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ACLI Questions China Branch Capital Requirements

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NU Online News Service, Feb. 6, 2004, 1:24 p.m. EST – The Chinese Insurance Regulatory Commission has set high capital requirements for foreign insurers that went to set up shop in China.[@@]

Brad Smith, managing director for international relations at the American Council of Life Insurers, Washington, discusses the ACLI’s concerns about the capital requirements in a comment on China’s compliance with the country’s World Trade Organization free-trade commitments.

The ACLI submitted the assessment to the U.S.-China Economic and Security Review Board, a federal agency that is monitoring China’s efforts to open its markets to foreign competition.

The ACLI firmly supported China’s application to enter the WTO, and, in general, an ongoing series of discussions with the CIRC “has already led to a much-improved communications and transparency process for U.S. insurers in China,” Smith says in written testimony to the U.S.-China review board.

The CIRC started out issuing regulations without giving insurers a formal chance to comment on the regulations or even answering questions about the regulations, Smith says.

In 2003, the CIRC began posting proposed regulations on the Web and requesting public comment, and some insurers say their relations with the CIRC have been perfect, Smith says.

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.