China's insurance regulators have made significant progress in the battle against overseas firms' illegal sale of policies on the mainland, and have given notice that there will be no let up in the campaign this year.

Senior officials of the China Insurance Regulatory Commission (CIRC) warned that this illegal activity not only disturbs normal market order, but also eats into the nation's tax revenues and is likely to spark legal disputes.

Chen Wenhui, director of the CIRC's Life Insurance Regulatory Department, said: "The crackdown has brought the growth of underground insurance policies under initial control."

Many insurance companies based in the Hong Kong and Macao special administrative regions, particularly life insurers, have been found selling policies in the Chinese mainland, mostly in coastal provinces, in recent years. Such sales, which the CIRC stresses are not only illegal but also not protected by Chinese law, are unofficially estimated to be around HK$12 billion (US$1.59 billion) each year, which is equivalent to almost one-third of Hong Kong's total premiums and nearly 10 percent of the mainland's life insurance premiums.

The policies are typically sold by individual agents employed by insurers. They either carry the premiums over to the special administrative regions, or channel them back through underground money markets.

"The reasons for underground insurance policies are quite complicated," said Meng Zhaoyi, director of the CIRC's International Department.

"One major reason is the huge potential of the mainland market. Motivated by profit, some overseas insurance companies are using various methods, such as 100 percent commissions, to encourage agents and other intermediaries to persuade mainland residents into buying their policies," he said.

"And mainland insurance companies lag behind the insurers from developed markets in terms of products, services and investment returns, which makes it possible for some overseas insurers to promote their products."

Analysts familiar with the situation say overseas insurers typically offer returns two or three times those of the policies sold by mainland insurers. And the agents are rewarded with commissions as high as 100 percent of the premiums that policyholders, mainly wealthy individuals, pay in the first year, which compares to the 20-30 percent offered by mainland insurers.

"Because overseas insurers' agents go about their business in a covert way, and the clients are scattered, there is no way we can calculate the specific number of sales," said Chen.

"But what we are sure about is that the existence of underground insurance policies has seriously disturbed the normal order in the mainland insurance market," he said.

The practice also reduces China's tax revenues and leaves policyholders at a disadvantage in the event of legal disputes because such policies are not protected by Chinese law, he added.

A crackdown was launched last year on illegal sales of insurance policies by the insurance authorities of the mainland, Hong Kong and Macao, as well as the mainland's police.

CIRC officials have made it clear to overseas insurers that having sold policies illegally on the Chinese mainland may jeopardize their efforts to enter the market, and have stepped up efforts to educate local residents about the risk of buying illegal policies.

"The spread of illegal policy sales has been contained effectively, and consumers have shown an increased level of awareness about the risk of underground policies," Meng said.

The official stressed the impact of underground insurance policies on the local insurance market is limited. "Last year, total premiums hit 431 billion yuan (US$52 billion), and it was the most profitable year for the industry," Meng said.

(China Daily February 3, 2005)