards long-term sustainable growth. This report overviews the key developments in the PRC This effort mainly involved an attempt to put China’s insurance industry in 2018 that impact foreign investors insurers on a sounder risk-management and solvency and explains what these developments will mean in footing by implementing reforms designed to improve practice. It then forecasts regulatory trends in 2019 corporate governance, protect consumers, increase and beyond and concludes with a discussion of some product selection and otherwise modernize the statistical highlights and key growth drivers of China’s industry; and insurance industry. • a complete overhaul of China’s financial regulatory system, including the creation of a super regulator and Developments the merger of the CIRC with China’s banking regulator, to create the CBIRC as a single regulator for and 2018 was another watershed year for foreign insurers insurance companies. and intermediaries in China in that the Chinese government not only made a number of major reform

2018 was another watershed year for foreign insurers and intermediaries in China in that the Chinese government not only made a number of major reform announcements, but also began to follow through in many instances.

1 © 2019 Winston & Strawn LLP We discuss these developments and more in further detail below. The repeal of the RO Requirement, when 1 Further Opening of the Market to Foreign Investment implemented, will be

1.1 Insurance Companies a major reform that Foreign insurance companies and foreign investors in China’s insurance sector will benefit from two changes. will cut more than two and half years off the Increase and then Elimination of Foreign Ownership Cap in Life Insurance Companies: application process for In November 2017, in the wake of President Trump’s newly established foreign visit to the PRC, the Ministry of Finance announced that, among other things, China would allow qualified insurance companies. foreign investors to take majority stakes in joint venture life insurance companies by raising the foreign-ownership cap in such companies from 50% investors in China’s insurance industry—including the to 51% in three years and then removing all foreign repeal of the RO Requirement. On 30 May 2018, the ownership restrictions in five years. In April 2018, in CBIRC circulated for public comment the Recommended the context of mounting trade tensions, the People’s Draft of Decisions Relating to Amending Regulations of China (“PBOC”) announced an accelerated Governing Foreign-invested Insurers in China. If timetable whereby China would allow 51% foreign implemented in its current draft form, the decisions ownership “as early as June 2018.” In June 2018, would repeal the RO Requirement. the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce published Impact on Intermediaries the new Negative List, which provides that 51% One question raised by the measures and ownership is now allowed and that the equity cap will recommended draft, however, is whether this change, be removed entirely by 2021, rather than by 2023, as if implemented, will also apply to foreign-invested originally announced. insurance intermediaries (i.e., brokers and agencies)— especially brokerages, which, unlike agencies, did a. Representative Office Requirement form a part of China’s WTO commitments in 2002. In 2018, the CBIRC began the process of repealing the requirement, set out in the Regulations Governing Foreign-invested insurance brokerages became Foreign-invested Insurers in China (the “Insurance subject to the RO Requirement by reference to Regulations”), that foreign insurance companies the Insurance Regulations. Specifically, the 2002 must have a representative office in China for two CIRC Notice Concerning China’s Accession to the consecutive years before they are allowed to apply to WTO not only authorized foreign investment into establish a foreign-invested insurance company (the insurance brokerages, but also made it clear that, as “RO Requirement”). This requirement has presented an a pre-condition, the investor would need to meet a additional barrier to entry into the insurance market in number of the same conditions applicable to foreign- China—which can already take years to complete.1 invested insurance companies found in the Insurance Regulations, including the RO Requirement. Thus, On 27 April, 2018, the CBIRC issued the Measures on foreign-invested insurance brokerages became Facilitating the Further Opening-up of the Banking and subject to the RO Requirement via the Insurance Insurance Sectors. These measures outline a plan to, Regulations. among other things, relax existing restrictions on foreign

1 It takes an average of 6-months to establish the RO. Once the RO is established, the applicant must wait two years before it can begin a “pre-application process” with the CBIRC for a new insurance company. This pre-application process usually takes 12-18 months to complete, after which the “formal application” process may commence. This usually takes another 12-18 months to complete—i.e., before a license is actually granted. Thus, the entire process from start to finish can sometimes take as long as 5.5-6 years.

2018 China Insurance Review 2 As a result, the underlying assumption is that, if the RO requirement is removed for foreign investment On 15 May, Willis Towers in insurance companies, the same must hold true for foreign investment in insurance brokerages. Watson received CBIRC

The repeal of the RO Requirement, when implemented, approval become the first will be a major reform that will cut more than two and half years off the application process for newly established foreign-invested broker foreign insurance companies. to be fully licensed to 1.2 Insurance Intermediaries transact all brokerage Foreign-invested insurance intermediaries will also benefit from these reforms. business in China. a. Foreign-invested Brokerages: On 27 April 2018, the CBIRC promulgated the Notice insurance agencies and loss-adjustment businesses. on Widening the Business Scope of Foreign-funded On 19 June, the CBIRC promulgated the Notice on Insurance Brokerage Companies. This notice Allowing Overseas Investors to Operate Insurance removes the limitations on the business scope of Agencies in China. This notice, which came into effect foreign-invested insurance brokerages. Prior to immediately upon promulgation, provides that foreign this change, wholly foreign-owned brokers could insurance agencies and foreign-invested insurers may only broker large-scale commercial, international now operate insurance agencies in China, provided maritime, aviation, and transportation insurance and that they have three years of experience. reinsurance. Foreign-invested insurance brokers may now engage in the following businesses: Similarly, on the same date, the CBIRC also promulgated the Notice on Allowing Overseas i. drafting insurance plans, selecting insurers and Investors to Operate Insurance Adjusters in China. making policy applications for insureds; This notice, which also came into effect immediately ii. assisting the insureds and beneficiaries in making upon promulgation, provides that overseas insurance claims; adjusters and foreign-invested insurers may now operate insurance adjusters in China, provided that iii. reinsurance brokerage; they have three years of experience and complete iv. consultation services with respect to disaster and filing formalities pursuant to the Regulatory Provisions loss prevention, and risk assessment and risk on Insurance Public Adjustors. management; and v. other businesses licensed by the CBIRC. In sum, these initiatives represent a significant opening of China’s insurance market to foreign investment. In This notice came into effect on the day of its the wake of these announcements, multiple foreign promulgation and existing foreign-invested insurance companies have announced plans to enter, or brokerages may now apply to amend their Insurance expand their operations in, the PRC market. For instance, Brokerage Business Permit with their local CBIRC in May 2018, FWD applied for a license for a majority office. On 15 May, Willis Towers Watson received foreign-owned life insurance joint venture. As well, in CBIRC approval become the first foreign-invested November 2018, received approval to establish broker to be fully licensed to transact all brokerage China’s first foreign insurance holding company and business in China. announced it would purchase the remaining 50% stake in its China joint venture, AXA Tianping. Prudential and b. Foreign Invest Insurance Agencies & Adjusters: Sun Life have also indicated their interest in increasing Qualified foreign institutional investors may now their holdings in their China operations. establish and operate wholly foreign-owned

3 © 2019 Winston & Strawn LLP 2 HK-PRC Harmonization, The favorable treatment of Hong Kong reinsurers is Developments In Reinsurance not restricted to BRI projects, however. Indeed, as and the Greater Bay Area discussed immediately below, Notice 34 is part of a Initiative massive effort to integrate the insurance markets, and ultimately the entire economies, of Hong Kong and a. HK-PRC Harmonization & Reinsurance China. By way of background, China’s risk-based solvency regime, the China Risk-Oriented Solvency System b. Greater Bay Area Initiative (“C-ROSS”), effectively requires that Chinese Notice 34 and the Framework Agreement are best insurers maintain a higher reserve ratio if they cede understood in the context of the Greater Bay Area risk to offshore reinsurers. As a result, C-ROSS has Initiative, a much broader effort to economically negatively impacted the amount of reinsurance ceded integrate the Hong Kong and Macao Special offshore from Mainland China. Administrative Regions with the surrounding Chinese cities of the Pearl River Delta. The Greater Bay Area On 16 May 2017, however, the CIRC concluded encompasses some of China’s largest cities, including a framework agreement with the Office of the Shenzhen and Guangzhou, and has a population of Commissioner of Insurance (“OCI”) to achieve mutual approximately 66 million. This burgeoning mega-city recognition that the solvency regimes of China will play a key role in the BRI and in its economy as a and Hong Kong are equivalent (the “Framework whole. Further integration of Hong Kong’s economy Agreement”). Mutual equivalence recognition is into the Greater Bay Area will likely provide additional meant to increase cooperation between the two opportunities for foreign insurers and insurance regulators, provide regulatory and supervisory intermediaries to access China’s insurance market. convenience, and prevent administrative overlap. Under the Framework Agreement, the CBIRC and the Hong Kong Insurance Authority, which has replaced the OCI, will complete an equivalence assessment Notice 34 is part of of their solvency regimes within four years. This assessment will take place in tandem with Hong a massive effort to Kong’s development of its own risk-based capital integrate the insurance regime. markets, and ultimately Following upon this, the CBIRC promulgated the Notice on Issuing the Solvency Regulatory Rules for the entire economies, of Insurance Companies (“Notice 34”) on 2 July 2018. Notice 34 is the one of the first steps in the transition Hong Kong and China. to mutual recognition of the two regimes. Essentially, it provides that, when a Chinese insurer cedes risk to a qualified Hong Kong reinsurer, a lower (vis-à-vis On 18 February 2019, the Central Committee of the other foreign reinsurers) risk factor will apply and the Communist Party of China and the State Council capital requirement of the Chinese insurer will be promulgated a new economic development plan that reduced accordingly. promises to create a wealth of new opportunities for insurers in both Hong Kong and mainland China, and This amounts to granting preferential treatment to potentially beyond. The Outline Development Plan Hong Kong reinsurers and Notice 34 will doubtless for the -Hong Kong-Macao Greater Bay increase the prominence of Hong Kong reinsurers Area, commonly known as the “Blueprint,” sets out a and brokers in China’s reinsurance sector. In specific timetable for regional integration, calling for particular, it will enable Hong Kong reinsurers to play the construction of a basic framework for the Greater a major role in reinsuring China’s One Belt One Road Bay Area by 2022 and the achievement of a high (“BRI”) projects, which are a major economic and degree of market integration by 2035. foreign policy priority of the Chinese government.

2018 China Insurance Review 4 As China’s insurance industry continues to open up and the Greater Bay Area continues to integrate, it seems very likely that Hong Kong, with its liberal regulatory regime, will be a channel through which many foreign insurers enter the mainland Chinese market.

