Chinese Life Insurance: Government Regulation Explained

China's insurance industry is one of the fastest-growing sectors in the national economy, second only to banking. The Chinese government has a significant stake in the insurance industry, with the state-owned China Life Insurance Company ranked as the country's largest life insurer by market share as of April 2023. The government began regulating and guiding insurance corporate governance behaviour in 2006 through the China Insurance Regulatory Commission (CIRC), which has established three pillars of regulation: market behaviour, corporate governance, and solvency. While Chinese insurance companies have made strides toward improving their governance structures, the rapid expansion of the industry has also created challenges, such as complex holding relationships that can hurt the interests of insured individuals and society. The government's role in regulating the insurance industry is crucial for maintaining social welfare fairness and protecting the interests of stakeholders.

The Chinese government holds a 68% stake in the country's largest life insurer, China Life Insurance

The Chinese government's 68% stake in China Life Insurance, the country's largest life insurer, underscores the government's influence in the insurance sector and reflects a broader trend of state involvement in key industries. This significant ownership gives the government substantial control over the company's direction and operations.

China Life Insurance's strong position in the market can be attributed to its state-owned status, which grants it a high degree of creditworthiness and broad name recognition. The company has a vast nationwide sales network, with hundreds of thousands of people selling individual and group insurance products and serving nearly 200 million customers. This extensive reach has allowed China Life Insurance to capture a substantial market share, which stood at 26% in 2014.

The insurer's state backing also enables it to forge strategic tie-ups with government entities, such as its collaboration with the Ministry of Public Security to offer accident insurance to public safety employees. Additionally, the company benefits from its alignment with the government in terms of credit risk, as reflected by its Aa3 rating from Moody's Investors Service, which is the same as the Chinese government's rating.

The Chinese insurance market has been expanding rapidly, driven by factors such as increasing personal income and an ageing population. The market is expected to continue its robust growth, with China projected to surpass the United States in terms of global premiums by 2029. This dynamic market, fuelled by strong economic growth, high government spending, consumer awareness, and technological innovations, presents significant opportunities for expansion and profitability.

China's insurance industry is subject to regulatory oversight by the China Insurance Regulatory Commission (CIRC), which introduced the 'Guiding Opinions on Regulating the Insurance Corporate Governance Structure (Trial)' in 2006. This regulatory framework, established with reference to the core principles of the International Association of Insurance Supervisors (IAIS), has played a pivotal role in improving corporate governance within the industry. The CIRC's three pillars of regulation – market behaviour, corporate governance, and solvency – have guided the development of Chinese insurance companies towards encouraging fair competition and healthy development.

However, the rapid growth of the insurance industry has also presented challenges for corporate governance. Large enterprise groups, through complex holding relationships, can exert control over insurance companies, potentially compromising the interests of insured individuals and society. Consequently, Chinese insurance companies are focused on establishing modern enterprise systems and governance structures that align with regulatory requirements. The varying degrees of success in this regard highlight the complex dynamics between state ownership, corporate governance, and business performance.

The China Insurance Regulatory Commission (CIRC) supervises and guides insurance corporate governance

Since the implementation of the CIRC's regulatory framework, Chinese insurance companies have formed a new pattern, encouraging fair competition and normal development. Chinese joint-stock insurance companies, such as the People's Insurance Company of China and China Life, are constantly improving their governance structures and operation mechanisms. They have gradually built insurance corporate governance structures and mechanisms with Chinese characteristics, based on international experience and the realities of China's insurance industry.

However, behind these regulatory compliance actions, many unsatisfactory cases still exist. The Chinese regulatory authority has increased the speed at which insurance licenses are issued. From October 2011 to April 2017, more than 50 licenses were issued, and nearly 200 insurance companies were preparing to apply for a license. The 'barbaric growth' of the insurance industry creates a series of problems for the corporate governance of insurance companies. Large enterprise groups control an insurance company through a complex holding relationship, making it an internal cash dispenser, which hurts the interests and trust of the insured and society.

Chinese insurance companies are focused on establishing a modern enterprise system and governance structure according to the regulations. Even when all insurance companies have established an appropriate governance structure, the effects have been proven to be completely disparate, with many companies able to operate continuously, while others collapsed rapidly. China's insurance corporate governance has improved since the comprehensive governance was introduced in 2006, but governance failures still abound, uncovering the limited effectiveness of the dominant governance structures and mechanisms.

