In China, substantive issues of insurance disputes are mainly governed by the following laws and interpretations:
Additionally, procedural issues are mainly governed by the Civil Procedural Law of the People’s Republic of China (the forthcoming version, effective on 01/01/2024) (hereinafter referred to as the “Civil Procedural Law”) and its relevant Interpretation promulgated by the Supreme People’s Court. For specific industries, respective laws apply, for instance, with respect to marine insurance disputes, the Special Maritime Procedure Law of the People’s Republic of China applies.
In addition to the aforementioned core laws and interpretations, administrative regulations formulated by the National Administration of Financial Regulation (NAFR) also govern insurance and reinsurance, although administrative regulations come second to laws in terms of legal hierarchy. The development and revolution of the NAFR are illustrated as follows:
Moreover, the Insurance Association of China (IAC) also promulgates regulatory documents that govern the industry standards, technical and service norms, trade rules and regulations. However, as a national self-regulatory and non-profit organisation, the regulatory documents issued by the IAC have a much lower hierarchy.
All licensed insurers and reinsurers (whether domestic or foreign) approved by the NAFR are entitled to write insurance and reinsurance business. From the perspective of NAFR regulations, there is no significant difference between the requirements for writing consumer insurance, SME insurance and corporate insurance.
In terms of paid-in capital, both foreign-invested insurers (insurers with a 25% or more (up to 100%) equity interest held by foreign investors are regarded as “foreign-invested insurers”, while others are regulated as “domestic insurers”) and domestic insurers must have a paid-in capital of at least RMB200 million or its equivalent in a foreign currency. In terms of solvency, all foreign-invested insurers and domestic insurers need to meet the following solvency requirements:
All licensed insurers and insurance activities are governed by the Insurance Law, Interpretations of the Insurance Law and regulations in relation to solvency, related-party transactions, corporate governance, etc. However, different types of insurers are subject to different regulations when writing insurance business.
We have not observed specific regulations regarding the underwriting of excess layers, however, we understand that excess layer insurance is defined as an insurance product rather than a reinsurance product therefore the regulations relating to insurance products should apply.
Insurance companies can be authorised to collect the following taxes and surcharges on behalf of tax authorities:
Property insurance contracts, including property, liability, guarantee and credit insurance contracts, are subject to stamp duty (0.3% of the insured amount). Personal insurance companies are not subject to stamp duty.
Insurers and reinsurers are subject to enterprise income tax of 25%.
All entities engaged in insurance business must be authorised or licensed by the NAFR. There are three forms of foreign-funded insurance companies through which overseas-based insurers or reinsurers conduct business in China:
Since 2019, as China has continued to ease market access restrictions on foreign-funded insurance companies, revising the Detailed Rules for the Implementation of the Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies, rules on foreign insurers subsidiaries establishment and management have been abolished. The requirements that a foreign insurance company must have engaged in insurance business for more than 30 years and have maintained a representative office in China for at least two years before it can establish a foreign-funded insurance company in China have been removed. As of 1 January 2020, the foreign investment ratio restriction for Sino-foreign equity joint venture life insurance companies has been officially lifted, and equity joint venture life insurance companies may be wholly owned by overseas equity.
The solvency of a subsidiary of a foreign reinsurance company shall satisfy the requirements of relevant systems issued by the NAFR such as the rules for the supervision of solvency of insurance companies. The premiums retained by a subsidiary of a foreign reinsurance company shall be subject to a quota directly authorised by its home office. The NAFR will carry out examination and approval of the applications for administrative licensing pursuant to the laws and regulations.
Fronting is not strictly prohibited. There are no specific regulations on fronting, except for some restrictions on reinsurance. To ensure compliance with Chinese law, in a broad sense, with respect to all insurance business of a cedant, the cedant must retain a portion of the risk itself and may not cede all risks to the reinsurer. In respect of each risk unit, according to Article 19 of the Regulations on the Administration of Reinsurance Business, when a cedant cedes a direct property insurance business by way of proportional reinsurance (except for aerospace, nuclear, petroleum, and credit insurance), the total proportion of each risk unit to be ceded to the same reinsurer shall not exceed 80% of the insured amount or of the limit of liability of the insurance contract underwritten by the cedant.