At this early stage, many are predicting that Hong towards long-term sustainable growth. The extraordinary Kong’s financial institutions, in particular its insurers, chain of events that led up to this massive reform are likely to emerge as major beneficiaries of this campaign and the key reforms enacted in 2018 as a initiative. Essentially, Hong Kong banks and insurers, result thereof are discussed in further detail below. as the strongest in the region, are in the best position to capitalize on the surge in cross-border insurance, 3.1 Background to 2018 Reforms banking and investment that the Greater Bay Area will The background to the 2018 reforms begins with former create. CIRC chairman, Xiang Junbo, who was dismissed from office in April 2017 and, in June 2018, pled guilty to the With respect to insurance, the Blueprint specifically crime of taking bribes totaling RMB 19.4 million (USD 3 contemplates enabling more cross-border insurance million) in exchange for helping secure contracts, loans, policy sales and encouraging cross-boundary car and qualifications and personnel promotions. medical insurance products. In addition to opening up massive new markets for Hong Kong insurers, the During his tenure, which began in October 2011, Blueprint should also have the effect of modernizing Xiang implemented far-reaching liberalization reforms, mainland Chinese insurers based in the region. In including, among other things: this regard, Shenzhen will likely also play a leading role, as the Blueprint calls for the establishment of an a. easing licensing requirements (permitting 52 new insurance innovation pilot zone in this city. We note insurers to begin operations); that Shenzhen is already a major insurance center in b. allowing insurers to invest more of their funds and to its own right, as it hosts the headquarters of Ping An invest more heavily in equities and other higher-risk Insurance, which, by some measures is the world’s investments; and largest insurer. c. allowing life insurers to sell high-return and high-risk wealth management products. As China’s insurance industry continues to open up and the Greater Bay Area continues to integrate, Although Xiang’s reforms resulted in a near tripling of it seems very likely that Hong Kong, with its liberal assets and doubling of premium income for Chinese regulatory regime, will be a channel through which insurance companies, they also led to Chinese insurers many foreign insurers enter the mainland Chinese becoming increasingly dependent upon wealth market. management products. In particular, universal life insurance, a product with flexible surrender terms, high guaranteed annual returns, and a minimal death benefit, 3 CIRC/CBIRC Industry Reforms became very popular during this time. By the end of 2016, seventy of China’s seventy-six life insurance Throughout 2018, the CIRC/CBIRC and other authorities companies were offering such products, which, for continued to implement the wave of reforms that they fourteen of these insurers, produced more than 70% of had initiated in 2017. These reforms are meant to address their total premium income. excessive risk and reorient China’s insurance industry

5 © 2019 Winston & Strawn LLP invest premium income in high-risk investments, This high dependence on universal life products was in particular large equity stakes in listed Chinese very perilous due to a fundamental incompatibility companies. This in turn curbed their ability to offer between the flexible surrender terms and the rate of the high returns that made investment products, such return promised to investors. Specifically, in search of as universal life insurance, attractive in the first place; higher returns, insurers invested premium income into and high-risk, longer-term, and relatively illiquid assets, such as large equity stakes in listed Chinese companies and c. increased regulations relating to compliance. offshore assets. Indeed, the investment in listed equities In addition to promulgating new regulations, the CIRC was especially problematic due to the high amounts also began conducting stricter risk assessments on involved (RMB 1.9 trillion, or 12% of total assets, as of insurance asset management and investments and: November 2017) and the fact that China’s equity markets have performed very poorly in recent years. Because of a. barred several insurers from selling new universal the duration mismatch, any downturn in sales or failure of life insurance products, ordering them to rectify the an investment to deliver the expected return would have problems in question, and imposing other sanctions; resulted in a liquidity crisis. b. stopped the issuance of new insurance licenses and required certain new insurers to provide Concerned about the high level of risk, the CIRC took supplemental materials explaining their business action on 7 March 2016 and promulgated the Circular on plans before they could begin operations; and Matters Concerning the Standardization of Medium- and c. fined some insurers’ senior management personnel Short-term Life Insurance Products, which prohibited and even banned them from the industry. insurers from selling certain universal life insurance products and assigned an overall ceiling on annual Ultimately, the combined effect of the CIRC’s reforms and premium income from universal life insurance to each increased enforcement efforts has been dramatic: sales insurer. This circular further stipulated that insurers of universal life insurance products plummeted 50.3% would have to reduce their sales of other universal life year-over-year in 2017. This has effectively forced the insurance products from 90% of the overall limit in 2016 industry to return to its traditional focus of selling actual to 50% by 2018. It also implemented other measures, insurance and has put the industry on the path back to such as barring insurers with low solvency adequacy sustainable growth. ratios from selling universal life insurance. 3.2 2018 Reforms For the remainder of 2016, the CIRC continued to rein In 2018 the CIRC/CBIRC promulgated additional in universal life insurance. It investigated a number of measures designed to push China’s insurance industry insurers and, upon finding irregularities, temporarily away from high risk investment products and towards barred several from selling universal life insurance. It also sustainable growth based on the sale of increasingly banned from opening new branches all insurers whose sophisticated protective products. As discussed below in universal life insurance premiums accounted for half or section 5, this will likely be the CBIRC’s modus operandi more of overall premium income. for 2019 and beyond. Indeed, in January 2018, the CIRC stated that it would take three years to resolve the As 2016 drew to a close, the CIRC sent clear signals that problem of excessive risk in the insurance industry. To reforms against excessive risk would continue into 2017. this end, on 2 January 2018, it promulgated the General Indeed, as discussed in the 2017 edition of this report, Plan for Risk Reduction and Reform of the Insurance the CIRC continued to vigorously advance the anti-risk Industry (the “General Plan”), which outlined the reform campaign that it initiated in 2016. Specifically, it: measures that the CIRC would take during this period to reduce financial risk and enhance stability in China’s a. promulgated various measures that effectively insurance industry. banned the sale of universal life insurance while encouraging insurers to return to the selling of Most of the measures set forth in the General Plan seek traditional protective insurance products (e.g., long- to reduce risk through implementing stricter enforcement term life insurance, annuities, and health insurance); or enacting regulatory measures targeting the solvency b. enacted major restrictions on insurers’ ability to of insurers and investment of insurance funds. The

2018 China Insurance Review 6 General Plan also focusses heavily on corporate insurance discussed above and will take measures to governance and investment in insurers and other guard against liquidity risks. measures, such as stronger consumer protection. While the above measures are meant to address To be clear, the General Plan is not law and does existing or imminent problems, the General Plan not specify a precise timetable for implementing any also states that the CBIRC will take a number of of its directives, which themselves are non-specific proactive measures to reduce systemic risk moving and presumably subject to change as political and forward. This includes improving the system for economic conditions evolve. Instead, the General Plan regulating insurance groups through, among is a high-level policy document that states the CIRC’s other things, amending both the Insurance Group reform agenda for the next three years. To clarify, the Company Management Measures to effectively General Plan was published prior to the creation of the reduce insurance group operating risk and the Interim CBIRC and refers only to the CIRC. Nonetheless, for Measures for the Administration of Non-Insurance convenience’s sake, we generally refer to the CBIRC Subsidiaries under Insurance Companies to prevent below as it will ultimately be the body that effects the the transfer of risks. reforms of the General Plan. Furthermore, the General Plan indicates that the In sections (a) to (g) below, we provide an overview CBIRC will improve the solvency regulation system. of the General Plan and the steps that the CBIRC has In this regard, it has already made some major thus far taken towards its implementation. In section moves. In particular, on 28 February 2018, the CIRC (h), we identify other 2018 reforms, which, although not promulgated the Notice on Printing and Distributing identified by the General Plan, are still important. the Insurance Assets and Liabilities Management Regulations (No. 1-5) and Matters Related to the Trial a. General Plan – Solvency Operation. These new regulations announced the The General Plan identifies improving the solvency of implementation, on a one-year trial basis, of new rules Chinese insurers as a key area for reform. meant to prevent asset-liability mismatch risks. The key aspects of these regulations are as follows: By way of background, the CIRC reforms and enforcement actions of 2017 may have averted i. during the trial period, the CBIRC will not take any a liquidity crisis in China’s insurance industry. An regulatory action with respect to an insurer’s rating; assessment of 120 insurers released in the first ii. all insurers shall complete self-evaluations of their quarter of 2016 showed that 10 life insurers and one asset and liability management capabilities before property insurer had dangerously low solvency levels 31 August 2018, and submit quarterly and annual that were approaching 100%. By the third quarter of reports to the CBIRC; 2018, the average solvency ratio Chinese insurance iii. the CBIRC will issue interim measures for the companies was a stable 245% and no insurers were at management and supervision of insurance assets dangerously low levels. and liabilities in the near future;

In this regard, it is not a surprise to see that the iv. upon implementation of the interim measures, the General Plan indicates that the CBIRC will target the CBIRC will classify insurers into four types (A, B, minority of companies that pose localized risks and C, D), based on their management capabilities. take “regulatory measures” against such insurers Type A insurers may receive special privileges to to ensure that such localized risks do not become encourage financing innovation. Meanwhile, the systemic. More concretely, this means identifying and CBIRC will regulate Type C and D insurers more monitoring insurers that have rapidly depleted capital strictly and impose a higher capital ratio on them. and preventing them from becoming capital deficient. However, such measures will not be implemented In particular, the General Plan states that the CBIRC until after the trial period. will closely monitor the cash flow dynamics of life insurance companies as they adjust their business In addition to this, the CBIRC has made continuous structure to adjust to restrictions on universal life efforts to refine C-ROSS (to, among other things,

7 © 2019 Winston & Strawn LLP favor long-term protective products) while closely Below, we discuss four new measures meant to better scrutinizing solvency data submitted to it by insurers regulate the investment of premium income. We then and harshly punishing any instances of fraud. To this highlight an unexpected move by the CBIRC to allow end, it has promulgated measures to obtain better and encourage insurers to develop “special products” solvency data. to invest in distressed listed companies.

