Multinational enterprises adeptly allocate insurance resources on a global scale. However, China’s laws and regulations impose restrictions on overseas insurance arrangements, requiring policyholders to navigate regulatory compliance challenges, particularly in insurance and foreign exchange regulation, when selecting coverage for their Chinese subsidiaries. Drawing on practical experience, this article examines the insurance and foreign exchange regulation risks multinational enterprises might face when an overseas parent company acts as the policyholder, arranging insurance for its Chinese subsidiaries.
(I) Insurance Regulation
According to Article 7 of the Insurance Law, “legal persons and other organizations within the People’s Republic of China that need to obtain domestic insurance shall purchase insurance from insurers within People’s Republic of China.” However, the Insurance Law and related regulations do not explicitly define what constitutes “domestic insurance.” The former China Insurance Regulatory Commission (CIRC) has issued several letters to clarify the application of Article 7 of the Insurance Law, which can be referenced as follows:
Letter on the Interpretation of Provisions in the Insurance Law (Yin Jian Ban Han [2002] No. 112)
From the wording of Article 6 of the Insurance Law, it can be understood that the requirement to purchase insurance from domestic insurance companies contains two conditions: First, the policyholder or the insured is a domestic legal entity or organization; second, the insurance is primarily for insurance objects within China.
Letter on the Interpretation of Article 7 of the New Insurance Law (Yin Jian Ban Han [2003] No. 19)
The interpretation of Article 7 of the new Insurance Law should focus on two aspects: First, the domestic legal entity or other organization is the policyholder paying the insurance premium; second, the insurance subject and risk are located within China.
Letter on the Interpretation of Article 7 of the Insurance Law (Yin Jian Ting Han [2009] No. 124)
According to the Letter on the Interpretation of Provisions in the Insurance Law (Yin Jian Ban Han [2002] No. 112), the Insurance Law requires that insurance be purchased from domestic insurance companies when the policyholder or the insured is a domestic legal entity or organization, and the insurance object is located within China.
Based on the above letters, the situation where insurance should be purchased from domestic insurance companies requires that both conditions are met: (1) the policyholder or the insured must be a domestic legal entity or organization, and (2) the insurance subject must be located within People’s Republic of China. Regarding the scenery we will discuss here, the policyholder is an oversea entity, the premium is paid by the oversea parent company, the insured is a domestic entity, and the insurance subject is usually located within China. From the literal understanding, since both the insured and the insurance subject are within China, this model could theoretically be considered as falling under the scope of “domestic insurance”.
However, since only one of the insured parties is a domestic company and the policyholder is an oversea parent company, so this could be deemed as not “domestic insurance”. Therefore, the compliance risk is relatively low. Based on the currently available information, no penalty cases for this scenario have been identified through public information research.
(II) Foreign Exchange Regulation
Under the abovementioned model, the Chinese subsidiary will share premiums payment with the parent company and may receive insurance benefit from the oversea insurer when an insured event occurs. The analysis of these capital inflows and outflows is as follows:
First, the nature of such payment and receipt need to be clarified. According to the Q&A section on the official website of the State Administration of Foreign Exchange (SAFE), service trade foreign exchange receipts and payments refer to the current account foreign exchange receipts and payments other than those related to goods trade, collectively known as service trade foreign exchange transactions. Specifically, service trade foreign exchange transactions include: (1) transactions under the following categories: transportation services, travel, construction, insurance services, financial services, telecommunications, computer and information services, other commercial services, cultural and entertainment services, etc.; (2) primary income (earnings), including wages, investment income, and other primary income; (3) secondary income (current transfers), including donations, non-life insurance compensation, social security, and other secondary income. Thus, premiums shared by the Chinese subsidiary and insurance benefits received from overseas insurers both fall under the category of service trade foreign exchange transactions. No prohibitive foreign exchange regulations on the outflow of shared premiums or the inflow of insurance claims have been identified.
However, the foreign exchange transactions in this model still need to comply with the relevant requirements for service trade foreign exchange transactions. According to Article 49 of the Circular on the Current Account Foreign Exchange Business Guidelines (2020 Edition), “For service trade foreign exchange transactions of a single amount equivalent to $50,000 or less, banks are generally not required to review transaction documents. For foreign exchange transactions where the nature of funds is unclear, the bank must require domestic institutions and individuals to submit transaction documents for reasonable review. For service trade foreign exchange transactions of a single amount exceeding $50,000 (exclusive of $50,000), the bank should confirm that the transaction documents align with the transaction entity, amount, and nature stated in the foreign exchange application.” Therefore, for premiums shared with the parent company and insurance benefits received from overseas, if the transaction amount is $50,000 or less, the bank generally does not need to review the transaction documents; if the amount exceeds $50,000, the transaction documents should be submitted for bank review.
In addition, for foreign exchange outflows from the Chinese subsidiary to share premiums with the parent company, Article 49 also stipulates, “(1) Costs of advance payments or shared expenses between related domestic and foreign entities should generally not exceed 12 months.” the Chinese subsidiary should pay attention to the relevant time limit requirements when remitting shared premiums, ensuring that the remittance is made within 12 months.
In conclusion, multinational enterprises engaging in cross-border insurance arrangements for their Chinese subsidiaries must carefully navigate both insurance and foreign exchange regulatory risks. While the structure of having an overseas parent company as the policyholder and a domestic subsidiary as the insured (coinsured) can be a cost-effective and efficient way to manage risks, it must be done in compliance with China’s regulatory frameworks.
