Caixin
Sep 10, 2019 02:46 AM
FINANCE

China Revises Rules on Insurers’ Related-Party Transactions

China’s insurance regulator moves to reduce risks via related-party transactions. Photo: VCG
China’s insurance regulator moves to reduce risks via related-party transactions. Photo: VCG

China’s banking and insurance regulator issued new rules Monday on insurance companies’ related-party transactions, aiming to stop the use of insurers as “ATM machines.”

The new rules define significant related-party transactions as a single transaction or annual cumulative transactions between an insurance company or its subsidiaries and an affiliated party amounting to more than 30 million yuan ($4.2 million) and accounting for more than 1% of the insurer’s net assets.

An insurance company’s combined investments in its shareholders or their related parties must not exceed 30% of the insurer’s total assets or net assets in the previous year, whichever is lower, according to rules released by the China Banking and Insurance Regulatory Commission (CBIRC).

Notably, in the consultation draft rules the CBIRC released earlier to seek public feedback, the cap on how much insurance firms can invest in their shareholders was the lower of the two indicators.

The regulator said some insurance companies channel interests to shareholders and related parties by setting up nonfinancial units and well-packaged financial products, using the insurers as “ATM machines” and causing severe risks.

The current rules on insurers’ related-party transactions that were enacted more than 10 years ago can no longer meet the regulatory needs of risk prevention and supervision, the CBIRC said in a press conference Monday.

The revision of current rules is especially needed after the high-profile fall of Anbang Insurance Group Co. revealed a labyrinthine web of cross-investment among its many affiliated companies.

Anbang was seized by the government last year after founder and former Chairman Wu Xiaohui came under investigation for fraud and embezzlement. Wu was later sentenced to 18 years in prison.

The current rules did not clarify the insurance company’s management responsibilities on related transactions by subsidiaries, making those in control of the insurer able to use the subsidiaries to bypass regulations to get access to the insurer’s premium income.

The new rules also clearly define related parties as any person or entity that holds more than 10% of a subsidiary controlled by the insurer.

The board of the insurer will be required to set up a committee to control and manage the risks of related transactions and disclose information on related transactions in the annual report, according to the new rules.

The new rules also make it clear that the board shall assume the ultimate responsibility for the management of related transactions.

Contact reporter Denise Jia (huijuanjia@caixin.com)

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