ACLI Questions China Branch Capital Requirements

So far, though, the ACLI is having trouble getting information about how the CIRC will be interpreting its regulations, Smith says.

“The lack of clarity in the regulatory process has slowed and confused the fulfillment of China’s insurance liberalization obligations,” Smith says.

Smith notes that China has asked insurers that sell insurance in China to incorporate as operational branches, not as subsidiaries. That structure means that the foreign insurers’ assets back the policies written in China. Chinese policyholders do not have to depend entirely on the capital that insurers happen to have put in their operations in China.

Today, the CIRC says a foreign insurer must back its first Chinese branch with the equivalent of about $25 million in capital and must back each additional branch with the equivalent of about $2.5 million in capital. The $25 million capital requirement for the first branch office “may be much higher than international norms with respect to specific business models and risks being assumed,” Smith says.

The additional capital requirements for additional branches appear to have “no prudential justification,” Smith adds.

The ACLI says the CIRC should treat sub-branches and the main branch office as parts of the same operation because the branch office and any sub-branches all are backed by the same corporate parent. “Branch operations should not be treated as if they were separate, stand-alone entities,” Smith says.