31 October 2013

Insurance Europe: Market Access issues for European insurers in Japan, China

Japan

This country represents an important market to the European insurance industry; however, the trading relationships could be further enhanced with the removal of certain trading barriers.

Japan Post Holding (JPH) preferential treatment

JPH is not only a post office but the world’s biggest bank (“postal savings scheme”) and has a life insurance unit, which controls 40% of the market. It was privatised in 2007; however the Japanese government still holds 100% of shares today and will continue to retain a stake of more than one-third. JPH entities enjoy favourable treatment from the Japanese Government. The benefits granted to JPH are inconsistent with Japan’s World Trade Organisation General Agreement on Trade in Services (GATS) commitments.

The Japanese Diet approved in April 2012 new amendments to the Postal Privatisation Law which eliminate the previous privatisation deadline of JPH (2017) and enlarge its discriminatory benefits (e.g. making easier for JPH to issue new products, restricting the access of private insurers to the JPH network). However, despite JPH applying for a licence to offer modified cancer insurance and/or stand-alone medical products, it is yet to be approved.

This follows the LDP Japanese Government committing to the establishment of a level playing field in Japan’s insurance market; and therefore not to approve JPH’s new products until (1) equivalent conditions of competition with private sector insurance suppliers have been established; and (2) JPH has a properly functioning business management system in place.

Discriminatory advantages for mutual aid cooperatives

In Japan, the Kyosai or mutual aid cooperatives are major players in the insurance market. However, the Kyosai are not subject to the same regulation as licensed insurance companies, which are regulated by the Japanese Financial Services Agency (FSA).

The kyosai are treated differently than private-sector insurers in terms of taxation (generally lower than for commercial companies), the protection they provide to their policy holders in the event of bankruptcy (no obligation to pay into industry “policy holder protection funds”), the rules and regulations they must abide by (not regulated by the Insurance Business Law), and how they are supervised (not supervised by the Financial Services Agency, the main financial regulator in Japan).

Position paper

China

This country represents a market of utmost importance to the European insurance industry; however, the trading relationships could be further enhanced with the removal of certain trading barriers. 

Foreign Direct Investment (FDI) cap for foreign companies.

Insurance Europe would like to see increased flexibility in admitting foreign insurers into the Chinese market in terms of both amendments to the joint venture restrictions and the elimination of caps on FDI in domestic insurers. Furthermore, it would be beneficial for the Chinese insurance market if the options for foreign investors would be increased to maintain more than one equity engagement in the Chinese insurance sector. This should include concurrent operation of a wholly foreign-owned institution and participation in another licensed insurer.

Minimum capital requirements for specialised insurers.

Currently, there is no distinction between general insurers and speciality insurers, such as health insurers. This results in speciality insurers being subject to excessive minimum capital requirements even if they only write one or two niche products. Insurance Europe believes that the minimum capital requirements for specialised insurers should be reduced as this restriction is hindering the development of speciality business in China.

Complicated procedures for converting (incorporating) foreign property and casualty insurance branches into subsidiaries.

It has been legally possible for several years for a branch to be converted into a subsidiary but in practice the procedure turns out to be highly selective, lacking in transparency, and often takes a long time. Additional provincial branches for foreign insurers are only approved consecutively with relatively long processing times between two approvals.

Restrictions on related party transactions by foreign-invested insurance companies.

Foreign-invested insurance company's related party transactions (e.g. reinsurance transaction, asset transaction) are governed by the "Foreign-invested Insurance Company Regulation". Under this regulation, a foreign-invested insurance company’ must obtain approval from CIRC for transactions with related parties. In contrast, a domestic insurance’s related party transactions are governed by "Interim Measures on Insurance Company's Related Party Transaction". Under these measures, prior approval from CIRC is not required, and only the "material related party transactions" (under which the transaction amount takes more than 1% of the net asset last year and is more than RMB 5 million) are required to be reported to CIRC. In addition, the scope of "other transactions" under the "Foreign-invested Insurance Company Regulation" is not clear. Without further clarification, any kind of related party transaction of foreign-invested insurance company could be subject to CIRC's prior approval.

Enterprise annuity business limitations.

Despite proven international experience in providing pension insurance, foreign companies have so far not been admitted into the enterprise annuity market. Enterprise annuity business has been available on the Chinese market for some time, but its growth has been slow.

Restrictions on foreign currency conversion.

Capital injections in foreign currency are subject to strict case-by-case control by the State Administration of Foreign Exchange (SAFE), regardless of whether they have already been approved by the China Insurance Regulatory Commission (CIRC). This puts a strain on the cash flow of a company and exposes it to foreign exchange risk.

Lack of clarity regarding the development stage of the Chinese natural catastrophe (Nat Cat) (re) insurance sector.

China is exposed to frequent natural catastrophe events; with recent disasters (earthquakes, floods, blizzards, typhoons etc.) affecting around 70% of the country’s land area, but (re)insurance penetration is low. The CIRC is aware of the current shortfall of Nat Cat protection solutions and has established a Nat Cat risk transfer program as part of its upcoming 5-year plan. However it is unclear which Chinese government entity is ultimately in charge of the Nat Cat program.

Licence restrictions for foreign brokers.

As per CIRC licensing requirements, foreign brokers are only allowed to do business with companies with an investment capital of more than RMB 150 million (€18.11 million, 1 € = 8.28 RMB) and more than RMB 400,000 (€48, 309) premium (with exceptions in reinsurance, marine, aviation and transport insurance). Thus many of the companies in the SME sector fall outside the scope of the business licence.

Requirement to establish representative offices.

Representative offices have to be established in order to satisfy CIRC’s regulatory requirements. The offices have to be established for at least 2 years before an application can be made to establish a joint venture on a wholly foreign owned company and are prohibited from engaging any in business activities.

Export trade credit insurance monopoly.

Currently local insurers are not allowed to offer export trade credit insurance in China. The only operators in this sector are China Export & Credit Insurance Corporation “Sinosure” and the People's Insurance Company of China (PICC), both state owned enterprises. Insurance Europe believes that this duopoly should be abolished and that all insurers should be able to obtain licences to operate in the trade credit insurance sector.

Market access restrictions for foreign loss adjusting companies.

Although there are no regulations which set restrictions on foreign ownership in this sector, foreign ownership is in practice capped by the CIRC at 25%1. In addition, Foreign Loss Adjusting Companies face onerous requirements when establishing a representative office, for example the level of assets in the previous year must be higher than RMB 13 million (€1.57 million).

Lack of transparency.

CIRC has recently approved important regulations without a meaningful consultation with the industry. The “CIRC Notice on Certain Issues Concerning Reinsurance Transactions Conducted by Foreign-invested Insurance Companies with Their Affiliates”, was released for consultation between December 24th and 31st 2012, not only was this consultation extremely short but it also coincided with the Western Christmas holiday break.

Position paper

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