On 17 January 2018, the CIRC promulgated the Notice i. New Regulations on the Investment of Funds on Adjusting the Frequency of Submitting Insurance Regulators including “Insured Amount” and “Number (1) Use of Funds: of Issued Policies”. This notice is meant to fine-tune C-ROSS by adjusting how the CBIRC collects some On 24 January 2018, the CIRC promulgated 1,000 different detailed indicators. Also, the CBIRC the Measures for the Administration of the has already issued revised rules for compilation Utilization of Insurance Funds (“Insurance Funds of actuarial reports, significantly tightening liability Measures”), which came into force on 1 April 2018. management and reporting requirements. To be precise, we refer to the Notice on Issuing Rules The Insurance Funds Measures impose a number for the Preparation of the Actual Reports of Life of restrictions on the use of funds. For instance, Insurance Companies, which the CBIRC promulgated they restrict the use of funds for outbound on 4 June 2018, and which contains, as an annex, investment and limit the ability of insurance the new version of the actuarial report, along with company shareholders to interfere in the detailed rules for its completion. As discussed below management of insurance funds. They also clarify in section (c), the CIRC also promulgated new anti- the regulation of insurance asset management fraud guidelines in January 2018. products and impose additional regulations on investment managers entrusted with insurance Finally, the General Plan also indicates that the funds. For example, the Insurance Funds Measures CBIRC will revise the Insurance Protection Fund bar asset management firms that manage Management Measures, which regulates the insurance funds from reassigning such funds. insurance industry relief fund into which all insurers pay a portion of their premium income. In addition to the Insurance Funds Measures, which have a broad application, the CIRC/CBIRC b. General Plan – Use of Funds has also promulgated new measures seeking to With a view to reducing and controlling risk, the regulate the use of funds in the rental housing General Plan indicates that the CBIRC will strengthen market, local government debt and domestic its regulation and supervision of the use of guarantees of foreign debt. insurance funds. In particular, the CBIRC will focus on uncovering and punishing illegal investments by (2) Rental Housing Market: insurers, including the use of leveraged insurance funds, investments with a multi-layer embedded On 28 May 2018, the CBIRC promulgated the structure (i.e. products that invest in other products), Notice on the Investment of Insurance Funds in and illegal overseas investments. the Long-Term Rental Housing Market (“Housing Investment Notice”), which is mainly an attempt The General Plan also provides that the CBIRC will to reduce investment risks in the rental housing enact measures to prevent insurers from investing market. premium income in high risk investments, such as investments with a duration mismatch and “irrational” The Housing Investment Notice imposes a number acquisitions. For greater clarity, an “irrational of restrictions on insurer investment in long-term acquisition” is a pejorative term commonly used by housing rental projects. In this context, “long-term” the Chinese authorities to refer to large high-profile refers to properties typically rented monthly or investments, typically overseas, in areas such as real longer (as opposed to nightly, as is the case with estate, sports and entertainment. rooms). For example, insurers investing in

2018 China Insurance Review 8 a long-term rental housing project must require local government credit worthiness. In fact, local that the fund-raising party and project owner government finance vehicles must have sufficient implement sound management and properly cash flow and provide a statement to the effect allocate funds. They must also create dedicated that they are not the borrowing arm of a local positions to be responsible for the post-investment government. The insurer’s compliance department management of various long-term rental housing must provide a specific legal opinion on the projects during the investment period, and legality of the investment. establish a whole-process management system to take effective risk control measures. (4) Domestic Guarantees for Foreign Debt:

Other provisions of the Housing Investment Notice On 5 January, 2018, the CIRC and State reflect a desire to address social concerns. For Administration of Foreign Exchange promulgated example, all housing rental projects must be in an restrictions on foreign borrowing backed by a area where such a project is needed (i.e., , domestic guarantee in the form of the Notice Shanghai, the Xiong’an New Area or any large on Regulating Matters Concerning Insurance or medium-sized pilot city with a net population Institutions Service of Domestic Guarantee of inflow). Offshore Loans.

(3) Local Government Debt: This notice is an attempt to better regulate the investment of insurance funds overseas and On 8 January 2018, the CIRC and Ministry of prevent overseas investment funding risks, in Finance promulgated the Guiding Opinions on particular with respect to insurance funds used Tightening Administration of Use of Insurance for BRI projects. By way of background, Chinese Funds and Supporting Prevention and Resolution companies commonly use domestic assets as of Local Government Debt Risks. These guiding collateral to secure debt overseas, in particular opinions are an attempt to more strictly regulate in the context of an outbound investment. This local government financing by insurance practice has been the key to the development of companies, and are part of a broader government the global asset allocations of Chinese insurers. campaign against illicit local government financing, However, it has also led to liquidity issues and high-risk lending and high local government debt. facilitated risky overseas investments.

According to the notice, the purchase of The key provisions of this notice: local government bonds by insurers is still “encouraged.” However, insurers must review the • cap offshore financing that is backed by compliance of such purchase, rectify any non- domestic guarantees at 20% of an insurer’s net compliance, and report it to the CBIRC. These assets as of the end of the previous quarter. As measures prohibit local governments from raising well, only insurers with a solvency ratio of 150% funds from insurance companies through alternate or above and a risk rating of A or above may channels such as local government financing engage in such funding; vehicles or government investment funds. This is • require that insurers report any overseas an attempt to quash the common tactic of cash- financing backed by domestic guarantees worth strapped local governments of using such entities USD 50 million or more to the Insurance Asset to bypass borrowing restrictions. Management Association of China (IAMAC) for its review and approval; and To clarify, insurers may still provide financing to • allow that such funding may only be procured such vehicles. However, they must do so on the by the insurer’s designated overseas affiliate basis of a commercial investment whereby they in which the insurers must hold at least a 95% conduct a strict risk assessment on the vehicle interest. as a commercial enterprise without reference to

9 © 2019 Winston & Strawn LLP ii. Notice on Special Products The Special Product Notice is an attempt to break Surprisingly, the CBIRC has also promulgated this cycle and stabilize financial markets. It is part one measure that is inconsistent with the of a larger effort whereby the central government General Plan’s stated goal of stricter regulation has called on the PBOC, local governments, of use of funds, the Notice on Insurance Asset brokerages and other financial institutions to bail Management Companies Set up of Special out “quality companies” facing financial difficulties. Products (“Special Products Notice”). This notice, which was promulgated and came into force on This notice provides that special products 24 October 2018, allows insurer-owned asset may invest in equity and debt issued by listed management companies to sell “special products.” companies. It specifies that special products Special products are those whose proceeds will should target institutional investors such as be used to offer financing for quality listed and insurers, and pension funds. As well, the notice private companies in order to support China’s directs insurer-owned asset management equity markets as they confront liquidity risks companies to use such investment as a vehicle to related to pledged shares (i.e., shares which the improve the corporate governance and value of company shareholders and investors have put up listed companies’ corporate governance and raise as collateral). their value.

By way of background, a slowing economy and Four insurers’ asset managers (China Life the impact of the China-US Trade War have hurt Insurance Assets Management Co. Ltd., Taiping many Chinese companies. As earnings decline Asset Management Co. Ltd., PICC Asset and losses mount, there have been reports of Management Co. Ltd., and New China Asset fire sales of prized assets and even questionable Management Co. Ltd.,) plan to raise a combined accounting practices by some of the dozens of RMB 68 billion (USD 9.8 billion) through special companies desperate to avoid expulsion from products. On 22 October, China Life Asset China’s stock markets. At the same time, China’s Management Co Ltd completed registration of efforts to eliminate shadow banking and increased the industry’s first special product at the China regulatory oversight of the financial industry have insurance asset registration and trading system. made it very difficult for companies facing financial Its target size is RMB 20 billion and it will provide difficulties to procure funds to refinance their both equity and debt financing to listed companies debts. This has forced many major shareholders in facing temporary liquidity difficulties. public companies to pledge their equity holdings as collateral for loans. Meanwhile, China’s equity In addition to the CBIRC promulgating this notice, markets were the worst performers in 2018. the PBOC has also announced that it will provide RMB 10 billion to the state-owned China Bond The decline in the value of listed equities has Insurance Co. Ltd. to help it provide insurance meant that these shareholders have had to products for debt issued by private companies. surrender more and more shares or cash to compensate lenders for the falling prices of their The Special Products Notice is unusual insofar pledged shares. Facing the prospect of losing as it runs contrary to the CBIRC’s determined control of their companies, some sold their stakes. efforts to deter insurance companies from making At the same time, brokerages and banks that high-risk investments. That is to say, a key factor lent money on the back of the pledged shares in precipitating the 2016-2017 upheaval of China’s also began to liquidate their holdings in order to insurance industry was the CIRC’s decision to limit their losses when borrowers were unable to remove restrictions on insurers’ investment of provide additional collateral or make payment on premium income in listed equities. Similar to their loans. In short, circumstances have conspired the case of the Special Products Notice, Xiang to create a vicious cycle driving down share prices Junbo’s reform was itself enacted under the guise and further depressing China’s already struggling of stabilizing Chinese equity markets, which had equity markets. suffered great turbulence in 2015-2016.

2018 China Insurance Review 10 Ultimately, this attempt to use insurers to support (1) Strengthening Corporate Governance and stabilize China’s volatile equity markets was one of the key ingredients in the proliferation of On 30 June 2018, the CBIRC promulgated the short-term investment products that put many Notice on Issuing the Administrative Measures for insurers in a precarious solvency position. As Independent Directors in Insurance Institutions discussed, in 2017, the CBIRC sought to defuse (“Independent Director Notice”). This notice this potential crisis by, among other things, significantly strengthens the role of independent enacting major restrictions on insurers’ ability to directors within the corporate governance invest premium income in high-risk investments, framework of Chinese insurance companies, in particular large equity stakes in listed Chinese including foreign-invested insurers (i.e., those companies. with 25% or more foreign shareholders). In this context, “independent directors” refers to directors Though the Special Products Notice does not who do not hold any post other than director in repeal any of these measures, it is inconsistent an insurance institution and whose relationship with them and not in the spirit of the General with the shareholders and actual controllers Plan. Indeed, it may be a sign that, in the face of the insurance institution will not affect their of the China-US Trade War and other economic independent and objective judgement on the headwinds, the CBIRC’s resolve to vigorously affairs of the insurance institution. enact the reform agenda of the General Plan is weakening. We further discuss this idea below in The Independent Director Notice sets out the section 5, Looking Forward to 2019. qualifications for independent directors, who must be university educated and have professional iii. Corporate Governance and Investments in experience in insurance or a relevant field (e.g., Insurers law or actuarial science). As well, this notice prohibits certain individuals from serving as The General Plan states that the CBIRC will independent directors, including individuals who strengthen corporate governance by, among have provided professional services to the insurer other things, drafting new measures for improving or who have a close relative or social relation who internal corporate governance mechanisms and has held a post within the insurer or is a significant enhancing supervision. The General Plan further shareholder. states that the CBIRC will also closely scrutinize the shareholders of insurers by reviewing their The Independent Director Notice mandates background, qualifications, and relationships, and, the appointment of independent directors and where necessary, forcing such shareholders to exit the implementation of specific internal support the industry. mechanisms. Some of the key points include:

As we summarize below, the CIRC/CBIRC have • an insurer’s board of directors must have at least already taken action on this front. three independent directors and the number of independent directors must account for at

The General Plan states that the CBIRC will strengthen corporate governance by, among other things, drafting new measures for improving internal corporate governance mechanisms and enhancing supervision.