Due to the scarcity of insurance licenses and the special nature of the insurance business, mergers and acquisitions relating to insurance companies are active in the capital market. There are two types of mergers and acquisitions of insurance companies: increase in registered capital and transfer of equity. Increase in registered capital is mainly for the purpose of improving the solvency of insurance companies to support business development. Since the implementation of the Solvency Supervision Rules for Insurance Companies (II), the solvency adequacy ratio of insurance companies has generally declined, and a number of small- and medium-sized insurance companies have increased their registered capital in the past one to two years to meet the solvency supervisory requirements. After the insurance regulator lifted the restriction on the proportion of shares held by foreign shareholders in insurance companies, foreign participation in capital increases and equity transfers in PRC insurance companies has gradually become more active.
Insurance products are commonly distributed through:
Individuals selling insurance products must be registered through an insurer or an insurance agency/broker; individuals who are not registered are not allowed to carry out insurance business.
To carry out insurance business, insurance intermediaries must obtain an insurance agent license or an insurance broker license from the insurance regulator. An insurance agent is the agent of the insurer and represents the interests of the insurer by introducing insurance products for the latter, while an insurance broker is the agent of the insurance applicant, insured and beneficiary (currently, there are different opinions in judicial practice; some courts consider it as providing intermediary services, while other courts deem it as the agent of the insurance applicant, insured and beneficiary).
Online sales of insurance products are mainly subject to the Measures for the Regulation of Internet Insurance Businesses. Telesales are regulated by the Measures for the Telemarketing Business of Personal Insurance Products and Notice on Regulating the Order of Telemarketing to Prohibit Phone Harassment by Property Insurance Companies, etc.
In relation to the distribution of reinsurance products, market practice shows that reinsurance contracts are usually concluded through reinsurance brokers or on the basis of a pre-existing partnership between the cedant and the reinsurer.
In China, there is no legal distinction in the obligation of providing truthful information between consumer contracts and commercial contracts, and the insurance applicant bears such an obligation as opposed to the insured regardless of the nature of the contract. Where an insurer makes enquiries regarding the subject matter of insurance or the relevant information of the insured party for the purpose of concluding an insurance contract, the insurance applicant must provide truthful information to the extent that satisfies its lawful disclosure obligation. Such disclosure by the insurance applicant, however, shall be limited to the scope and contents enquired by the insurer.
However, in marine insurance cases, the insured is obligated to disclose to the insurer, before the contract is concluded, every material circumstance that is known to them, and the insured is deemed in possession of the knowledge of every circumstance that, in the ordinary course of business, they ought to know.
Consequences if a party fails to perform the obligation of providing truthful information include:
There are two kinds of intermediaries involved in the negotiation of an insurance contract in China: insurance brokers and insurance agents.
The Insurance Brokers
Insurance brokers refer to organisations which, based on the interests of insurance applicants, provide intermediary services for execution of insurance contracts between insurance applicants and insurance companies and collect commissions, including insurance broker companies and their branches. Insurance broker services include:
Insurance agents refer to organisations or individuals that are entrusted by an insurance company and collect commissions from the insurance company to handle the insurance business on an agency basis within the scope authorised by the insurance company, including specialised insurance agencies, sideline insurance agencies and individual insurance agents.
The insurance contract should be executed in writing. Where an insurance contract is concluded, the insurer shall promptly issue an insurance policy document or any other insurance certificate to the insurance applicant, which states the contents of the contract agreed between the contracting parties. The contracting parties may also agree on adopting another written format recording the contents of the contract.
Except where engagement of insurance is mandated by laws and administrative regulations, conclusion of an insurance contract shall be voluntary, and the rights and obligations of the parties shall be determined by parties’ mutual agreement pursuant to the principle of fairness.
A life insurance applicant shall, at the time of conclusion of the insurance contract, have insurance interests in the insured party.
An insured party in a property insurance policy shall, at the time of occurrence of an insured event, have insurance interests in the subject matter of insurance.
An insurance contract shall contain information regarding the following:
The insurance applicant and the insurer are at liberty to incorporate other matters pertaining to the insurance into the contract. The insurance clauses and premium rates of insurance policies that relate to social and public interests, insurance policies of mandatory insurance implemented pursuant to the law and newly-developed insurance policies of life insurance, etc, shall be subject to approval of the NAFR.
