China's insurance regulator announced the establishment of an insurance protection fund system Wednesday. It will aim to protect policyholders in case of insurer bankruptcy.

The China Insurance Regulatory Commission (CIRC) said it has promulgated a new regulation that requires all insurers to put part of their premiums in an Insurance Protection Fund, starting this year.

The fund, which the commission said will pool 2.5-3 billion yuan (US$301-361 million) from insurers by the end of this year, will be used to compensate policyholders in case any insurer goes bankrupt.

The new regulation also applies to foreign insurance companies and Sino-foreign insurers operating in China, CIRC said. Thirty-nine foreign insurance companies have entered the Chinese market and have set up 70 operational entities, including branches and joint ventures.

Jiang Xianxue, deputy director-general of the CIRC's Finance and Accounting Department, said the new system signals that the insurance industry has become the first financial sector in the nation to break away from the years-old practice of "the State budget holding the bag when financial institutions go bankrupt."

"Because of the bankruptcy compensation arrangements, insurance companies that have serious solvency problems can, in the future, peacefully exit the market under market principles," Jiang said.

There has been no case of insurer bankruptcy in China since the industry was restarted more than 20 years ago following a suspension for political reasons.

The regulation says that when a non-life insurer goes bankrupt but its assets are not enough to repay liabilities, policyholders' losses that are no more than 50,000 yuan (US$6,000) will be fully covered by the fund.

For losses in excess of that number, the fund will cover 90 percent of the extra for individual policyholders and 80 percent for corporate policyholders.

In the case of a life insurer bankruptcy, the company's policies will be transferred to another life insurer, which will then receive compensations that are no more than 90 percent of individual policyholders' losses and a maximum 80 percent of corporate policyholders' losses.

The regulation confines a policyholder's potential loss from an insurer bankruptcy to 20 percent of the value of insurance contracts, and can mostly cover all losses from non-life policies for individuals, since such losses typically come in below 50,000 yuan (US$6,000), Jiang said.

"Therefore, it's fair to say that, after the establishment of the insurance protection fund system, the functioning of the insurance market will be healthier, while the interests of policyholders will be better protected," Jiang said.

The official said a special division would be set up under his department, hopefully in the first half of this year to oversee the matter, before an Insurance Protection Fund Council is put together later with government officials and scholars to officially manage and supervise the use of the fund.

The fund is estimated to collect a little more than 1 billion yuan (US$120 million) from life insurance and non-life insurance sectors respectively each year, but the number will depend on actual premium growth, CIRC officials said. Life insurance and non-life insurance are separately regulated in China.

Insurers are required to submit up to 1 percent of retained premiums to the fund, with the percentage varying by business lines, until the total contribution amounts to 6 percent of total assets for property insurers and 1 percent for life insurers.

The regulation will have a bigger impact on the balance sheets of life insurers than other insurers, which have been setting aside insurance protection reserves since 1999, but the impact remains "bearable," Jiang said.

China Life, the largest life insurer in China, will contribute an estimated 200 million yuan (US$24 million) plus annually to the fund from this year, but the impact on its net profit will be smaller since the contribution is deductible from 33 percent income tax, CIRC officials said.

China Life's net profit stood at 2.8 billion yuan (US$337 million) for the first half of last year, according to its 2004 interim reports.

(China Daily January 6, 2005)