VZCZCXRO0358
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0577/01 0640944
ZNR UUUUU ZZH
P 050944Z MAR 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 2705
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 03 BEIJING 000577 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD, MAIN 
STATE PASS TO TREASURY 
 
E.O. 12958:  N/A 
TAGS: EIND ETRD EFIN ECON CH
SUBJECT:  CHINA INTRODUCES NEW MEASURES TO BOOST CONFIDENCE IN 
INSURANCE INDUSTRY 
 
REF: (A) 08 Beijing 01569 (B) 08 Beijing 07535 
 
¶1. (SBU) SUMMARY. On February 28 China's National People's Congress 
(NPC) adopted an amended Insurance Law as part of the government's 
efforts to boost credibility and consumer confidence in the 
industry. This long-awaited amendment will take effect on October 1. 
The new law includes measures to regulate insurance company 
transactions and improve governance practices through tightened 
government control and oversight, as well as protect the rights of 
the insured. A prominent industry expert tells emboffs that the 
amendment and additional recent regulations are a response to a high 
level of consumer complaints about the industry. Overall, foreign 
industry contacts welcomed the amendment as a step in the right 
direction towards improved transparency and consumer protection, and 
are pleased that restrictions on the reinsurance market have been 
relaxed. However, contacts are disappointed that their suggested 
changes to the branch licensing process were ignored, and that 
barriers to entering other markets, such as auto insurance, were not 
lifted (Ref A). End Summary. 
¶2. (U) At a February 28 session of the Standing Committee of the 
NPC, Chairman Wu Bangguo and committee Vice Chairpersons approved an 
amendment to the Insurance Law designed to encourage both fiscal and 
managerial responsibility in China's insurance industry. The amended 
law includes the following key measures: 1) gives the China 
Insurance Regulatory Commission(CIRC)the power to halt transactions 
by insurance companies and their subsidiaries that are deemed too 
risky; 2) authorizes CIRC to restrict salaries of board members and 
senior administrators of insurance companies with inadequate 
solvency; 3) expands the investment choices for insurance companies; 
and 4) gives both foreign and domestic companies more flexibility in 
the reinsurance market. 
 
PRC Stressing Quality, Not Quantity 
----------------------------------- 
¶3. (SBU) An influential insurance expert at Beijing's China 
University of Political Science and Law told emboffs that the 
amendment is focused on creating a quality insurance market, not 
necessarily expanding the market. According to foreign industry 
contacts, the amendment reflects a good faith effort by the 
government to address long-standing customer dissatisfaction with 
the industry. The 2008 Sichuan earthquake highlighted severe 
problems with life and personal property insurance sales. According 
to Chinese media sources, customers were misled by sales 
representatives at the point-of-sale, only to be left empty-handed 
after the disaster struck. Industry sources acknowledge consumers' 
negative perception of the industry, and cite lack of professional 
training, transparency, product choice, and consumer education as 
the major contributing factors (Ref B). 
 
Amendment Addresses Global Financial Crisis Worries 
--------------------------------------------- ------ 
¶4. (U) At the annual National Insurance Working Conference on 
December 27, CIRC Chairman Wu Dingfu expressed anxiety over industry 
prospects for 2009-2010, despite a 42% growth in premium income in 
¶2008. He listed greater risk for overseas investment, and lower than 
expected return for the investment products as some of the 
challenges the industry faces. To address these concerns, the 
amended Insurance Law allows companies to invest in: infrastructure 
construction projects; other property assets such as real estate; 
and marketable securities such as bonds, stocks, and funds. (Note: 
The original Insurance Law allowed only investment in government and 
financial bonds. End note.)  Both foreign and domestic industry 
sources welcomed the opening of investment channels. 
 
Onerous Reinsurance Articles Deleted 
------------------------------------ 
¶5. (SBU) For foreign insurance companies, the biggest direct change 
may concern reinsurance. Foreign companies welcomed the removal of 
two provisions that had restricted domestic insurance companies from 
entering into outbound reinsurance contracts with foreign-invested 
companies.  The amended Law's Article 105 provides that domestic 
insurance companies may conduct outbound reinsurance matters solely 
on "prudential grounds." (Comment: Interestingly, this change was 
not highlighted by the National People's Congress in its explanation 
of the amendment of the Law. Foreign companies were pleased to see 
the new provision, but think the gains here could just be a 
by-product of the Chinese government trying to support domestic 
companies' interests. It is also possible the Chinese government did 
not want to highlight this perceived opening to foreign-invested 
companies. End comment.) 
 