In China, insurance activities typically come under (i) personal insurance, including life insurance, health insurance, accident insurance, etc; or (ii) property insurance, including property damage insurance, liability insurance, credit insurance, guarantee insurance, etc.
As defined in the Insurance Law, the term “beneficiary” specifically applies to personal insurance activities. In this context, the beneficiary is an individual designated by either the insured party or the insurance applicant, and this designated beneficiary has the right to make insurance claims.
The beneficiary of a life insurance policy can be one or several persons, and both the insured party and the insurance applicant are eligible. The appointment of a beneficiary by an insurance applicant shall be subject to consent of the insured party. An insurance applicant who takes up life insurance for their employee(s) shall not designate any person as the beneficiary other than the insured themselves and their immediate relatives. Where an insured party is a person without capacity or with limited capacity for civil conduct, their legal guardian may step in and designate the beneficiary.
Consumer protection is one of the most important aspects of PRC insurance regulation. To further improve the protection of consumer rights and interests, the CBIRC issued the Administrative Measures for the Protection of Consumers’ Rights and Interests by Banking and Insurance Institutions, effective 1 March 2023. It is worth noting that the official version of the document explicitly excludes reinsurance companies from the scope of the subject of the regulation as compared to the draft.
Generally speaking, in China, laws and regulations relating to insurance contracts slightly favours the insured. As noted in 8.1 Interpretation of Insurance Contracts and Use of Extraneous Evidence, the insurance contract is subject to the contra proferentem rule, meaning that any ambiguity in a policy shall be interpreted in the interest of the insured party and the beneficiary. Upon conclusion of the insurance contract, the insurance applicant has the right to rescind the contract – a right the insurer does not enjoy except in certain circumstances prescribed by law or by contract; eg, where the insurance applicant failed to perform the obligation of providing truthful information as noted in 6.2 Failure to Comply With Obligations of an Insurance Contract, or the insurance applicant or the insured party intentionally creates or falsely claims an insured event, etc.
Widely applied principles in reinsurance activities are outlined below.
Back-to-back interpretation principle
A reinsurance contract is always concluded as a back-to-back contract to ensure consistency with the insurance contract; ie, the understanding and interpretation of a reinsurance contract shall be equivalent to the original insurance contract. The reinsurance policy usually includes incorporation clauses, such as “subject to the same terms and conditions as the original policy”.
“Following the fortunes” principle
The principle of “following the fortunes” shall apply to indemnity refunding; ie, the claim settlement decision made by the ceding company shall automatically apply to the reinsurer provided that the ceding company determines the loss with due diligence in accordance with the insurance clauses.
“Utmost good faith” principle
All parties to a reinsurance contract shall engage in reinsurance business under the principle of “utmost good faith”, which implies a higher standard of honesty than that usually required in commercial contracts.
ART transactions are relatively uncommon in China; in practice, the more prevalent approaches involve insurance-linked securities and captive insurance.
These are the most common insurance-linked securities. Chinese insurance companies have issued catastrophe bonds overseas. The CBIRC issued the Notice on Matters Concerning Domestic Insurance Companies Issuing Catastrophe Bonds in the Hong Kong Market to support domestic insurance companies in issuing catastrophe bonds in the Hong Kong market. According to this Notice, the issuance of catastrophe bonds will involve reinsurance arrangements (contracts) between domestic insurance companies and their special-purpose insurance companies established in Hong Kong. However, catastrophe bonds themselves are not recognised as insurance or reinsurance contracts by regulators.
Captive Insurance Company
Insurance products issued by captive insurance companies are recognised as insurance contracts. According to the Notice on Issues Concerning the Supervision of Captive Insurance Companies, the business scope of captive insurance companies is limited to property insurance related to the group’s parent company, as well as accident and short-term health insurance for employees.
We have not identified instances where overseas ART transactions are recognised by domestic regulators as reinsurance contracts.