11 © 2019 Winston & Strawn LLP least one third of all directors. However, where To clarify, the Insurance Equity Measures primarily an insurer has a shareholder who holds 50% or target Chinese invested insurance companies. more of its equity, the number of independent However, they apply “by reference” to foreign- directors must account for not less than half of invested insurers (i.e., insurers with more than 25% all the directors; foreign ownership) and the CIRC has indicated • audit and remuneration committees must also that it will consider the provisions of the Insurance have a minimum of two independent directors Equity Measures when examining and reviewing (one third or more) and must be chaired by an foreign-invested insurance companies. The key independent director; and regulation for foreign insurers is still the Regulation • the notice grants independent directors new on the Administration of Foreign-invested powers, including the ability to review the Insurance Companies and the CBIRC will likely fairness of major related-party transactions, eventually issue rules clarifying how the Insurance the implementation of internal examination Equity Measures apply to foreign-invested processes, and the ability to independently insurance companies. engage auditors. The Insurance Equity Measures are quite This notice provides for an extensive oversight extensive and will have a major impact on and enforcement role for the CBIRC. In particular, domestic insurers. However, given that they are all independent directors must submit annual of secondary importance to foreign-invested reports addressing corporate governance risks insurers, we will only briefly summarize some key and issues, barriers to the independent directors’ provisions: performance of their duties, and other matters. They must further report serious corporate • Shareholding Cap of One Third: The Insurance governance problems to the CBIRC on an ongoing Equity Measures impose a single shareholder basis and in a timely fashion. The CBIRC has the equity cap of one-third of the company’s power to intervene when an insurer suffers from registered capital. An insurance company ineffective corporate governance by, among other investing in another insurance company due to things, restricting the rights of shareholders to “business innovation, specialization, or group nominate independent directors or by directly operation needs” may seek an exemption from appointing its own independent directors. this cap. However, when an insurance company invests for such reasons, it may not transfer its controlling interest. This cap will clearly not (2) Shareholder Qualifications apply to foreign-invested insurers. The centerpiece of the CBIRC’s effort to improve • Shareholder Categorizations and Restrictions: the quality of investments in insurers is the The Insurance Equity Measures categorize Administrative Measures for Equity Interests shareholders into four types based on their in Insurance Companies (“Insurance Equity amount of equity holdings in an insurance Measures”), which the CIRC promulgated on 7 company and impose restrictions on each March, 2018. such category. The Insurance Equity Measures impose various qualifications (e.g., minimum These measures, which came into effect on asset requirements) and restrictions (e.g., lock 10 April 2018, are part of a broader effort to up period) four each of the categories. strengthen the corporate governance of China’s • Restrictions on Investors: The Insurance Equity insurance companies and prevent them from Measures prohibit certain persons from investing being misused as financing platforms for high-risk in insurance companies (e.g., entities with an investments. The Insurance Equity Measures seek unclear shareholder structure) or from becoming to achieve this by restricting who may become controlling shareholders (e.g., investors in a a shareholder in an insurance company and precarious financial position). what funds they may use by imposing reporting • Restrictions on Funds: The Insurance Equity requirements in relation to the foregoing. Measures prohibit the use of certain kinds of

2018 China Insurance Review 12 funds to acquire insurance company equity If promulgated in its current form, this draft notice (e.g., loans related to insurance companies and would impose related party transaction ratios. funds acquired through charges on insurance Essentially, it would cap: company assets). These measures further prohibit investment into an insurance company • related-party investments at 30% of the insurer’s by way of entrustment and require that investors total assets at the end of the previous quarter. use only their own funds to acquire equity As well, such investments would be further interests in insurance companies. capped at the value of the net assets of the In addition to the Insurance Equity Measures, insurer at the end of the previous quarter. the CBIRC has taken other steps to improve the • any investment in a single related party at 15% quality of investments into insurance companies, of the insurer’s total assets or 5% of the related in particular by stepping up its enforcement to root party’s total assets (whichever is greater) as of out “illegal investments” in insurance companies the end of the previous quarter. (e.g., investments that have exceeded legal shareholding limits or violated other restrictions Insurers with investments exceeding the stipulated through nominee shareholders, reporting false limits would be barred from carrying out any more materials, and other means). The CIRC/CBIRC transactions that would increase such holdings. has already ordered certain shareholders of Insurers would also have to submit quarterly some smaller insurers to sell their shares after reports on related party transactions and balances it uncovered irregularities, such as falsified to the CIRC. information and shares held through proxy. As well, in 2018 it took unprecedented action against This draft notice also sets out detailed , which was once China’s second largest requirements for internal compliance measures insurance group. for related party transactions and strict reporting requirements. It also sets out an enforcement In February 2018, after finding that Anbang had mechanism that targets both the insurers and violated Chinese laws and seriously endangered responsible officers. Breaching insurers may its solvency, the CIRC effectively seized control be fined, have their operations restricted, be of and nationalized Anbang Group. The CBIRC is prohibited from transacting new business or even now continuing work on the equity restructuring have their business licenses revoked. Responsible of Anbang, which, at the time of its nationalization, officers are liable for formal warnings, fines, had RMB 1.97 trillion (USD 310.85 billion) in assets cancellation of their “fit & proper criteria” or even and ranked 139 on the Global Fortune 500 list. As a ban from working in the industry. Shareholders well, in May 2018, a Shanghai court sentenced, or non-equity controllers that effect related party Wu Xiaohui, Anbang’s founder and chairman, to transactions in breach of the rules may also face 18 years imprisonment and seizure of his USD punishment such as a rectification order or forced 1.7 billion worth of assets. The charges were divestment. embezzling about USD 1.6 billion and illicitly raising USD 10.2 billion in capital. iv. Compliance and Consumer Protection

(3) Related Party Transactions The General Plan indicates that the CBIRC will enhance its supervision of insurers, in particular As mentioned in the General Plan for Risk by improving the insurance product management Reduction, the CIRC announced its intention to system through standardized product more strictly regulate related party transactions, development and the implementation of a product which have become increasingly common in inspection system. It further states that the CBIRC recent years and which pose the risk of the will also implement more on-site inspections, unwarranted transfer of benefits and risks enhance its scrutiny of data and statistics reported among related companies. To that end, on 3 May to it by insurers, and improve the process for 2018, the CBIRC circulated the Draft Notice on reporting illegal acts. Insurance Company Related Party Transactions.

13 © 2019 Winston & Strawn LLP The CBIRC is now continuing work on the equity restructuring of Anbang, which, at the time of its nationalization, had RMB 1.97 trillion (USD 310.85 billion) in assets and ranked 139 on the Global Fortune 500 list.

Finally, the General Plan states that the CBIRC will rules regulating insurance adjusting in an attempt implement a number of measures that seemed to guarantee practice quality, clearly delineate designed to protect consumers. Specifically, it practice responsibilities, and protect the lawful will seek to curb illegal fund-raising, with a focus rights and interests of the parties to insurance on part-time insurance sales and third-party adjusting activities. It calls upon adjusters to fulfill wealth management. The General Plan goes so the obligations prescribed in the above-mentioned far as to state that the CBIRC will severely punish regulatory provisions, strictly abide by professional staff of regulatory agencies that have not been ethics, and consciously maintain their professional sufficiently diligent in preventing and handling image. such illegal fund-raising. The General Plan further states that the CBIRC will implement reforms to To ensure the better regulation of adjusters, the curb misleading sales practices and foster a better notice enacts a number of measures, including handling of consumer dissatisfaction. requiring that adjusters register practitioners and calling for the self-regulatory body to have a We outline below the key measures that the CIRC/ national uniform exam and implement continuing CBIRC have already taken to enhance consumer professional development requirements. It also protection in China’s insurance industry. regulates accounting and recordkeeping practices, insurance adjusting reports, and obligations to (1) Compliance Measures for Adjusters and clients. Brokerages (c) Anti-Fraud Guidelines As part of its efforts to promote long-term sustainable stable growth through better On 11 February 2018, the CIRC promulgated the regulation, the CIRC issued new rules governing Anti-Insurance Fraud Guidelines, which came insurance adjustors and insurance brokerages on into force on 1 April. These guidelines impose 2 February 2018. The Regulatory Provisions on significant fraud risk management compliance Insurance Public Adjusters and the Regulatory obligations on insurance institutions. For instance, Provisions on Insurance Brokerages, both of they require that insurance institutions establish which came into force on 1 May 2018, are meant to an insurance fraud risk management system and tighten regulation of insurance adjustors by, inter impose fraud prevention obligations on boards alia, imposing requirements on their corporate of directors and supervisors. Insurers must also structure, shareholders, and qualifications (of designate a senior manager to take responsibility senior management, practitioners and the for fraud risk management and establish an anti- brokerage / adjuster entity itself). fraud “internal institution” at their headquarters with a full-time anti-fraud management position to Further, on 2 May 2018, the CBIRC promulgated be responsible for the implementation of fraud risk the Notice on Issuing Basic Rules for Insurance management measures. Adjusting. As its title suggests, it stipulates basic