The CIRC has established three pillars of regulation: market behaviour, corporate governance, and solvency

The China Insurance Regulatory Commission (CIRC) has established three pillars of regulation: market behaviour, corporate governance, and solvency. These pillars were established to supervise and guide insurance corporate governance behaviour, using the core principles of the International Association of Insurance Supervisors (IAIS) for reference.

The first pillar, market behaviour, aims to encourage fair competition and normal development among Chinese insurance companies. This includes promoting ethical business practices, preventing anti-competitive behaviour, and ensuring compliance with relevant laws and regulations. The CIRC seeks to create a level playing field for all market participants, fostering a healthy and sustainable insurance industry in China.

The second pillar, corporate governance, focuses on improving the governance structures and operation mechanisms of insurance companies. This includes enhancing the role of the board of directors, strengthening internal controls, and promoting transparency and disclosure of information. The CIRC encourages insurance companies to adopt best practices in corporate governance, such as establishing clear roles and responsibilities for key stakeholders, and implementing effective risk management frameworks.

The third pillar, solvency, relates to the financial stability and resilience of insurance companies. The CIRC sets capital adequacy requirements, conducts regular stress tests, and monitors the investment activities of insurance companies to ensure they have sufficient assets to meet their obligations. This pillar aims to protect the interests of policyholders and maintain the stability of the insurance industry.

By establishing these three pillars of regulation, the CIRC seeks to create a well-regulated and robust insurance industry in China, promoting fair competition, strengthening corporate governance, and ensuring the financial stability of insurance companies. These regulations are designed to protect the interests of policyholders, promote the sustainable development of the industry, and contribute to the overall stability of China's financial system.

The Chinese government encourages private investment in the insurance sector

The Chinese insurance industry has experienced rapid expansion over the past decade, with demand steadily increasing. Two major supply-side trends have encouraged the development of the industry. Firstly, under the World Trade Organization (WTO) framework, the Chinese government lowered entry barriers for foreign insurers, allowing them to establish joint-venture insurance firms in China. Secondly, domestic insurers strengthened themselves through initial public offerings and other market developments. As a result, China had 100 insurance companies as of 2007, with 59 being domestic-funded and 41 foreign-funded.

The Chinese government's encouragement of private investment in the insurance sector is also evident in its relaxation of restrictions on foreign investment in healthcare. Despite negative experiences with market-based solutions in healthcare during the 1980s and 1990s, the Chinese government has allowed greater foreign investment in the sector, and the private system is growing.

In 2009, the Chinese government enacted a major health reform plan, aiming to accelerate the basic health insurance system, increase public health financing, provide essential drugs, and expand primary health facilities. As a result, China plans to achieve universal health coverage by 2020 through four existing insurance schemes.

The Chinese government's encouragement of private investment in the insurance sector is also reflected in its support for private investment in healthcare delivery. While public hospitals in urban areas are often overcrowded, there is a market among wealthier Chinese for private facilities that offer reduced waiting times and efficient, high-quality healthcare services. The Chinese government wants to encourage private investment in underserved areas, and private investors are attracted by the opportunity to cater to the country's large and growing middle class.

China's healthcare reforms have included a shift from fee-for-service to alternative payment systems, such as capitation payments

Capitation payments, on the other hand, are intended to foster efficiency and cost control while providing incentives for better healthcare. Under this model, providers contract with an Independent Physician Association (IPA) to receive a flat monthly payment for every patient enrolled, regardless of the number of services provided or the cost of treatment. A study by the Health Research and Education Trust found that capitation was more cost-effective for Medicaid patients with severe mental illness compared to fee-for-service models.

However, capitation also has its drawbacks. Providers may opt for less expensive procedures and drugs to save money, potentially compromising the quality of care. Additionally, in areas with high populations, providers may receive relatively low capitation rates, forcing them to supplement capitation with fee-for-service methods.

The impact of capitation payments in China has been evaluated through several studies and policy initiatives. One such study, conducted in Ningxia province, found that switching from fee-for-service to a capitated budget with pay-for-performance reduced antibiotic prescription rates and total spending per visit to village clinics. However, it had no significant impact on total spending per visit to township health centres. Another study in Changde City found that capitation payment reduced out-of-pocket inpatient costs and length of stay but did not significantly impact overall inpatient expenditure.

Overall, China's shift from fee-for-service to alternative payment systems, including capitation payments, is aimed at improving the efficiency and cost-effectiveness of healthcare while ensuring better health outcomes for patients. However, the impact of these reforms may vary depending on local contexts and the specific design of payment models.

Frequently asked questions