Interpretation of Insurance Contracts
Pursuant to the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the General Rules of Contract of the Civil Code of the People’s Republic of China, interpreting contracts typically involves a combined approach. This starts with the “common understanding”, also known as semantic interpretation, considering the relevant terms, contract nature and purpose, customary interpretations, and the principle of good faith. Additionally, factors like background, negotiation process, and performance history, contribute to justifying the meaning of disputed terms.
In respect to insurance contracts, the following rules also apply.
The utmost good faith interpretation
Based on the utmost good faith principle as noted in 6.6 Consumer Contracts or Reinsurance Contracts, an insurance contract shall be interpreted using waiver and estoppel rules.
Contra proferentem rule
Particularly, when construing insurance contracts, the substantive law of China relating to insurance generally favours the insured. Where there is a dispute over a contract clause between an insurer and the insurance applicant, the insured party or the beneficiary of an insurance contract concluded by adopting the standard clauses provided by the insurer, interpretation shall be made using normal reasoning. Where there are two or more interpretations of the contract clause, the People’s Court or arbitration agency shall adopt the interpretation that is in the interest of the insured party and the beneficiary. Besides, the contra proferentem rule is also applicable to both consumer contracts and commercial contracts.
By way of special interpretation, where the contents are inconsistent, the insurance slip takes precedence over the policy document or any other insurance certificate, the non-template clauses take precedence over the template clauses; the handwritten certificate signed and sealed takes precedence over the printed version.
The slight differences in relation to consumer contracts are listed in 6.6. Consumer Contracts or Reinsurance Contracts. Moreover, since reinsurance contracts are concluded between equal commercial entities such as insurance companies, and the parties are endowed with professional insurance knowledge and experience in insurance management, the contra proferentem rule does not apply, whereas customary and market understanding play a greater role than in consumer insurance.
The principle of reasonable expectation is a concept imported from US insurance law; namely, the objective reasonable expectations of the insurance applicant and the beneficiary should be respected, even if the explicit terms of the contract may not fully support these expectations. Its purpose is to protect the interests of insurance applicants and beneficiaries who are in a disadvantaged position and to balance the interests of insurance applicants, beneficiaries and insurance companies. The judge may determine the insurer to bear the insurance liability according to the principle of reasonable expectation. The relevant case includes: GONG, Jiaju v China Pacific Property Insurance Co., Ltd. Zhengzhou (No 1744, Hu 74 Minzhong, 2022).
Use of extraneous evidence
Extraneous evidence may be admissible, such as evidence about negotiations, the circumstances in which the contract was entered into, or the “usual practice” or market understanding in relation to such contracts or certain terms therein, which may be evidence of mutual agreement and both parties’ intention. Additionally, the Basic Terminology of Insurance jointly issued by the State Administration for Market Regulation and the Standardisation Administration is also a significant source of interpretation.
Insured and Insurer Obligations
There are no explicitly defined warranty clauses in China. Nonetheless, insurers and the insured are subject to obligations, including but not limited to the following.
The insured’s obligation to provide truthful information
See 6.1 Obligations of the Insured and Insurer and 6.2 Failure to Comply With Obligations of an Insurance Contract.
The insured’s obligation to prevent or reduce loss
The insured party shall, at the time of occurrence of an insured event, endeavour to adopt the necessary measures to prevent or reduce losses.
The insured’s obligation to safeguard the safety of the subject matter of insurance
An insured party shall comply with the provisions of the State on fire services, safety, manufacturing and operation, labour protection, etc, and safeguard the safety of the subject matter of insurance.
The insured’s obligation to provide notification and relevant materials
The insurance applicant, the insured party or the beneficiary shall:
The insurer’s obligation to highlight and explain specific disclaimers
Where the standard clauses provided by an insurer are adopted:
The insurer’s notification obligation
The insurer is required to promptly inform the insurance applicant, the insured party, or the beneficiary in a single notification, requesting additional evidence and materials to address any deficiencies in establishing the nature, cause, and extent of damages related to the insured event.
The insurer’s obligation relating to a prompt assessment and compensation or payment of insurance monies
Upon receipt of a claim for compensation or payment of insurance monies, the insurer shall promptly make an assessment; where the case is complex, the assessment shall be made within 30 days, unless otherwise provided in the contract. Subsequent to the assessment process, the insurer shall notify the insured party or the beneficiary of the assessment outcome; where the claim falls under insurance liabilities, the insurer shall indemnify the insured within 10 days of reaching an agreement with the insured party or the beneficiary on compensation or payment of insurance monies, unless otherwise specified in the contract.