2018 China Insurance Review 14 vi. information on other major matters, including The guidelines also set forth a number of change of control, application for bankruptcy, stipulations regarding audits and assessments. For and major investment losses. instance, an insurance institution must perform a separate audit and an assessment of its fraud risk The Disclosure Measures require that insurers management strategies, systems and procedures establish company websites with a prominently at least once per year. positioned information disclosure section that displays all basic company information, which must On top of all this, the guidelines further require be updated every ten days. Insurers must also that insurance intuitions establish an “information make a public annual information disclosure report system” for effectively identifying, measuring, before 30 April of each year and disclose certain evaluating, monitoring, controlling and reporting urgent information within 10 working days. the risk of fraud. (e) Real Name Registration Finally, the Anti-Insurance Fraud Guidelines require that insurers promptly report fraud and On 4 June 2018 the CBIRC circulated, for public major fraud risk incidents to the CBIRC and, if comment, the Draft Administrative Measures on criminal activity is suspected, to the Public Security Real-name Registration for Insurance. The draft Bureau. They must also submit annual fraud risk would require that insurers verify the real names reports to the CBIRC each year before 31 January. of policyholders and insureds through a real-name registration platform if the insurance contract in (d) Information Disclosure Measures question has a term of more than seven days and a premium of RMB 200 or more. On 28 April 2018, the CBIRC promulgated the Administrative Measures on Information (f) Consumer Protection and Improving Disclosure of Insurance Companies (the Insurance Services “Disclosure Measures”), which repealed the 2010 measures of the same name when they came into On 18 July 2018, the CBIRC promulgated effect on 1 July 2018. These measures require the Notice on Effectively Strengthening and insurance companies to publically disclose a Improving Insurance Services. This notice is range of information. Specifically, the Disclosure essentially a general directive calling on insurers Measures stipulate that, subject to certain and intermediaries to improve their services for exceptions for state secrets, trade secrets, and consumers. Specifically, it directs them to redress other confidential information (as defined by law), certain persistent problems that have plagued the insurance companies shall publicly disclose key industry. For example, insurers and intermediaries information, including: must curb irregularities in sales behavior by using plain language in all promotions and by marketing i. basic company and financial accounting insurance products separately from investment information; products and explicitly making the distinction. The ii. insurance liability reserve and risk management notice further directs them to improve their claims information; settlement and dispute resolution services by informing consumers of their different options and iii. solvency information; this includes the core the services available to them and by shortening solvency adequacy ratio, comprehensive the payment cycle. solvency adequacy ratio, actual capital, and minimum capital; (g) Improving Standardization iv. insurance product management information, including details on best-selling products; In order to improve standardization in the v. information of major related party transactions; insurance industry, the CIRC promulgated and the Insurance Standardization Administrative

15 © 2019 Winston & Strawn LLP Measures (the “Standardization Measures”) on the Notice on Individual Income Tax (IIT) Deferral 29 December 2017. The Standardization Measures on Commercial Pensions in Pilot Areas on 2 April call for coordinated standardization by government 2018. and industry of the insurance sector, including insurance technologies, products and services. This notice sets out a one-year commercial The stated goal of these measures is to increase pension IIT deferral pilot program that took effect efficiency and transparency, while reducing from 1 May 2018 in Shanghai, Fujian Province and transaction costs and operational risks. the Suzhou Industrial Park Zone. The program will allow individuals in the pilot areas to defer IIT on The Standardization Measures set out commercial pension insurance contributions and detailed procedures for the development investment gains until the distribution stage after of standards. Specifically, they direct the retirement. The effective tax rate at that point will Insurance Subcommittee of the China Financial be only 7.5%. Standardization Technical Committee to work under the CBIRC’s direction to develop a plan for We consider it likely that, as is often the case in standardization. As well, under the supervision of China, this trial will eventually become permanent the CBIRC, insurance groups will be responsible and apply nation-wide. If so, this measure could for developing internal standards, which may be help drive the sale of commercial pensions in elevated to industry standards upon application. China. As discussed immediately below, the Chinese government is examining various ways to (h) Other Reforms Not Mentioned in the use private insurance to make up for shortfalls in General Plan its pension system.

ii. As mentioned, during 2018, the CIRC and CBIRC Expansion of Elderly Housing Reverse made a number of important reforms which do not Mortgage Pension Insurance fit under any of the rubric identified by the General Plan. These initiatives include: On 31 July 2018, the CBIRC promulgated the Notice on Expanding the Scope of Elderly • an expansion of legislation on individual income Housing Reverse Mortgage Pension Insurance. tax (IIT) deferral on commercial pensions; As its title suggests, this notice is an attempt to • an expansion of elderly housing reverse promote reverse mortgages, whereby people mortgage pension insurance; and aged 60 and above take out insurance policies • consultation draft measures on life insurance that provide them with monthly payouts in viatical settlement. exchange for ownership of their property upon their death. The common denominator of these new measures is that they may serve to generate new business Reverse mortgage pension insurance is best for insurers by generating greater demand for viewed as an attempt to compensate for traditional protective products. In that sense, deficiencies in China’s government pension these initiatives are very consistent with the main system, which is unable to cope with the nation’s direction of the General Plan, even though they greying demographics. By way of background, are not specifically mentioned therein. as of December 2017, China’s elder population was approximately 241 million, i.e., 17% of the i. IIT Deferral on Commercial Pensions population. As the ratio of workers to retirees steadily shrinks, the pension system becomes In a move that will likely help China’s insurance increasingly unsustainable. Pension experts industry shift back towards offering traditional project that, from 2018 to 2022, several provinces protective products, the Ministry of Finance, the in China will not be able to fund existing liabilities. State Administration of Taxation, and several other Heilongjiang Province is already borrowing from ministries and departments jointly promulgated the central government’s social security fund to

2018 China Insurance Review 16 pay its pensioners. To complicate matters further, pension payouts are typically far too small for a Beginning in late 2017, pensioner to survive on. the central government In 2013, the central government suggested reverse mortgages as a means of dealing with this totally restructured problem and, in 2014, initiated pilot programs in certain cities. Yet, interest so far has been limited. China’s financial As of May 2018, only one insurance company in all of China offered reverse mortgage services, regulatory system. and only 132 people had taken out policies. Experts speculate that this resistance stems from Meanwhile, the third party investor would continue the fact that Chinese families generally want to pay the monthly premium and would receive their children to inherit their property. Lack of the full benefits when the insured died. Making familiarity with reverse mortgages and certain high policies tradable would provide an additional profile frauds in which elderly people mortgaged incentive to buy insurance products. their properties to invest in high-risk investment schemes may also contribute to their unpopularity. By way of background, insurance policy financing of this nature exists in other jurisdictions. However, At the same time, decades of rising prices mean it generally accounts for no more than 5% of total that the paper value of homes now far exceeds premium incomes. Nonetheless, this is considered outstanding loan values. The estimated total value significant as it could boost life insurers’ flagging of China’s urban residences is RMB 360 trillion premium growth. Indeed, the shares of listed (USD 72 trillion). Meanwhile, total household debt insurers rose in the wake of the announcement. If (this includes non-mortgage debt) is only RMB 44 implemented, these draft measures would require trillion. institutions offering viatical services to have a minimum registered capital of RMB 500 million Despite these issues, the inadequacy of Chinese (USD 77 million). pension payouts may mean that reverse mortgages may still become attractive. The notice stipulates that, from its date of promulgation, 4 Overhaul of Financial reverse mortgage endowment insurance for the Regulatory Bodies elderly will be available nationwide. The relevant regulations set out in the Guiding Opinions of Beginning in late 2017, the central government totally the China Insurance Regulatory Commission restructured China’s financial regulatory system. on Launching the Pilot Program of the Reverse Mortgage Endowment Insurance for the Elderly First, in November 2017, it established the Financial shall apply nationwide. Stability Development Committee (the “FSDC”), a cabinet-level “super regulator” charged with iii. Life Insurance Viatical Settlement coordinating financial regulation so that China’s financial system can better cope with excessive risk. The FSDC On 2 January 2018, the CIRC circulated the Draft has the authority to supervise the implementation Life Insurance Viatical Settlement Management of monetary policy and financial regulation, and this Measures, which solicited public consultation, until includes questioning and guiding local authorities and 26 January 2018, on viatical policy settlement for financial regulators. Noting that the FSDC was headed life insurers. by a vice-premier, some commentators suggested that it may be more powerful than a government ministry, while Essentially, viatical settlement allows a third party others predicted that that it will wield great influence to invest in an insured’s life insurance policy at comparable to that of the NDRC, China’s central a discount from its face value. This allows the economic planner. insured to benefit from the policy while still alive.

17 © 2019 Winston & Strawn LLP As predicted by the 2017 edition of our insurance review, regulatory bodies. China’s securities regulatory body, the the establishment of the FSDC was only the first step China Securities Regulatory Commission (the “CSRC”) to a much broader reorganization of China’s financial will remain as a separate regulator, but, like the CBIRC regulatory bodies. On 13 March 2018, the National will be subject to PBOC and, ultimately, FSDC oversight. People’s Congress announced further major changes, including: Pre- and Post-Reform structures are summarized in Figures 1 and 2 below. a. the merger of the CIRC with China’s banking regulator, the China Banking Regulatory Commission By way of background, the high systemic risk caused by (the “CBRC”), to form the combined CBIRC. This excessive credit and debt and lax government oversight merger, which was effected on 2 April 2018, is meant has been a serious, widespread, and persistent to resolve problems relating to cross-regulation, problem throughout China’s financial system. Indeed, regulatory arbitrage, and an unclear delineation of the excessive risk in the insurance industry discussed responsibilities; and above is merely one manifestation of this broader b. the newly created CBIRC ceding authority to the phenomenon. Other recent examples include the 2015- PBOC, which has assumed responsibility for drafting 2016 China stock market turbulence and the proliferation key regulations and prudential oversight in banking of illegal fundraising schemes that, in some cases, have and insurance. led to “mass incidents” where defrauded investors take to the streets to protest government inaction. These reforms are meant to address the high systemic risk which has plagued China’s financial system in China’s financial oversight system has struggled to deal recent years and which many observers have linked with these crises, and some experts have attributed to the fragmentary nature of its regulatory system. The this difficulty to the fragmented nature of the pre-reform FSDC will oversee the activities of these reorganized system, which previously consisted of four separate

Figure 1: Pre-Reform

China Banking China Insurance China Securities People’s Bank of Regulatory Regulatory Regulatory China (PBOC) Commission (CBRC) Commission (CIRC) Commission (CSRC)

Note: The placing of each of the four regulators on a level horizontal plane is deliberate, as they tended to function independently, though the PBOC did have greater powers in terms of drafting financial reforms and ensuring financial stability.

