big corporations -- we welcome all

China’s insurance system needs to be reformed, to guarantee solvency and efficiency of insurance companies.

By staff reporters Chen Huiying and Ling Huawei



For years, Chinese insurers have followed the fast track in growing their business. Control over risks, however, has not kept pace. China Insurance Regulatory Commission (CIRC) disclosed recently that twelve Chinese insurers are struggling to maintain sufficient solvency. Based on their semi-annual reports, several large insurers are lagging behind on payment of premiums, an indicator of adequacy in capital against risk.

  In an exclusive interview with Caijing, CIRC’s chairman Wu Dingfu stressed that supervision should be strengthened over insurers’ corporate governance and how they should manage solvency. Born in 1946, Wu used to head the audit bureau of Hubei Province and had worked at Chinese Communist Party’s Commission for Disciplinary Inspection before he took the rein of China’s insurance regulatory body in 2002.





New Starting Point



Caijing: Premium income, asset scale and investment income have recorded historic highs for insurance companies in 2007. But with the downturn in the capital markets, the insurance industry is facing increasingly tough operational challenges. What is your view of the outlook for and mission of the insurance sector?



Wu: I said recently at the National Insurance Working Conference and the National Insurance Regulatory Conference that “the insurance sector is at the beginning of a new stage of development.” This is my basic view of the situation and development of the insurance sector.



The insurance industry has assumed a basic shape, with about 120 participants offering property and casualty coverage, life insurance and reassurance. There are also many forms of ownership, with domestic and international companies all competing,moncler, and insurance-led financial institutions have emerged. Services have improved greatly, products have been diversified and insurance coverage has expanded from cities to rural areas. Insurance has helped find solutions to many problems: rural migrant workers, farmers losing land and rural cooperative medical coverage, among other issues.



Meanwhile, the regulatory system led by the state has taken shape, extending from state supervision to local supervision and from professional service agencies to trade associations. The media also has a role.



I can summarize the characteristics of this new stage as follows: the market system has assumed its basic shape but is not fully formed; institutions have developed swiftly but in an imbalanced way; services have improved but not enough; the regulatory system has taken shape but is not fully fledged.



So regulators should not only see achievements; they also need to see what needs improvement.



At the moment, the main problem is that the insurance industry is not adaptable to the development of the overall economy. The primary mission of the insurance sector is to speed up development and this is our fundamental understanding.



Caijing: What changes are in store for the working philosophy of the China Insurance Regulatory Commission (CIRC), considering the current trend?



Wu: As insurance regulators, we should take a scientific development approach in four areas.



First, we should protect insurance buyers, and this is fundamental for our work. China is a country of 1.3 billion people, and there is great potential to improve awareness of and dependence on insurance. Meanwhile, it means we have quite a few issues to resolve. This is our top priority and most crucial job.



Second, we should establish scientific concepts in supervision and should combine supervision with services. We manage by making laws and regulations, and then we enforce the laws and regulations with rewards and punishments. These involve both management and services. That is what I mean by “combine supervision with services.” What are the standards for good service? A well-regulated market, corporate compliance, consumer satisfaction, and government satisfaction. As long as we provide good service, supervision will be in place.



Third, infrastructure building should be strengthened. When several big insurance companies listed on the stock market, some did so without solid corporate governance mechanism in place, and we let them go public first before conducting a reform. Thus, many basic aspects of industry infrastructure should be strengthened. From regulators’ perspective, our first priority is to strengthen the infrastructure in terms of laws and regulations, communications and talent.



Fourth, (we should) manage the relationship between administrative actions and market mechanisms. As the market is immature, it’s one-sided for some people to say that everything should be market-driven. Some emphasize that we should adopt administrative actions at the current stage, which is also a one-sided view.



In the past few years, the insurance sector developed relatively well and rapidly, thanks to the rather good relationship between market and administrative mechanisms. We should not only abide by market principles but also make reasonable use of administrative means. At the current stage, it shouldn’t be one or the other.