Unlike the strict limitations in the UK or the United States, where an insured’s failure to comply with a condition precedent could discharge the insurer from its coverage obligations under the insurance contract if the insurer proves that such failure prejudices its ability to investigate the loss, defend a liability claim, or develop a defense to coverage, in China, consequences arise when the insurance applicant intentionally or due to gross negligence fails to perform the disclosure obligation as noted in 6.1 Obligations of the Insured and Insurer and 6.2 Failure to Comply With Obligations of an Insurance Contract.
Addressing Disputes over Coverage
The difference between consumer contracts and reinsurance contracts do not bear legal implications in China. Generally, disputes concerning coverage are addressed in accordance with the insurance contracts and their related materials; eg, application forms, policy documents, policy schedules and insurance slips.
Statute of Limitations
Pursuant to the Insurance Law, the statute of limitations for life insurance disputes is five years, and two years for property insurance disputes, which is one year shorter in comparison with the general statute of limitations of three years prescribed by the Civil Code. However, in accordance with the principle that the new law takes precedence over the former and protecting the interests of the insured, a statute of limitations of three years is mostly applied to property insurance claim. The statute of limitations commences from the date on which the insured or the beneficiary becomes aware or should have become aware of the occurrence of the insured event.
With respect to property insurance and life insurance, a third party cannot bring a direct action against the insurer. However, concerning liability insurance, where the insured party does not request the insurer to make compensation of insurance monies, the third party may bring a direct action against the insurer.
Beneficiary or Third Party’s Right to File a Claim
As noted in 6.5 Multiple Insured or Potential Beneficiaries, the specifically defined “beneficiary” in the personal insurance contracts has the right to claim for compensation or payment of insurance monies. The beneficiary agreed between the insurance applicant or the insured and the insurer, on the other hand, is only entitled to the insurer’s performance of the payment, without the right to claim insurance benefits from the insurer.
Choice of Law
In China, disputes may be resolved by negotiation, settlements, litigation, arbitration, or mediation. Regarding the choice of law, the parties to a contract can explicitly choose the laws applicable in accordance with the Law of the People’s Republic of China on the Application of Laws to Foreign-related Civil Relations.
The disputing parties may voluntarily choose arbitration as the preferred dispute resolution method. The arbitration clauses are effective, and the People’s Court shall not hear the case, except if the arbitration agreement is invalid. Arbitration is not subject to the hierarchical jurisdiction and territorial jurisdiction outlined below.
In China, there are four levels of courts: the primary courts, the intermediate courts, the high courts and the Supreme People’s Court. If the amount in dispute for a civil case is less than RMB500 million (not inclusively), the primary court will have first-instance jurisdiction. If the amount in dispute for a civil case is between RMB500 million (inclusively) and RMB5 billion (not inclusively), an intermediate court will have first-instance jurisdiction. If the amount in dispute for a civil case is more than RMB5 billion (inclusively), the high court will have first-instance jurisdiction. It is rare for the Supreme People’s Court to hear a case at the first instance.
The People’s Court at the location of the defendant’s domicile or the insurance subject matter shall have jurisdiction over an insurance contract dispute lawsuit. However, the territorial jurisdiction is subject to some exceptions. China has established some professional courts, such as the financial court, to handle litigation in some specific sectors. For instance, since 26 March 2021, the Beijing Financial Court will hear insurance disputes over which the Beijing Intermediate People’s Court has first-instance jurisdiction. The Beijing Financial Court will also hear the appeals in insurance disputes from the district courts of first instance.
In China, the judicial system primarily follows an inquisitorial approach, with judges actively involved in questioning both parties and other relevant individuals, such as witnesses, during proceedings.
Trial of First Instance
The People’s Court will hear the case following registration if the disputing parties do not reach a settlement or mediation, and such proceedings may be conducted in either an ordinary procedure or a summary procedure.
Trial of Second Instance
The People’s Court of second instance shall examine both the relevant facts and applicable laws for the appeal requests. A second instance judgment shall be binding and enforceable and can therefore only be challenged by judicial review.
