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China – A Positive Sign For Foreign Insurers?

28 April, 2014



Over the past decade, domestic life insurance companies have come to dominate the Chinese market and foreign insurers have seen their market shares dwindle. This development reflects the increased sophistication of the domestic insurers but also the uneven regulatory landscape. The prohibition to own more than 50% of a life insurance company is a key concern for any foreign insurers wishing to take control over its life insurance joint venture in China. The various forms of red tape and unequal treatment facing insurance companies with a foreign shareholding of 25% or more (“Foreign-invested Insurance Companies“) is also frequently mentioned as a concern. Does the recent regulation issued by the insurance regulator China Insurance Regulatory Commission (“CIRC“) signal a shift?

On 21 March 2014, CIRC issued the Administrative Measures for the Acquisition and Merger of Insurance Companies (the “M&A Rules“), which will come into effect on 1 June 2014. The M&A Rules will apply to the acquisition and merger of both insurance companies with a foreign shareholding of less than 25% (“Domestic Insurance Companies“) and Foreign-invested Insurance Companies1 in China, whether by Chinese or foreign investors. According to CIRC, the new rules are aimed at promoting an optimal structure for the insurance industry and enhancing competitiveness.2

The major highlights of the M&A Rules are set out below:

Allowing Peer Competition

The M&A Rules allow a single investor to, with CIRC’s approval, control two insurance companies that compete in the same business segment (e.g. life insurance) after completion of its acquisition. This is a relaxation of the non-compete restriction imposed by the Administrative Measures on Equity Interests of Insurance Companies issued by CIRC in 2010 (the “2010 Rules“). According to the 2010 Rules, two or more Domestic Insurance Companies that are under common control, or have controlling relationship with each other, are not permitted to carry out the same type of insurance business which will give rise to a conflict of interest or competition between (among) them.

Although the 2010 Rules were the first CIRC regulation to expressly impose the non-compete restriction and should have only applied to Domestic Insurance Companies3, it would appear that it had long been CIRC’s practice to require foreign insurers to focus their business in a single venture, and the 2010 Rules merely emphasised CIRC’s position4. According to a statement made by a CIRC spokesman regarding the 2010 Rules, the reason for the 2010 Rules to impose the non-compete restriction was that with the expansion of the Chinese insurance market, it had come to CIRC’s notice that a single institution might have equity interest in or control multiple insurance companies, and international merger and acquisition activities had also resulted in multiple insurance companies being controlled by a single overseas financial institution; this would increase the risk of peer competition, benefit transfer and risk transfer, and in order to prevent such risk, the 2010 Rules adopted the aforesaid restriction.5 In order to satisfy CIRC’s non-compete requirement, Metlife Inc, which had a 50% equity interest in two Sino-foreign life insurance joint ventures (being United Metlife Insurance Co., Ltd and Sino-US Metlife Insurance Co., Ltd), merged these two subsidiaries into a single joint venture in 2010; and the ING Group, which also had a 50% equity interest in two Sino-foreign life insurance joint ventures (being ING-BOB Life Insurance Co., Ltd. and Pacific-Antai Life Insurance Co., Ltd. (“Pacific-Antai“)), sold its entire stake in Pacific-Antai to China Construction Bank in 2011.
Now with the non-compete restriction partially relaxed, foreign insurers might be able to buy into more than one Chinese insurance company, thereby expanding their footprint in China’s vast insurance market and achieving scale.

Removing The Restriction On Financing

According to the M&A Rules, upon approval of CIRC, investors in insurance company acquisition and merger activities may obtain finance from loans or other channels, provided that the financing does not exceed 50% of the cash consideration. This repealed the restriction imposed by the 2010 Rules that an investor must make investment using its own funds from legitimate sources rather than with bank loans or funds from other channels.

Removing The Time Limit Of Three Years

The M&A Rules have removed the time limit requirement for an investor to hold more than 20% equity interests in a Domestic Insurance Company. According to the 2010 Rules and the subsequent CIRC regulation6, if an investor wishes to hold more than 20% equity interest in a Domestic Insurance Company, it should have been an existing shareholder of that company for three years or longer. Now under the M&A Rules, an investor is not subject to the aforesaid precondition, and may directly acquire more than 20% equity interest in a Domestic Insurance Company.



The M&A Rules mark another step in the gradual liberalisation of China’s vast insurance industry in recent years. This may be good news for foreign insurers who are already on the ground in China and seek to diversify their investment in the sector. However, some caution is warranted. Any new investment is subject to CIRC approval and it remains to be seen how the regulator will exercise its discretion. Other regulatory approvals such as MOFCOM merger clearance may also be required.
Moreover, before a foreign insurer which already has an insurance joint venture in China seeks to invest in another insurance company engaged in the same type of insurance business, it is advised to review any existing joint venture contracts, as extensive non-competition clauses are common in Sino-foreign joint venture contracts.


End Notes:


1 Under the relevant PRC laws, Domestic Insurance Companies refer to insurance companies with a foreign shareholding of less than 25%, while Foreign-invested Insurance Companies refer to insurance companies with a foreign shareholding of 25% or more. Compared with Domestic Insurance Companies, Foreign-invested Insurance Companies are subject to more entry barriers and regulatory restrictions.
2 Please see http://www.circ.gov.cn/web/site0/tab5168/info3912628.htm.
3 Please see Article 2 of the 2010 Rules.

4 Please see www.21cbh.com/HTML/2008-4-2/HTML_4S8YBFOLLA73.html.
5 For details, please see http://www.scio.gov.cn/xwfbh/gbwxwfbh/xwfbh/bjh/Document/643513/643513.htm.
6 Please see Article 2 of the Notice of CIRC on Issues concerning Article 4 of the Administrative Measures on Equity Interests of Insurance Companies.


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For further information, please contact:


Robert Ogilvy Watson, Partner, Ashurst
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Michael Sheng, Partner, Ashurst
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Daniel Öhvall, Ashurst
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Tian Zhou, Ashurst
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