The China Insurance Regulatory Commission (CIRC) announced on Wednesday that it has promulgated a new regulation that requires all insurers to deposit a portion of their premiums in an insurance protection fund starting this year. The fund will be used to compensate policyholders in event of insurer bankruptcy.

CIRC expects the fund to have collected 2.5–3.0 billion yuan (US$302.0–398.7 million) from insurers by the end of this year.

The new regulation applies to foreign and Sino-foreign insurance companies operating in China as well as domestic ones. Thirty-nine foreign insurers have entered the Chinese market and have set up 70 operational entities, including branches and joint ventures.

Jiang Xianxue, deputy director-general of CIRC's Finance and Accounting Department, said that the new system reflects that the insurance industry is the first financial subsector in the nation to break away from the years-old practice running to the government for a bailout if a company goes bankrupt.

"Because of the bankruptcy compensation arrangements, insurance companies that have serious solvency problems can, in the future, peacefully exit under market principles," Jiang said.

No insurers have declared bankruptcy in China since the industry was restarted more than 20 years ago following a suspension for political reasons.

According to the new regulation, the fund will fully cover policyholders' losses not exceeding 50,000 yuan (US$6,000) when a non-life insurer goes bankrupt and its assets are insufficient to repay liabilities. The fund will pay 90 percent of losses in excess of that amount for individual policyholders and 80 percent for corporate policyholders.

In a case of life insurer bankruptcy, the company's policies will be transferred to another life insurer, which will then receive compensation not to exceed 90 percent of individual policyholders' losses or 80 percent of corporate policyholders' losses.

Jiang said that since the typical individual non-life claim is for less than 50,000 yuan, the majority of policyholders will be completely covered under the new regulation.

"Therefore, it's fair to say that, after the establishment of the insurance protection fund system, the functioning of the insurance market will be healthier, while the interests of policyholders will be better protected," Jiang said.

He indicated that a special division would be set up under his department, probably in the first half of the year, to oversee the fund temporarily. An insurance protection fund council is to be assembled later with officials and specialists to manage and supervise the use of the fund.

The life and non-life segments are each expected to contribute about 1 billion yuan (US$120 million) to the fund each year, although the total will depend on premium growth. The two segments operate under separate regulations in China.

Insurers are required to submit up to 1 percent of retained premiums to the fund, with the percentage varying by business lines, until the total contribution amounts to 6 percent of total assets for non-life insurers and 1 percent for life insurers.

The regulation will have a bigger impact on the balance sheets of life insurers than their non-life counterparts, which have been setting aside protection reserves since 1999.

China Life, the country's largest, will contribute an estimated 200 million yuan (US$24 million) annually to the fund from this year. However, the impact on its net profit will be smaller since the contribution is deductible from 33 percent income tax, according to CIRC.

(China Daily January 6, 2005)