The retrial may be conducted if a litigant deems that there is an error in a judgment or ruling that has come into legal effect or a People’s Court discovers an error in a judgment letter and deems that there is a need for retrial, although such applications are not always approved. Where the litigants apply for retrial, enforcement of the judgment or ruling shall continue.
Unlike the UK procedural regime, except for hearing in the courts or applying for arbitration, in China there is no independent body like the Financial Ombudsman Service (FOS), which reviews complaints from consumers or small businesses against insurers, makes binding decisions, and can only be challenged through judicial review.
In cases where the ratification and enforcement of a judgment or ruling from a foreign court, which has attained legal effect, is sought, a People’s Court will assess the matter. The examination will be conducted in accordance with an international treaty entered into or participated in by the People’s Republic of China or based on the principle of reciprocity. If the People’s Court determines that such enforcement does not contravene the basic principles of the laws of the People’s Republic of China, or impinge upon the sovereignty, security, or public interest of the State, it will issue a ruling confirming the validity. Should enforcement be necessary, an enforcement order will be issued and carried out in accordance with relevant provisions.
Conversely, if the People’s Court finds that the enforcement of the judgment or ruling would violate the basic principles of the laws of PRC or compromise the sovereignty, security, or public interest of the State, the foreign court’s judgment or ruling will not be ratified and enforced.
An arbitration agreement shall include arbitral clauses stipulated in the contract and other written agreements which request arbitration to be made prior to or following the occurrence of a dispute. An arbitration agreement shall include:
An arbitration agreement shall be deemed invalid when:
The arbitration agreement shall exist independently, and its validity shall not be affected by changes, dissolution, termination or invalidity of the contract.
Where the parties concerned filed a complaint to a People’s Court without declaring the existence of the valid arbitration agreement and, following acceptance of the case by the People’s Court, the other party provides the arbitration agreement prior to the beginning of the hearing, the People’s Court shall dismiss the case. Where the other party fails to provide the opposing opinion prior to the beginning of the hearing by the People’s Court, the arbitration agreement shall be regarded as having been forfeited and the People’s Court shall continue the hearing.
Enforcement of Awards
Arbitration awards are final. The arbitration commission or People’s Court will not hear a reapplication arising from the same matter if a lawful and valid arbitration award has been issued.
The parties concerned shall enforce the award. A party may apply to a People’s Court for enforcement if the other failed to implement the award.
Enforcement of Foreign Awards
Where an arbitral award of an overseas arbitration organisation requires ratification and enforcement by a PRC People’s Court, the parties concerned shall submit an application directly to an intermediate People’s Court at the location of the enforcee’s residence or the location of the enforcee’s properties; the People’s Court shall handle the matter pursuant to the international treaty concluded or participated by the PRC or in accordance with the principle of reciprocity.
New York Convention
China became a party to the New York Convention on 22 Jan 1987. However, two reservations were made upon joining, namely the reciprocity reservation and commercial reservation. The territorial application of the Convention extended to the Hong Kong Special Administrative Region of China and Macao Special Administrative Region of China. The People’s Court can refuse enforcement of a foreign award based on the grounds as set out in the New York Convention.
Alternative Dispute Resolution (ADR) is not only recognised but also actively promoted in China. Among the various ADR methods, settlement is particularly common. This involves a process initiated by the court before the case is officially registered. Typically, a specialised judge, often a retired senior judge, is appointed to assist the parties. Another approach is a pre-arbitration procedure organised by a third party aiming to facilitate a settlement between the involved parties. In certain cases, with relatively low claim values, the court may delegate a third-party agency to assist in mediation.
It is important to note that the mediation preceding both court proceedings and arbitration are internal processes conducted within the framework of the courts or arbitrations. These processes are not independent of the litigation or arbitration itself.
In light of the insurer’s obligation regarding prompt assessment and compensation or payment of insurance monies noted in 8.2 Warranties, where the insurer failed to perform such obligation, the insurer shall, in addition to payment of insurance monies, compensate the insured party or the beneficiary for losses incurred therefrom. In practice, the People’s Court may also uphold the insured’s or the beneficiary’s claim for the loss of interest during the period of delayed performance. The interest is calculated based on the Loan Prime Rate (LPR) issued by the People’s Bank of China.