Figure 2: Post-Reform

Financial Stability and Looking forward, we expect that China’s new regulatory frame- Development work will implement stricter regulations that will put the nation’s Committee (FSDC) financial system on a sounder footing. This will be a continuation of an ongoing trend towards increased regulation and stricter oversight. People’s (PBOC) Ultimately, this should be propitious to foreign investors, which, relative to their Chinese counterparts are more experienced in dealing with a heavy compliance burden. As well, one of the China Banking and China Securities stated goals of the FSDC is to coordinate efforts to further open Insurance Regulatory Regulatory China’s financial sector to foreign investment. Commission (CBIRC) Commission (CSRC)

2018 China Insurance Review 18 entities, the CBRC, the PBOC, the CSRC, and of course, hospitable to foreign investment and will see increased the CIRC. These entities have been criticized as activity by foreign insurers and intermediaries. operating in silos and the creation of a super regulator is an idea that has been circulating for at least a decade. 5.1 China’s Financial Reform Agenda As discussed above, the General Plan very clearly We are cautiously optimistic that, if properly states that the CBIRC intends to direct China’s insurance implemented, such reforms will help further the industry away from high risk investment products maturation of China’s insurance industry and be and towards sustainable growth based on the sale of propitious towards foreign investment. As discussed increasingly sophisticated protective products. Indeed, below in section 5.3, better and stricter regulation plays this document, issued in January 2018, is meant to set to the strengths of foreign insurers. the reform agenda until the end of 2020 and is itself an integral part of China’s financial reform and economic planning. 5 Looking Forward to 2019 Higher-level pronouncements from the central It is difficult to forecast the direction of development government have, until very recently, also stressed the in China’s insurance industry in 2019. Many observers importance of deleveraging and reform. In particular, in predict that premium income growth, which figured at March 2018, the Chinese central government conducted 3.92% in 2017, will rapidly accelerate as insurers adjust to its annual “Liang Hui.” Roughly, translated to “two new economic and regulatory conditions. For instance, sessions,” this refers to the annual joint plenary sessions Swiss Re Group anticipate 10% premium income annual of China’s two national-level decision-making bodies, the growth in 2019 and 2020. National People’s Congress and National Committee of the Chinese People’s Political Consultative Conference, Beyond strong premium income growth, however, which occur every spring. predictions are difficult. Though the Chinese central government and the CBIRC have made their plans and During the 2018 Liang Hui, there were many indications objectives very clear, it remains to be seen whether that the Central government intended to forge ahead the China-US Trade War, China’s economic slowdown with its attempts to deleverage the Chinese economy or other factors will shift the industry’s direction. As and reduce risk in the financial sector. In particular, discussed below, there are already signs that the central China’s Premier, Le Keqiang, vowed that China would government is recalibrating its economic policy away continue to “resolutely” crackdown on financial from deleveraging and reform and towards stimulus. irregularities, and contain risk. This in turn is consistent with the edicts of the October 2017 19th National Ultimately, if the CBIRC can continue to advance Congress of the Communist Party of China, the meeting its reform and liberalization agenda, we predict the of the highest body (formally speaking) within the emergence of an insurance industry that will be very Communist Party that occurs only once every five years.

Many observers predict that premium income growth, which figured at 3.92% in 2017, will rapidly accelerate as insurers adjust to new economic and regulatory conditions. For instance, Swiss Re Group anticipate 10% premium income annual growth in 2019 and 2020.

19 © 2019 Winston & Strawn LLP During this last meeting of the National Congress, the services sector, the China-US Trade War seems to have central government laid out a relatively low-growth (i.e., thus far had a positive impact insofar as it may have 6.5% for 2018) agenda that prioritizes reducing financial accelerated certain reforms. Yet, at the same time, there risk and deleveraging the economy while encouraging are also indications that trade tension could actually “quality growth,” greater openness to foreign investment, delay the implementation of certain reforms. Indeed, and giving priority to social development. The central in January 2019, it came to light that the PBOC had not government confirmed and further developed this yet formally acknowledged applications from Visa and agenda in the December 2017 Central Economic Work Mastercard to process RMB payments, despite such Conference (CEWC), which effectively set the tone for applications having been filed over a year earlier. In this China’s 2018 economic policies. Specifically, the 2017 sense, ongoing trade tensions could also be viewed as CEWC singled out curbing financial risk as one of the an impediment to greater openness. “three battles” that it must win by 2020, on par with eradicating poverty and fighting pollution.

5.2 The China-US Trade War and Clearly, the China-US Reorientation Towards Stimulus The 2018 CEWC, which convened in December 2018, Trade War is a wild shifted the focus of economic planning away from card that could impact deleveraging towards growth-oriented easing. Likely in response to the China-US Trade War and China’s the foreign investment economic deceleration, the CEWC endorsed a “six- stability” policy whereby in 2019 regulators would focus environment in many on achieving stability in employment, financial markets, trade, investment and foreign investment, and market different ways. expectations. However, it appears “stability” actually means “stimulus,” as larger scale tax and fee cuts, increased local government bond issuance and counter- To further complicate matters, the China-US Trade War cyclical spending are all part of this new agenda. may impact China’s insurance industry in other less direct ways. That is to say, though China’s economy Indeed, since autumn 2018, there have been a number was already poised to slow in 2019, the China-US of indications that China will attempt to use economic Trade War is widely considered to have caused greater stimulus and debt to attempt to forestall economic deceleration. Economic growth in the third quarter of slowdown as it weathers the China-US Trade War. For 2018 sank to 6.5%, the lowest since the 2008 financial instance, the PBOC reduced compulsory cash reserve crisis. But, the worse may be yet to come, as, in early amounts for banks five times in 2018 and has allowed 2019, many foreign and domestic companies, including more firms to qualify from low borrowing rates. Also, and Apple, Huawei and Baidu, all indicated that they are as mentioned above, the Special Products Notice seems bracing for a major slowdown. to suggest that the CBIRC may direct insurers to invest premium income in struggling listed equities in order to Further economic deceleration would likely adversely contribute to the central governments stimulus efforts, impact the insurance industry, and this in itself is a even if this is inconsistent with the agenda laid out in the negative development for foreign investors in this area. General Plan. More importantly, if economic deceleration derails the Chinese government’s financial reform agenda, then 5.3 Impact on Foreign Investors we are inclined to view it as a negative development At this juncture, it is uncertain how this policy from the standpoint of foreign insurers. This is because reorientation and economic slowdown will develop the CBIRC’s recent and anticipated reforms should in 2019 and how they will impact the environment for help foster the long-term sustainable stable growth foreign investment. and increasing sophistication of China’s insurance industry. They should also confer a competitive From the standpoint of foreign investors in the financial advantage on multinational insurers, which have better

2018 China Insurance Review 20 risk-management standards and strategies and are room to grow. Foreign insurers’ market share is currently better equipped to handle China’s increasingly heavy modest. However, new regulations, along with economic compliance burdens. As well, multinational insurers and social growth drivers, have created conditions that can offer more sophisticated products that have higher are conducive to their expansion. margins and more recurring premiums, such as pensions, retirement planning, and health insurance, all of which 6.1 Market Share are currently underserved by Chinese insurers and Large domestic insurers have long dominated China’s favored by the authorities. insurance industry. As recently as 2010, the four largest insurers—People’s Insurance Company of China (PICC), Meanwhile, many of the smaller, newly established , China Pacific Insurance Company insurers will likely struggle to adjust to the new (CPIC), and China Life Insurance—accounted for over regulatory reality. These insurers lack the product 95% of the market’s premium income. However, this was design and internal corporate governance capabilities before Xiang Junbo transformed the market by allowing of their larger competitors. As well, they have the entry of many new insurers. As discussed, many of depended heavily on universal life insurance, which, these insurers grew rapidly off universal life insurance as previously discussed, is now heavily restricted. premium income and this eroded the market share of the Premium income from this source has plummeted, and larger well-established insurers. For instance, the market it remains to be seen if smaller insurers will be able to share of China Life Insurance, a state-owned company muster the significant marketing resources necessary that has historically been China’s largest insurer, has to sell traditional insurance products. The removal of contracted from 43.5% to 17.3% over the past ten years. restrictions on foreign investment will make it easier to Similarly, the combined market share of China’s seven induce multinationals to invest in or partner with these largest insurers slid from approximately 80% in 2014 smaller domestic insurers. Though they can no longer to approximately 60% by early 2017. It remains to be rely on universal life insurance to generate significant seen whether these older insurers can take advantage premium income, these smaller insurers are licensed as of the restrictions on universal life insurance and new insurers in the PRC and this is a substantial benefit as it regulatory environment to reverse their declining market greatly expedites market entry and expansion. share. They seem well-positioned to do so, as many of their newer rivals were highly dependent on income from For the above reasons, we view the reform of China’s universal life insurance and may be unable to handle insurance industry as a net positive for foreign insurers. the heavier regulatory burden. For a list of the largest As such, unless the CBIRC’s reform and liberalization domestic life and non-life insurers in China, please refer agenda is derailed by the China-US Trade War and/or a to Appendices 1 and 2, respectively. major economic slowdown, we predict increasing foreign investment in China’s insurance industry. Foreign insurers, though increasingly present in China, still possess relatively low market shares – 6.7% of the Clearly, the China-US Trade War is a wild card that could life insurance market and 2% of the general insurance impact the foreign investment environment in many market as of 2017. However, we expect robust growth in different ways. Many in the industry are closely following the coming years. As mentioned above, the liberalization trade negotiations which seem to be rapidly developing. of foreign investment rules will create new openings Winston & Strawn will circulate bulletins and analysis as for foreign insurers to exploit some of their strengths, this matter develops. including providing sophisticated products, technical skills, and risk-management expertise.

6 Highlights of China’s Insurance For a list of the largest foreign-invested life and non-life Industry insurers in China, please refer to Appendices 3 and 4, respectively. Given the rapid state of development and reform of China’s insurance industry, it is difficult to summarize 6.2 Reinsurance current market conditions. In general terms, China’s With respect to reinsurance, the major domestic insurance industry is still maturing and has significant reinsurers are Group, China Taiping Re, PICC

21 © 2019 Winston & Strawn LLP b. Economic and Social Drivers Re, and Qianhai Re Domestic. A number of foreign reinsurers are also active, including , Swiss In terms of economic and social drivers, life insurance Re, Hanover Re, General Re, Scor Re, RGA, and Lloyd’s. will continue to enjoy robust growth due to the growing demand for savings/investment instruments from China’s During 2017, a number of foreign reinsurers revealed that increasingly urbanized, well-educated, and affluent they were struggling with low margins in China. However, population. Health insurance and retirement products as discussed below, when looking at the fundamentals, will also grow as government programs are not keeping China appears to be a promising market for foreign up with the aspirations of China’s middle class and the reinsurers due to its rapidly expanding industrial and needs of its very rapidly growing senior population. infrastructure base. As well, as mentioned above, the China–Hong Kong mutual solvency recognition Non-compulsory automotive insurance also has room framework agreement and the Greater Bay Area Initiative to grow, as China remains relatively underinsured and may create new opportunities in China for foreign penetration rates are below those found in more-mature reinsurers that are licensed in Hong Kong. economies.