Change “Genes” of our Companies

Caijing: Does the CIRC plan further measures to reform institutions in the market at the current new stage?

Wu: Reforms should be strengthened and more energy should be directed toward improving corporate structure and establishing modern corporate governance. Shareholders, the board of directors, and management should cultivate amicable relationships among themselves. If corporate governance is not good, external supervision will only find its effects discounted. If corporate governance is good, supervision might lead to enlarged effects.



In the past few years, we have put a great deal of energy into corporate governance, including learning from international experience in supervision, holding training courses, and enacting a series of guidance measures and regulations pertaining to establishing modern insurance corporate governance. Also, (we) established specific rules on the constitution of boards of directors, qualifications, rights and responsibilities.



Our Chinese insurance companies are encountering the question of reform and how to extend it. We should straighten out the system and mechanism. China Life and People’s Insurance Company of China (PICC) are actively creating conditions for their groups to incorporate and to list on stock markets. This is to meet the challenges for the insurance sector in full opening up of the market and universal businesses. Listing on stock markets is beneficial for companies to become resilient against risks, achieve sustainable growth, and integrate their resources.



Caijing: In the area of corporate governance, shareholders’ qualifications and what they can offer are crucial. From the perspective of CIRC, what kind of investors do you need the most?



Wu: The qualifications needed for shareholders are questions we have always thought about. Given the character of the insurance industry,louboutin chaussure pas cher, we favor strategic investors rather than financial investors who only contribute money.



We hope shareholders in insurance companies are strategic investors. Insurance coverage is a long-term commitment, so shareholders should have a capacity for long-term investment. In addition, (we want strategic investors) to assist these companies to improve management abilities, in both the business and corporate governance.



CIRC has recently carried out a series of corporate governance measures to regulate the corporate governance of insurers. Beside shareholders’ qualifications, the qualifications of board members, rights and responsibilities, and internal controls, are what we as regulators will focus on.



Caijing: In terms of reforming professional agencies in the market, does CIRC have further plans?

Wu: Our reform goal is to privatize rates, although we should carry it out with discretion. Now we have more participants in the market,doudoune moncler pas cher, but they are not fully-fledged, and our consumers are not mature. So, hasty privatization will mean extremely negative results.



For example, some companies aggressively build up market share. Their local branches think that they will have fee income if they have premiums. The headquarters thinks that it can invest with these premiums. Risk control is immature. Under these conditions, if we privatize rates, it will only hurt consumers.



Despite these concerns, rate privatization has gradually moved forward in the past few years. Car insurance pricing has been opened up and companies need only file a report to the government to keep record (instead of wait for governmental approval). As conditions mature, we will actively carry it out with discretion.



A challenge for market reform is that many issues are beyond the scope of CIRC’s responsibilities. Rather, they depend on cooperation among government offices. For example, when it comes to the disaster insurance system, the government should take the lead and relevant departments collaborate. For another example, reforms of medical insurance and pension funds all involve systems, mechanisms, and duties among relevant departments and ministries. With social development, these problems will draw more attention.



New Mindsets for Regulators



Caijing: During this year’s National Insurance Working Conference, you mentioned that one hand should maintain a grip on financial institutions and the other hand should keep a grip on supervision, in combination with new developments in the sector. Regulators therefore should adjust their perspectives and approaches. Can you provide some details?

Wu: Improvements in supervision focus on strengthening five aspects: corporate governance, solvency, on-site inspection, use of capital, and insurance provisions.



Corporate governance and risk control are the foundations of these five areas. If corporate governance is not good, no matter how strong external supervision is, corporate effectiveness will be discounted. Therefore, corporate governance and internal control should be the foundations for supervisory jobs.

(We) used to think supervision was an afterthought, and we did not intervene in the internal affairs of companies. Now, we think that we should combine prevention with penalties. In the end, it is an internal control problem when a company violates the regulations, so we should consider (corporate governance and internal control) as the basics of our work.



