I. Purposes for setting up a non-insurance subsidiary
An obvious fact for foreign insurers is that they are not allowed to conduct insurance business within the territory of China (excluding jurisdiction as Hong Kong, Macau and Taiwan for the purpose of this article), nor can their Chinese non-insurance subsidiaries which do not possess any insurance licenses. Additionally, the establishment of a Chinese insurance company will be subject to strict review and must be approved by the Chinese insurance regulator (i.e. the Chinese Banking and Insurance Regulatory Commission).
However we observed that more and more foreign insurers (esp. reinsurers) are setting up or exploring the opportunity to set up non-insurance subsidiaries in China. Why is that? Based on our experience, the following may offer stimuli for foreign insurers to take such steps:
First, some foreign reinsurers often need a Chinese subsidiary to provide technical support for their business when conducting reinsurance cooperation with Chinese direct insurance companies. Specifically, these subsidiaries will be responsible for bordereau reconciliation, statement of account verification, actuarial analysis, verifying claims information, etc.
Second, some foreign insurers view their non-licensed subsidiaries as platforms for providing value-added services to Chinese insurance clients (i.e. policyholders, insureds).
Last but not least, allowing their Chinese subsidiaries to assist in processing data related to insurance business physically in China to some extent eliminates the need for data outbound transfer procedures while the data outbound transfer is highly regulated by the Chinese authority.
Additionally, for achieving the above purposes, having a representative office in China may not be an appropriate alternative compared to the subsidiary, in that the scope of business of the representative office is strictly limited to non-profiting activities.
Since establishing a Chinese non-insurance subsidiary seems a good attempt for a foreign insurer, the next question which this article aims to explore is: How to set up a non-insurance subsidiary in China and what should such company pay attention to during its business operation.
II. Procedures for the set-up of a non-insurance subsidiary
Generally, as a foreign invested company, the establishment procedures of a non-insurance subsidiary mainly involve the registration procedure of the local Administration for Market Regulation (“AMR procedure”), and the foreign investment information reporting procedure of the Ministry of Commerce (“MOFCOM procedure”).
For the AMR procedure, the procedures for foreign-invested enterprises and domestic enterprises are quite similar and convenient, but the following aspects need to be noted:
a. The company name. Some foreign insurance groups have trade names associated with geographical locations, which carry profound brand cultural influence and international recognition. Therefore, they hope that their non-insurance subsidiaries in China can also use such unified trade names. However the use of such trade names in China may not be feasible——according to Article 11 of the Administrative Provisions on the Registration of Enterprise Names, an enterprise name shall not adopt the name of any foreign country (region), or any abbreviation or special title thereof. In practice, some cities in China have adopted online systems for preliminary check of company names. It is suggested that foreign insurers check whether the proposed names for their subsidiaries can be adopted on these systems before formally submitting application materials to the local AMR.
b. The business scope. As a foreign invested company, there are some fields which are not open to them (e.g. internet-based news services, online publishing services), and some fields in which foreign insurers need to satisfy more conditions compared to domestic companies (e.g. the proportion of foreign investment in value-added telecommunications services (except for e-commerce, domestic multi-party communications, store-and-forward, and call center services) shall not exceed 50%). While the general consulting business which the non-insurance subsidiaries normally intend to conduct would not involve such “negative list”, it is suggested that foreign insurers make detailed plans for the business scope of their subsidiaries during the establishment procedure, to avoid touching the areas on the negative list.
c. The registered capital. While banks, asset management companies, insurance companies and other financial institutions normally are subject to requirements as paid-up capital and minimum capital, there is no such requirement on a non-insurance subsidiary which mainly conducts consulting business. However it is common practice for such companies to have a registered capital of RMB1million to 1.5million. Foreign insurers may consult local AMRs to check if there is any local requirement on registered capital that need to obey.
The currency of the capital is another issue. According to relevant Chinese laws, foreign investors are allowed to use freely convertible foreign currency as the registered capital. Where the currency of the registered capital of a non-insurance subsidiary changes, an application for amendment of its registered particulars should be filed with the local AMR.
For the MOFCOM procedure, according to Article 9 of the Measures for Reporting of Information on Foreign Investments, a foreign investor shall submit the initial report on foreign investment information through the enterprise registration system when it applies for the registration of the foreign-invested enterprise. Therefore, the non-insurance subsidiary needs to file such initial report during the establishment process.
While the establishment procedure sounds easy by law, the actual process of setting up the Chinese subsidiary may still be time consuming, in that the main work lies in location selection, personnel selection, and documents preparation, which may not be quick moves under control. In particular, currently, many local AMRs require some documents to be executed by the foreign insurer with original copies submitted to the local AMR for review, the foreign insurer’s internal procedure and courier time also need to be counted.
III. Main issues on the operation of the non-insurance subsidiary
As discussed above, Chinese non-insurance subsidiaries mainly provide technical support related to insurance business to foreign insurers or other insurance related clients. Therefore, the Chinese insurance regulation is one thing they can not ignore. While only insurance companies and other insurance organizations (e.g. insurance agents, insurance brokers, etc.) established in accordance with the Insurance Law of China are permitted to conduct insurance business in China, there is no clear definition of “insurance business” by law. Furthermore, related sanction cases in this regard are also limited from public information, which makes the boundary between assisting and conducting insurance business remain unexplicit.
In practice, underwriting, policy issuance, premium collection, claims payment are deemed as typical insurance business, thus non-insurance subsidiaries are strictly prohibited from conducting such activities. For other activities that do not appear to belong to the typical insurance business mentioned above, analysis needs to be conducted on a case-by-case basis. Based on our experience, the bottom line would be refraining from making any decision on insurance activities, where such decisions should be ultimately made by insurance institutions.
Besides, marketing and fee collection are two sensitive areas for non-insurance subsidiaries during their business operation. At the level of promotion or marketing, the non-insurance subsidiary should not use marketing terms as insurance intermediary or conduct marketing activities under such names, in order to avoid misleading the public or partners into believing that it is an insurance institution. In terms of fee collection, the non-insurance subsidiary may collect service fees but not in the name of commissions which is exclusive to insurance intermediaries. Furthermore, the service fee may be calculated such as per solution, per solution package or on working hours basis. On the contrary, it should not be calculated in proportion to insurance premiums, or in connection with the success of the insurance transactions.
IV. In summary
Although the negative impact of the current global economic situation cannot be avoided, many people still believe that the InsurTech market will continue to empower the traditional insurance industry to cope with constantly changing market challenges, which means the role of non-insurance subsidiaries will become increasingly important for the insurers. As setting up Chinese non-insurance subsidiaries has become a trend to facilitate their business in China, foreign insurers also need to get prepared because in practice, many problems may occur in the process of establishing non-insurance subsidiaries in China; Even after the establishment of the company, it is still necessary to pay attention that the business carried out cannot enter the minefield of insurance business.