For further information on some of the foreign and In more general terms, Chinese corporate insurance domestic reinsurers operating in the PRC, please refer to buyers are often very price-sensitive and weary of Appendix 5. added-value services (e.g., risk control). Many Chinese businesses still self-insure or view insurance as a kind 6.3 Drivers for Growth of cash flow management. This is changing, however, The key drivers for growth in the Chinese insurance and laws and attitudes towards corporate governance market are: (i) state governance and regulation; and (ii) and risk management best practices will likely stimulate economic and social drivers. stronger demand for insurance. a. State Governance and Regulation Ultimately, China has considerable potential for As discussed, the CBIRC’s new regulatory priorities insurance growth. By the end of 2017, its insurance (i.e., better risk management and development of more penetration rate had reached a modest but respectable sophisticated insurance products) may slow growth 4.42% (2.59% in life insurance and 1.83% in non-life). in the short term but should reorient the industry By comparison, Hong Kong and Taiwan have very high towards long-term sustainable quality growth. As well, penetration rates of 15% and 16% respectively. Indeed, these reforms, combined with foreign investment China has a massive USD 18 trillion “protection gap” that liberalization, should be favorable to foreign insurers, is projected to increase to USD 46 trillion by 2020. whose strengths typically include risk management and product sophistication. Foreign insurers also seem well-positioned to capitalize on the BRI, which promises to channel USD 1.25 trillion in investments in large construction and engineering projects. With respect to such projects, foreign insurers can complement the offerings of Chinese insurers through their larger global networks, greater expertise in technical underwriting, and ability to offer broad coverage.

2018 China Insurance Review 22 2018 China Insurance Review Appendices 1-5

23 © 2019 Winston & Strawn LLP Appendix 1: Largest Domestic Life Insurers by Premium Income (CBIRC)

Insurer 2018 Insurance Premium Income (Million RMB)

China Life Insurance Co., Ltd. 536205.5466 Ping An Life Insurance Co.of China, Ltd. 446884.5228 China Pacific Life Insurance Co., Ltd. 201343.3723 Co., Ltd. 158275.1873 Tai Ping Life Insurance Co., Ltd. 123618.6534 Co., Ltd. 116121.5356 Tai Kang Life Insurance Co., Ltd. 117358.4338 PICC Life Insurance Co. Ltd. 93716.8532 Funde Sino Life Insurance Co., Ltd. 71730.9489 Tianan Life Insurance Co., Ltd. 58572.3946 China Post Life Insurance Corporation Ltd. 57657.6004 Qian Hai Life Insurance Co., Ltd. 49551.5739 Aeon Life Insurance Co., Ltd. 38565.0342 Sunshine Life Insurance Corporation Ltd 38008.3589 Guohua Life Insurance Co., Ltd. 34524.9489 June Life Insurance Co., Ltd. 29556.0773 CCB Life Insurance Co., Ltd. 24906.7282 Ping An Annuity Insurance Co. of China, Ltd. 21112.0826 Anbang Life Insurance Co., Ltd. 19599.6636 ABC Life Insurance Co., Ltd. 17637.7957 Union Life Insurance Co., Ltd. 15135.6026 PICC Health Insurance Co., Ltd. 14797.922 Minsheng LIFE Insurance Co., Ltd. 11517.8252 Li An Life Insurance Co., Ltd. 11096.532 Sun Life Everbright Life Insurance Co., Ltd. 10344.4269 Happy Life Insurance Co., Ltd. 9165.6841 Hongkang Life Insurance Co., Ltd. 8138.1239 Sinatay Life Insurance Co., Ltd. 7389.8738 Company 6853.1067 Shanghai Life Insurance Co., Ltd. 6408.2431 Greatwall Life Insurance Co., Ltd. 6188.7562

2018 China Insurance Review 24 Appendix 1: Largest Domestic Life Insurers by Premium Income (CBIRC) continued

Insurer 2018 Insurance Premium Income (Million RMB)

Yingda Taihe Life Insurance Co., Ltd. 5405.4829 Zhongrong Life Insurance Co., Ltd. 5077.7386 Taiping Pension Insurance Co., Ltd. 4862.7473 Bohai Life Insurance Corporation Ltd. 4750.2104 Pearl River Life Insurance Co., Ltd 4216.0013 Jixiang Life Insurance Co., Ltd 2793.4154 Hengqin Life Insurance Co., Ltd. 2462.2613 1 2434.5673 国寿存续 China Merchants Life Insurance Co., Ltd 2067.6855 Kunlun Health Insurance Co., Ltd. 1916.0308 Soochow Life Insurance Co., Ltd. 1894.4966 Guolian Life Insurance Co., Ltd. 1823.4435 China United Life Insurance Co., Ltd. 1336.4599 Hetai Life Insurance Co., Ltd. 659.62 Huagui Life Insurance Co., Ltd. 646.6083 Trust Mutual Life Insurance Company 538.6992 Fosun United Health Insurance Co., Ltd. 520.1265 Hexie Health Life Insurance Co., Ltd. 366.2608 Anbang Annuity Insurance Co., Ltd. 362.8866 Aixin Life Insurance Co., Ltd. 303.4621 CPIC Allianz Health Insurance Co., Ltd. 263.2916 Beijing Life Insurance Co., Ltd. 190.8684 Guofu Life Insurance Co., Ltd. 151.4248 Guobao Life Insurance Co., Ltd. 128.0932 Haibao Life Insurance Co., Ltd. 81.6853 Sino-Conflux Insurance Co., Ltd. 19.9695 Three Gorges Life Insurance Co., Ltd. 11.0369 Ruihua Health Assurance 0.7481 China Life Pension Co., Ltd. 0 Changjiang Pension Insurance Co., Ltd. 0 New China Pension Co., Ltd. 0 PICC Pension Co., Ltd. 0

25 © 2019 Winston & Strawn LLP

1 Regretfully, the English name of this insurer, which seems to be affiliated with China Life Insurance (Group) Co., is not readily available. Appendix 2: Largest Domestic Non-Life Insurers by Premium Income (CBIRC)

Insurer 2018 Insurance Premium Income (Million RMB)

PICC Property and Casualty Co., Ltd. 388002.6917 Ping An Property and Casualty Insurance Co. of China, Ltd. 247443.9208 China Pacific Property Insurance Co., Ltd. 117379.7136 China Life Property and Casualty Insurance Co., Ltd. 69106.1637 China Continent Property & Casualty Insurance Co., Ltd. 42414.5301 China United Property Insurance Co., Ltd. 42232.286 Sunshine Property and Casualty Insurance Co., Ltd. 36231.1597 Taiping General Insurance Co., Ltd. 24230.1354 China Export & Credit Insurance Corporation 19539.6096 Tian An Insurance Co., Ltd. 15103.1631 Sinosafe General Insurance Co., Ltd. 11962.2258 ZhongAn Online Property & Casualty Insurance Co., Ltd. 11223.1089 Yong An Insurance Co., Ltd. 10448.8219 Huatai Property & Casualty Insurance Co., Ltd. 8087.8075 Yingda Taihe Property Insurance Co., Ltd. 7727.6956 Alltrust Insurance Co., Ltd. 6163.0755 BOC Insurance Co., Ltd. 5929.877 Guoyuan Agricultural Insurance Co., Ltd. 5760.3576 Zking Property & Casualty Insurance Co., Ltd. 5489.4233 Anhua Agricultural Insurance Co., Ltd. 4983.6567 Dinghe Property Insurance Co., Ltd. 4475.8205 Zheshang Property & Casualty Insurance Co., Ltd. 4398.1295 Ancheng Property & Casualty Insurance Co., Ltd. 4096.3579 Guoren Property and Casualty Insurance Co., Ltd. 4090.7341 Bohai Property Insurance Co., Ltd. 4002.3479 AnBang Property & Casualty Insurance Co., Ltd. 3848.8238 Dubon Property & Casualty Insurance Co., Ltd. 3792.9206 The Asia-Pacific Property & Casualty Insurance Co., Ltd. 3726.1188 Sunlight Agricultural Co., Ltd. 3424.5642 TK.CN Insurance Co., Ltd. 2950.5158 Chang An Property & Liability Insurance Co., Ltd. 2903.8658 Beibu Gulf Property & Casualty Insurance Co., Ltd. 2832.2602

2018 China Insurance Review 26 Appendix 2: Largest Domestic Non-Life Insurers by Premium Income (CBIRC) continued

Insurer 2018 Insurance Premium Income (Million RMB)

Funde Property & Casualty Insurance Co., Ltd. 2329.4558 Huahai Property & Casualty Insurance Co.,Ltd. 2032.8303 Jintai Insurance Co., Ltd. 2012.4745 China Huanong Property & Casualty Insurance Co., Ltd. 1862.607 Taishan Property & Casualty Insurance Co., Ltd. 1712.5314 Zhongyuan Agricultural Insurance Co., Ltd. 1656.5803 Anxin Agricultural Insurance Co., Ltd. 1530.1399 China Coal Insurance Co., Ltd. 1444.9066 Urtrust Insurance Co., Ltd. 1298.8607 E An Property & Casualty Insurance Co., Ltd. 1284.2272 Anxin Property & Casualty Insurance Co., Ltd. 1221.7738 Champion Property & Casualty Insurance Co., Ltd. 1193.8196 Xinjiang Qianhai United Property & Casualty Insurance Co., Ltd. 1149.8074 Yanzhao Property & Casualty Insurance Co., Ltd. 817.7674 Zhonglu Property & Casualty Insurance Co., Ltd. 794.9087 Changjiang Property & Casualty Insurance Co., Ltd. 728.4813 Hengbang Property Insurance Co., Ltd. 721.6806 Sanguard Automobile Insurance Co., Ltd. 628.4807 China Railway Captive Insurance Co., Ltd. 549.4642 CNPC Captive Insurance Co., Ltd. 526.6283 Qomolangma Property & Casualty Insurance Co., Ltd. 461.5095 China COSCO Shipping Captive Insurance Co. Ltd. 408.9453 Haixia Goldenbridge Insurance Co., Ltd. 403.4159 CCB Property & Casualty Insurance Co., Ltd. 383.9823 Public Mutual Insurance Corporation 383.9608 Yellow River Property & Casualty Insurance Co., Ltd. 261.4248 Sunshine Surety Insurance Co., Ltd. 249.452 Union Property & Casualty Insurance Co., Ltd. 208.9107 Donghai Marine Insurance Co., Ltd. 188.6682 Long Property & Casualty Insurance Co., Ltd. 181.951 GDYD Property & Casualty Captive Insurance Co. Ltd 58.7395 Taiping Science and Technology Insurance Co., Ltd. 46.791 Hero Mutual Property Insurance Corporation 35.4792 Rongsheng Property Insurance Co. Ltd. 17.2191

27 © 2019 Winston & Strawn LLP Appendix 3: Largest Foreign-Invested Life Insurers by Premium Income (CBIRC)

2 2018 Insurance Insurer Foreign Investor (Equity Stake)² Premium Income (Million RMB)