The second firewall is solvency supervision. This concept emerged at the end of 2002. At the time, it was only a concept. Six years later, we have transformed the concept into reality, and gradually given it definition and a framework, and empowered it.



The third firewall is on-site inspection, which used to be one of the supervisory methods in the insurance sector. But on-site and other types of inspection should be integrated, as the industry has grown more diversified and more complex. We recently held the National Insurance Supervisory Conference to find a way to blend the two.



Our next step is to develop a mechanism that combines on-site inspection and off-site inspections. For example, insurance companies have branches in many provinces. We could have the CIRC determine what items to check on-site and set targets. Then, local insurance bureaus could check out these branches based on those standards. The CIRC will act like a physician who watches patients’ overall health. In particular, solvency will be our focus and (we) should continuously work on improving the effectiveness and enforcement of such regulations.



The fourth firewall is the use of capital. Is the current investment channel loose or tight for insurance companies? We think the current investment channel has gone through major changes and been broadened. For now, the most important thing is to prevent risks.



The fifth firewall is insurance funds. These funds have developed and become market-driven and professionally managed. Very soon, they will be officially launched.



Caijing: Does the market provide an exit for those insurers that have long been insolvent? Will we see survival of the fittest?

Wu: Our next step is to act on those companies that have made efforts but still have insolvency problems. We already have regulations on exit mechanisms for such insurers. Life insurance companies should seek mergers and acquisitions to solve this problem, as specified under the Insurance Law. Property and casualty insurers can either pursue mergers or exit the market.



But, the insurance sector touches upon a variety of aspects, which makes it different from other sectors. Life insurance contracts last for decades. (We) had better be careful with exit issues to reassure policy-holders.



For a long time, (we) did not approve the establishment of new insurance companies. Five years ago, when the market was first opened, private firms with funds all wanted a share in the market. We set the entrance bar so low that for insurance companies, 200 to 300 million yuan in capital could allow them to register a company. However, those insurance companies would need to develop their business, so more capital would be needed. If more capital cannot be provided, an insurer will run into an operational crisis. Therefore, mergers, restructuring, and exiting the market all seem to be natural.



Caijing: How will the future Insurance Guarantee Fund Management Company settle the issue of the 38.8 percent stake it holds in Xinhua Life Insurance?

Wu: The future Insurance Guarantee Fund Management Company will follow the market rule to select shareholders to the best advantage of its corporate governance. Xinhua Life Insurance was wrong in its corporate governance.



Exit can take many forms, including negotiations, a public auction, etc. The Insurance Guarantee Fund Management Company will follow the market principle and meanwhile seek input from Xinhua Life shareholders. It will abide by laws and regulations, and be open, fair, and transparent.



Caijing: The CIRC has dual duties as to regulate and develop the insurance market. How do you manage these dual roles?

Wu: Since its foundation, the CIRC has followed the working principle of enforcing supervision, preventing risks, and promoting development. But, each stage of development has a different focus.



We have straightened out the relationship between development and supervision. I often use a metaphor. Several years ago, our main mission was to repair the roads to make space for more cars. More people will buy cars when the roads are in good condition.



Several years later, there are plenty of financial institutions in the market. Our goal is a simple one: to strengthen supervision, including improving the traffic rules, enforcement of those rules, and preventing accidents.



Some people complain that the CIRC only focused on development but did not care for supervision in previous years. That is incorrect. Since the CIRC was founded in 1998, its main role has been supervision. However, at the time of its foundation, there were only four or five companies in the entire market. The industry was challenged by lack of capital and insolvency and by huge losses on interest-rate differentials. If at the beginning (we) had regulated based on solvency, these companies would have closed down.



Since 2002, the state has not set any conditions for the speed of development or the scale of premiums; instead, it emphasized risk control. What were the biggest risks at the time? The interest-rate gap loss, and poor services. If these two problems were not solved, the insurance industry would have died. Therefore, at the time, (our) concept was first to make companies incorporate to list on the stock market, to create conditions for them to improve their solvency. This concept came from a regulatory perspective.



