CIRC tightens scrutiny on equity structure of insurers

China’s insurance watchdog will enhance its supervision of the equity structure of insurers by tightening criteria on market entry for investors as well as monitoring shareholders' behavior and scrutinizing share capital strictly.   

The China Insurance Regulatory Commission will require insurers to set clear, reasonable and transparent equity structures to protect the rights and interests of policyholders, insured and beneficiaries, according to a statement detailing revised policies on its website.

Investors are now categorized into four types — finance type I, finance type II, strategic and controlling — and they are subject to strict restrictive standards to become shareholders.

A company hoping to become a qualified finance type I shareholder of an insurance company must show that it has been operating well, has sound finances and is profitable for the last fiscal year.

Also, any single shareholder's stake in an insurance company has been cut from the previous 51 percent to a third, the statement said.

The CIRC also drafted a negative list on market entry by forbidding investors who have unclear ownership structures and hold poor record in the industry to become shareholders of insurance companies.

Investors should not transfer their shares within five years of becoming the controlling shareholders of the company, with a three year limit for strategic shareholders, two years for financial II shareholders and one year for financial I shareholders, the CIRC said.

The CIRC will strengthen its deep supervision of the equity structure, sources of funds and actual controllers of the insurance companies. Any change of actual controllers needs to be reported to the CIRC which aims to resolve problems like hidden shareholders.

To better supervise the authenticity of their capital, the CIRC requires that investors must use their own legitimately sourced funds and they should not circumvent supervision by creating shareholding bodies and transferring equity rights.

The CIRC decided to act tough after instances of actual controller's rights in some radical insurers overriding the whole company, making false capital injection and using the insurance company as a financing tool, said the non-financial research team led by Wei Tao at Pacific Securities in its research note.