 
Regulations Bring New Training Woes 
----------------------------------- 
¶6. (SBU) In January 2009, CIRC imposed new regulations as part of a 
bigger plan to "clean up" the industry and restore consumer 
confidence, according to an industry expert. Companies are now 
 
BEIJING 00000577  002 OF 003 
 
 
regulated by the CIRC Supervision Scheme, which aims to tighten the 
management of insurers, particularly those with poor governance 
structures, and ranks insurance companies in descending order, "A," 
"B," "C," or "D."  The companies rated "D" have serious problems in 
payment, corporate governance, capital management, or market 
behavior. This ranking system applies to all insurance companies, 
foreign and domestic alike, and comes with new training requirements 
for upper level management personnel. Foreign industry contacts told 
emboffs that they need clarification on the new management training 
curriculum and information on the level of management CIRC is 
targeting for training on company governance issues. U.S. insurance 
companies already complain of wasting management time in 
Chinese-language mandatory training imposed by CIRC. 
 
¶7. (SBU) In addition to the Supervision Scheme, CIRC recently 
announced it will ban sales of investment-linked life insurance 
products at bank counters designed for depositors. As of March 15, 
banks will be allowed to sell investment-linked insurance products 
only through their wealth-management counters, and representatives 
selling these products are required to have at least one-year of 
experience selling life insurance and 40 hours of special training. 
These new regulations are designed to make it difficult for 
unqualified sales representatives to sell risky products to 
uninformed consumers. A foreign industry contact commented that the 
regulations were no surprise, as CIRC announced them well ahead of 
time, and that in the long-run they are good for the industry as a 
whole. He did add, though, that the announcement of new training is 
cause for concern and his company will be taking the issue up with 
CIRC. 
 
¶8. (SBU) In addition, foreign industry sources tell emboffs that 
they fear this new environment could bring more training 
requirements for managers and CEOs. They hope CIRC will inform them 
of any new training requirements in the works. 
 
New Priorities Exacerbate Long-standing Issues 
--------------------------------------------- - 
¶9. (SBU) The current CIRC-imposed moratorium on opening sales 
offices throughout China is unlikely to be lifted soon. A foreign 
industry contact suspects that the suspension of sales office 
approval was targeted at Chinese companies that mislead customers at 
the point-of-sale. Currently, foreign companies face significant 
barriers to opening large regional branch offices in China (which 
requires central government approval), and in the past have relied 
on opening small local sales offices (locally permitted) to enter 
Chinese markets. Chinese companies currently receive branch licenses 
at a much faster rate than foreign-invested firms, making the 
moratorium on the opening of smaller sales offices less of a burden 
to them, as the Chinese firms can rely on their ever-multiplying 
large branch offices to sell products. Our contact lamented that 
U.S. companies always share the punishment equally, but are not on 
equal footing with Chinese companies when it comes to industry 
advancements. 
 
No Revisions Made to Article on Branch Licensing 
--------------------------------------------- --- 
¶10. (SBU) With regard to branch licensing, Article 81 of the 
previous version of the Insurance Law states that the Supervision 
and Administration Department of the State Council will decide 
whether to approve or disapprove an application for the 
establishment of branches or sub-branches. Foreign industry contacts 
reported that they submitted a request to the State Council to allow 
re-submission of applications initially denied. Our contacts were 
disappointed to learn that the Amended Insurance Law did not include 
this suggested revision to Article 81. 
CIRC's Role in Industry Feared Too Broad 
---------------------------------------- 
¶11. (SBU) Sources from foreign-invested insurance companies are 
uneasy about CIRC's supervisory role over the Insurance Association 
of China (IAC). Many sources shared their fears that CIRC wears too 
many hats, as it makes all the laws and regulations in addition to 
overseeing the industry association. Representatives of 
foreign-invested insurance firms were pleased to see that the new 
law does not include the old law's Article 158, which stated that 
the Insurance Association could impose disciplinary punishment upon 
members that violate the IAC's bylaws or industry self-disciplinary 
rules. 
¶12. (SBU) According to an industry expert, the new Supervision 
Scheme allows CIRC to take strict measures and possibly "take over" 
companies that receive a "D" ranking. Article 139 of the new 
Insurance Law clarifies this by stating that CIRC will be given 
strong authority to supervise insurance companies with inadequate 
solvency capacity, including orders to increase capital and increase 
the cession of reinsurance, restrict the scope of business, limit 
the distribution of dividends, restrict the purchase of fixed assets 
and other operations, restrict the form and proportion of other uses 
of funds, restrict stock offerings, prohibit the transfer of bad 
 
BEIJING 00000577  003 OF 003 
 
 
assets and the transfer of business lines, limit the compensation of 
directors, supervisors and senior officers, restrict advertising, 
and suspend the acceptance of new business. 
 
Comment 
------- 
¶13. (SBU) Many of these changes do appear intended to improve 
corporate governance and protect consumer interests, which will 
generally benefit the market's development. However, the net costs 
and benefits to U.S. companies from the changes will depend on 
CIRC's implementation of new administrative rules. End Comment. 
 
PICCUTA