ICBC-AXA Life Insurance Co. Ltd. AXA Group (27.5%) 33680.6427

Evergrande Life Assurance Co. Ltd. Assurance Co., Ltd. (25%) 32371.6683

AIA Insurance Group. Ltd. AIA Group Ltd. (100%) 26134.2891

Citic-Prudential Life Insurance Co., Ltd. (50%) 15384.5806

Cigna & CMB Life Insurance Co., Ltd. Cigna Health and Life Insurance Co., Ltd. (50%) 15061.649

Generali China Life Insurance Co., Ltd. S.p.A. (50%) 14012.2251

Sino-US United Metlife Insurance Co., Ltd. MetLife, Inc. (50%) 11601.6731

Manulife-Sinochem Life Insurance Co. Ltd. (International) Ltd. (51%) 8096.5435

BoComm Life Insurance Co. Ltd. Commonwealth Bank of Insurance Group (37.5%) 8017.9913

Aviva-COFCO Life Insurance Co., Ltd. plc (50%) 7959.5556

Huatai Life Insurance Co. Ltd. Chubb Ina Holdings Inc. (20%) 5319.3289

Allianz China Life Insurance Co. Ltd. Allianz SE (51%) 4946.1073

ING-BOB Life Insurance Co.,Ltd. BNP Paribas Cardif (50%) 4694.2929

Ping An Health Insurance Co. of China, Ltd. Discovery Ltd. (24.99%) 3703.1358

Aegon THTF Life Insurance Co. Ltd. Aegon N.V. (50%) 3681.4605

Heng An Insurance Co., Ltd. Standard Life Aberdeen plc (50%) 3279.0526

BOC- Life Insurance Co. Ltd. Co. Ltd (25%) 2866.3706

Cathay Lujiazui Life Insurance Co., Ltd. Cathay Life Insurance Co., Ltd. (50%) 2323.7494

Great Wall Changsheng Life Insurance Co., Ltd. Insurance Co. (30%) 2315.868

Founder Insurance Co., Ltd. Meiji Yasuda Life Insurance (29.24%) 2089.8263

2 As discussed above in Section, the 50% foreign ownership cap that applies to life insurance companies has not yet been abolished. The foreign equity stakes in excess of 50% shown below are in companies that were established before the cap was implemented.

2018 China Insurance Review 28 Appendix 3: Largest Foreign-Invested Life Insurers by Premium Income (CBIRC) continued

2018 Insurance Insurer Foreign Investor (Equity Stake) Premium Income (Million RMB)

HSBC Life Insurance Co., Ltd. HSBC Insurance (Asia) Ltd. (50%) 1424.7362

Pramerica Fosun Life Insurance Co., Ltd. The Prudential Insurance Co. of America (50%) 1259.9535

King Dragon Life Insurance Co., Ltd. Taiwan Life Insurance Co., Ltd. (50%) 611.4978

ERGO China Life Insurance Co., Ltd. ERGO Life Insurance SE (30%) ERGO Group AG 600.3431

Sino-Korea Life Insurance Co., Ltd. Co., Ltd. (50%) 564.714

Old Mutual-Guodian Life Insurance Co., Ltd. Life Assurance Company (South 560.4394

Shin Kong-HNA Life Insurance Co., Ltd. Shin Kong Life Insurance Co., Ltd. (50%) 92.6396

Sino-French Life Insurance Co., Ltd. CNP Assurances S.A. (25%) 0.113

29 © 2019 Winston & Strawn LLP Appendix 4: Largest Foreign-Invested Non-Life Insurers by Premium Income (CBIRC)

2018 Insurance Insurer Foreign Investor (Equity Stake) Premium Income (Million RMB) AXA Tianping Property & Casualty AXA Versicherungen AG (50%) 6334.7609 Insurance Co., Ltd.

Cathay Insurance Co., Ltd. Cathay Life Insurance Co., Ltd. (24.5%) 3846.9127 Cathay Century Insurance Co., Ltd. (24.5%)

Groupma AVIC Property Insurance Co., Ltd. Groupama S.A. (50% ) 2307.2021

Liberty Insurance Co., Ltd. Insurance Co. (100%) 1949.9216

AIG Insurance Co. China, Ltd. American Home Assurance Co. (100%) 1590.3553

Allianz China General Insurance Co., Ltd Allianz SE (100%) 1049.0796

Samsung Property & Casualty Insurance Co Samsung Fire Marine Insurance Co., Ltd (100%) 852.4112 (China) Ltd.

Fubon Property & Casualty Insurance Co., Fubon Life Insurance Co., Ltd (40%) 780.3643 Ltd Fubon Property & Casualty Insurance Co., Ltd. (40%)

Generali China Insurance Co., Ltd Assicurazioni Generali S.p.A. (49%) 669.7512

The & Nichido Fire Insurance Tokio Marine & Nichido Fire Insurance Co., Ltd. (100%) 608.0087 Co. (China) Ltd.

Zurich General Insurance (China) Co., Ltd. Zurich Insurance Co., Ltd (100%) 567.9858

Mitsui Sumitomo Insurance (China) Co., Ltd. Mitsui Sumitomo Insurance Co., Ltd. (100%) 550.0617

Chubb Insurance (China) Co., Ltd. Federal Insurance Co. (100%) 541.9537

Sompo Japan Insurance (China) Inc. Sompo Japan Nipponkoa Insurance Inc. (100%) 395.7119

Starr Property & Casualty Insurance (China) Starr Insurance & Reinsurance Ltd (77.45%) 202.1349 Co., Ltd. Starr Indemnity & Liability Co. (20%)

Swiss Re Corporate Solutions Insurance Swiss Re International SE (100%) 150.7034 China Ltd.

LIG Property Insurance (China) Co., Ltd. KB Insurance Co., Ltd (100%) 131.1967

2018 China Insurance Review 30 Appendix 4: Largest Foreign-Invested Non-Life Insurers by Premium Income (CBIRC) continued

2018 Insurance Insurer Foreign Investor (Equity Stake) Premium Income (Million RMB) Hyundai Insurance (China) Co., Ltd. Hyundai Marine & Fire Insurance Co., Ltd (100%) 91.4804

Nipponkoa Insurance Co., (China) Ltd. Sompo Japan Nipponkoa Insurance Inc. (100%) 61.9492

Aioi Nissay Dowa Insurance (China) Co., Aioi Nissay Dowa Insurance Co., Ltd. (100%) 54.9148 Ltd.

XL Insurance (China) Co., Ltd. XL Reinsurance (America) Inc (51%) 30.2239 XL Insurance Co. SE (49%)

Lloyd's Insurance Co. (China) Ltd. Lloyd’s of London (100%) 12.3828

31 © 2019 Winston & Strawn LLP Appendix 5: Select Domestic and Foreign-invested Reinsurers Active in the China Market

234

Insurance Business Income as of Q3 2018 Licensed Reinsurance Entities Domestic/Foreign (million RMB)

China Reinsurance (Group) Corporation3 20748.05176732 (China Property and Domestic Casualty Reinsurance Co., Ltd) 47357.1454 (China Life Reinsurance Co., Ltd.)

Swiss Reinsurance Co., Ltd. Beijing Branch 8524.8652097 (Q4: 2790.21064155) Foreign

Munich Reinsurance Co. Beijing Branch 8001.2211119 (Q4: 2437.03108739) Foreign

Hannover Rück SE Shanghai Branch 7150.44492 (Q4: 2368.002403) Foreign

SCOR SE Beijing Branch 4556.30 (Q4: 1386.70) Foreign

Qianhai Reinsurance Co., Ltd. 4742.57 (Q4: 1905.10) Domestic

Taiping Reinsurance (China) Company 3662.90 Domestic Limited

General Reinsurance AG Shanghai Branch 2346.573784 (Q4: 1396.193171) Foreign

RGA Reinsurance Co. Shanghai Branch 779.83867229 (Q4: 285.98752106) Foreign

PICC Reinsurance Company Limited 3918.0124 Domestic

3 Only in relation to the subsidiaries of China Property and Casualty Reinsurance Co., Ltd. and China Life Reinsurance Co., Ltd.

2018 China Insurance Review 32 2018 China Insurance Review Key Contacts

33 © 2019 Winston & Strawn LLP Key Contacts

Brinton Scott Gregory Harris Managing Partner, Shanghai Associate, Shanghai +86 21 2208 2654 +86 21 2208 2642 [email protected] [email protected]

Brinton has extensive experience in advising Fortune 500 Greg is a Canadian lawyer who concentrates his practice and large private multinational corporations in various on cross-border M&A, China outbound investment and matters including: investigations (fraud, corruption, and general corporate matters. Having worked in China, Foreign Corrupt Practices Act); foreign direct investment; Taiwan and Canada, his experience includes advising mergers and acquisitions (including merger controls); Asian, European and American companies on their reorganizations; joint ventures; construction (Greenfield); cross-border transactional projects. His corporate employment; intellectual property; and technology and experience includes drafting various agreements licensing. He has advised clients across a broad array (distribution, licensing, confidentiality, settlement, of industry sectors including: aerospace; automotive; consulting, service, royalty, share purchase, asset chemical; construction; food and beverage; insurance; purchase, etc.). medical device; pharmaceutical; publishing; media and entertainment; real estate; and retail.

Susan Deng Jane Zhou Legal Consultant, Shanghai Associate, Shanghai +86 21 2208 2644 +86 21 2208 2694 [email protected] [email protected]

Susan has a focus on general corporate, M&A, regulatory Jane’s experience includes drafting legal documents, compliance, corporate governance, and foreign direct contracts, legal due diligence reports and memos, investment. She has experience advising on various and employment contract templates in relation to the legal issues from the establishment of companies to different aspects of the establishment of foreign-invested their liquidation/bankruptcy, including advising on enterprises in the People’s Republic of China. She has labor and employment, intellectual property aspects, represented clients across the automotive, insurance and commercial contracts. She also has experience and pharmaceuticals & medical devices industries. in advising and managing the entire legal process associated with the incorporation of new FIEs, including changing registered addresses and when needed, advising on their liquidation and deregistration.

2018 China Insurance Review 34 About Winston

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Winston is organized as a single law firm with 16 We represent clients in all phases of international geographic locations. We do not function as a collection transactions and disputes, as well as before of independent offices—all of the firm’s resources are governmental and international agencies. Winston has equally available to each attorney in the service of a continued to expand our capabilities and resources— client. Through this approach, we ensure consistent with offices in North America, Europe, Asia, and the outcomes, and all clients receive the same high level of Middle East—to keep pace with our clients’ legal needs service anywhere in the world. around the world.

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