Foreign Investment in the PRC Insurance Brokerage Market

-----Janet Qu

China has become quite attractive to foreign investment, and has been quite effective in its use of foreign investment. The vast number of potential customers, rising GDP, greater market access and the relative infancy of the PRC insurance market has made the insurance industry in China one of the most promising for international investors. This article is intended to analyze legal conditions for foreign investment in the PRC insurance brokerage market, as well as to provide some comment on entry investment startegies.

1. WTO commitments concerning insurance brokerage
According to the SCHEDULE OF SPECIFIC COMMITMENTS ON SERVICES, WTO accession commitments concerning insurance brokerage are as follows:

A. Forms of establishment
Generally, WTO commitments insurance brokerage are solely limited to large-scale commercial risks and brokerage for reinsurance and brokerage for international marine, aviation and transport insurance and reinsurance. Upon WTO accession, joint ventures with foreign equity no more than 50% will be permitted. Within three years after China’s accession, foreign equity share shall be increased to 51%. Within five years after China’s accession, wholly foreign owned subsidiaries will be permitted. Presently, foreign investment into joint venture insurance brokerages is still restricted to control majority of equity.

B. Geographic Coverage
Upon accession, insurance brokers will be permitted to provide services in Shanghai, Guangzhou, Dalian, Shenzhen and Foshan. Within two years after China’s accession, insurance brokers will be permitted to provide services in Beijing, Chengdu, Chongqing, Fuzhou, Suzhou, Xiamen, Ningpo, Shenyang, Wuhan and Tianjin. Within three years after China’s accession, there will be no geographic restriction. Thus, it can be seen that, currently, geographic restriction towards foreign investment imposed by PRC government are being gradually phased out.

C. Business Scope
According to provisions regarding National Treatment, foreign insurance brokers will be permitted to provide “Master Policies” no later than Chinese brokers, under equal conditions.

D. Business License
Upon accession, licenses will be issued with no economic needs test or quantitative limits on licenses.

2. Legal Qualifications
Presently, the ADMINISTRATIVE REGULATIONS ON INSURANCE BROKERS (TRILA IMPLEMENTATION) issued by the People’s Bank of China in February 1998, and the INSURANCE BROKERAGES PROVISIONS promulgated by CIRC in November 2001 are the primary laws governing the administration of insurance brokerages (including foreign-invested one). Conditions for the establishment of foreign invested insurance brokerages can be divided into three categories, i.e. self-requirements, requirements for foreign investors and requirements for local investors.

A. Self-requirements
a) Have a minimum paid-in capital amount of RMB 10,000,000 yuan;
b) Have articles of association that comply with the provisions of the law;
c) Have shareholders and promoters which comply with the provisions of law;
d) No less than one half of the total company employees are qualified PRC insurance brokers;
e) Have senior management personnel with professional qualifications which comply with the provisions of both the People’s Bank of China and China’s Insurance Regulatory Commission (“CIRC”);
f) Have fixed business premises which comply with regulations.

B. Requirements for foreign investor
Where a foreign insurance brokerage company wishes to set up a foreign funded insurance brokerage company, in addition to complying with the aforesaid requirements, the company must also meet the following additional requirements:

a) Have a sound reputation and financial standing and have not incurred a serious penalty in the last three years from the departments in charge and the judicial department of the country in which it is located;
b) Have thirty or more years’ experience in conducting insurance brokerage business;
c) Have total assets more than US$200,000,000;
d) Have a recorded business income of no less than US$100,000,000 in the three consecutive years before the submission of this application;
e) Have had a representative office established in China for a period of two or more years;
f) Being located in a country which has a complete insurance supervisory and administration system; and
g) Other requirements prescribed by the People’s Bank of China and CIRC.

C. Requirements for local investor
a) Have a sound reputation and financial standing and have not incurred a serious penalty in the last three years from the PRC departments in charge and the PRC judicial department;
b) Have recorded a profit in the three consecutive years before the submission of this application;
c) Have had a year-end capital amount of no less than RMB 50,000,000 yuan in the year before the submission of this application; and
d) Other requirements prescribed by the People’s Bank of China and CIRC.

In addition, applications for the establishment of foreign investment insurance brokerage companies should be submitted to CIRC. After initial review, the promoters should work on preparation of the company and the preparatory stage will be for six months. After that, there would be a second application to CIRC for approval of formal opening and upon such approval, the insurance brokerage company would be formally granted a BUSINESS CERTIFICATE OF INSURANCE BROKERAGE.

3. Multiform Foreign Investment in PRC Insurance Brokerage

In recent years, with the progress of restructuring and reorganization of local state-owned insurance brokerage companies as well as the promulgation of governmental policies concerning conversion and change of operation system of state-owned insurance brokerage through the input of foreign investment and public funds, establishment of joint ventures has become an alternative choice but not the only choice for foreign investors and more and more foreign financial institutions have shown great interests in various forms of foreign investment.

There are about three investment approaches available for foreign investors entering into PRC insurance market:
（1） To set up joint ventures with 50% foreign ownership;
（2） To purchase equity of local player with 20%-50% foreign ownership;
（3） To participate large-scale state-owned insurance company with minor equity.

Practically speaking, the author believe,
（1） In case a foreign investor wishes to co-operate with non-insurance large state-owned enterprise, the mode of setting up a joint venture with 50% foreign ownership would be appreciated (see the case of the first foreign-invested insurance brokerage joint venture promoted by Aon Corp. and China National Cereals, Oils, & Foodstuffs Import & Export Corp. (COFCO) in Shanghai);
（2） In case a foreign investor wishes to co-operate with local insurance brokerage player, the mode of purchasing proper equities from such local player would be appreciated.

Moreover, considering the coming of entirely opening of PRC insurance brokerage market by the end of 2006, the author herein suggests that for the purpose of mutual enjoyment of priorities and advantages, foreign investment may enter into PRC insurance brokerage market with the background of financial holding group company and try to realize inter-group global integration.

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