If we regulate for the sake of regulation, we would not have the Chinese insurance industry as it is today. Prior to listing on the equity markets, China Life, among other insurers, had severe interest-rate gap losses. We did not offer credit through the Treasury or the central bank; instead, we relied on policy support from the central bank and the State Council to complete their incorporation and listing.



Development and Standards

Caijing: Since last year, investment-type insurance products have increased as a portion of the portfolio. As regulators, how do you see the rapid growth in investment-type insurance products?

Wu: Based on international experience, investment-affiliated insurance products are good products. They were created for Chinese who have attained certain income levels and have investment needs.



Now, many insurers only see that this product yields higher returns as they chase market share. Their only wish is that the 2007 equity bull market returns. For these insurers, we should adopt regulatory measures, as their performance affects our goals for the insurance industry.



In addition, we should consider the characteristics of the insurance industry. Based on varying levels of needs in China, what percentage should guaranteed products have in the total life insurance sector? We think that even for investment-type products, some degree of guarantee should be maintained.



Overall, the advantage of insurance is to provide guarantees, which should not be forgotten. In the future,polo ralph lauren homme, we will integrate more market measures,louboutin chaussure, including raising requirements for solvency, and containing capital use of investment-type insurance products, to adjust the market.



Caijing: Many commercial banks want to own a stake in insurance companies. What impact will it have on the insurance industry? What are regulators’ attitudes on this?

Wu: As approved by the State Council, the China Banking Regulatory Commission and the CIRC signed a memo to strengthen cooperation between the banking and insurance sectors. However, we are still at the negotiation stage for this effort.



Insurers might have concerns about banks owning stakes. As regulators, we do not have these concerns. Our view is, we want the best for the insurance sector, and we want to have more financial institutions provide services to the public.



(We) certainly have a differentiation between domestic investors and foreign investors. For domestic investors -- banks, big corporations -- we welcome all, as long as they have the qualifications. We want to see strong marriages through equity restructuring.



Banks should employ their strengths in buying a stake in insurers. They can expand their insurance coverage through integrating resources and cost savings. These are positive factors.

Caijing: Since first half of this year, management compensation has become a public focus in the insurance sector. Earlier this year, we saw the Ministry of Finance halt equity incentive policies at some insurance companies? What do you say about the compensation issue?

Wu: We have always paid attention to the compensation issue. Several insurance companies pay senior managers a rather high salary, mainly for the following reasons.



First, the insurance industry developed rather recently, but there is strong public demand for its products. So, talent is scarce and valuable. As insurance companies hunt for the best and brightest, salary offers would naturally soar.



Second, the compensation issue is both a system and mechanism issue. For state-owned insurance companies, ownership belongs to the state, but salaries are decided by the board, usually controlled by the management. In other words, members of management decide their own salary and set their own performance targets. The management can set a rather easy performance target; as long as earnings are positive, they will get paid. If they discover losses, they might adjust their targets to earn their money.



Thus, the first thing to do is to define the position of ownership and prevent management control, in our efforts to transform state-owned companies into truly modern incorporated companies.



The CIRC is not the asset representative for state-owned assets. We can only supervise operational behavior. Having said this, the CIRC has instituted some guidelines on compensation in recent years for state-owned insurance companies, including “Temporary Measures for Senior Executive Compensation at State-owned Insurance Companies” “Guidelines in Board of Directors Operation in Insurance Companies” and “Guidelines Regarding Regulating Corporate Governance in Insurance Companies”.



Senior executives should earn high pay if they create value. This should be based on objective and honest judgment. However, because of insufficient data, a system that is not fully fledged, and an absence of [real] owners, (we) do not have an objective,moncler pas cher, reasonable assessment.



Finally, in a socialist market economy, compensation levels should not be detached from reality. Senior executives might earn a high salary, but they should not earn vastly more than the average Chinese. Personal effort is certainly important for companies to grow fast, but state support and market conditions are indispensable. We cannot deny the value of these conditions.
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