If an insurer refuses to perform the indemnification obligation, it may face corrective orders from the NAFR and a fine ranging from RMB50,000 to RMB300,000. In severe cases, the insurer’s business operations may be restricted or it may be ordered to stop accepting new business, or its business permit be revoked.
Where the occurrence of an insured event is due to damages to the subject matter of insurance made by a third party, the insurer shall, with effect from the date of making compensation of insurance monies to the insured party, exercise subrogation rights within the scope of the compensation amount to claim for compensation from the third party.
Where the insurer is unable to exercise subrogation rights due to an intentional act or gross negligence of the insured party, the insurer may deduct or request a refund of the corresponding insurance monies. An exception to that would be when an insured event is caused intentionally by a family member of the insured party or its member, in which case the insurer shall not exercise subrogation rights to claim compensation from the family member of the insured party or its member.
The latest insuretech developments are listed below.
Artificial Intelligence (AI) Applications
The overall regulatory attitude supports the development of innovative insurance technology while emphasising the control of risks associated with it.
The CBIRC released the Fourteenth Five-Year Plan for Standardisation in the Chinese Insurance Industry, stating that digital transformation is a crucial means for the insurance industry to implement new development concepts and promote high-quality development. Standardisation facilitates the digital transformation of the insurance industry while concurrently strengthening industry standards in network and data security and personal privacy protection, balancing development and security. The plan also advocates for the development of standards in information technology capabilities to solidify the foundation for further development. Local authorities have convened meetings to actively promote the digital transformation of insurance institutions.
In response to technological advancements and to leverage technological innovation in the insurance industry, leading insurers such as China Life, Ping An, PICC, CPIC, and Tai Ping are strategically positioning themselves in insurance technology by establishing dedicated insurance technology subsidiaries.
Emerging risks that affect the market include:
Insurance institutions face significant data security risks when outsourcing services; such outsourcing has led to various security incidents impacting their networks, data security, and business continuity.
The main issues contributing to these risks are as follows:
The NAFR has issued the Risk Prevention and Control Management Measures for Criminal Cases Involving Banking and Insurance Institutions, effective on 1 January 2024, as a response to the high incidence of criminal cases in insurance institutions.
Insurance companies have leveraged artificial intelligence and big data technology to establish an intelligent claims anti-fraud platform to achieve intelligent claims and anti-fraud capabilities. The CBIRC has also introduced the Management Measures for Consumer Rights Protection in Banking and Insurance Institutions, safeguarding consumers’ legitimate rights from various aspects, including information security and property safety rights.
Relevant departments have intensified efforts to combat the illicit practice of “policy surrender through agent”, which include:
The NAFR has issued the Notice on Strengthening Network and Data Security Management in Third-Party Co-operation, which requires the insurance institutions to conduct risk self-inspections, enhance overall management of technological risks, and reinforce monitoring and regulatory reporting for off-site outsourcing risks.
Promulgation of The Financial Stability Law
The Financial Stability Law of the People’s Republic of China (Draft) (“Financial Stability Law” (Draft), promulgated on 30 December 2022, serves to establish a legal framework for financial institution risk management, encompassing prevention, resolution, and wind-down. The law highlights several key mechanisms:
In practice, the mitigation measures explicitly provided in the Financial Stability Law (Draft) have been utilised, including but not limited to:
The Fifth Amendment of the Insurance Law
Since its inception in 1995, the Insurance Law in China has undergone four amendments in 2002, 2009, 2014, and 2015, with a fifth amendment currently in the pipeline. Anticipated to be enacted after an eight-year interval, the fifth amendment aims to address the disparity between theoretical provisions and practical implementation. Key areas of focus include establishing an insurance mechanism with a core focus on consumer protection, providing guidance or regulation for cyber insurance, and enhancing supervision of insurance fraud, among other considerations.
Administrative Measures for the Protection of Consumers’ Rights and Interests by Banking and Insurance Institutions
The Administrative Measures for the Protection of Consumers’ Rights and Interests by Banking and Insurance Institutions came into effect on 1 March 2023 to further improve the protection of consumer rights and interests.
Notice on Strengthening Network and Data Security Management in Third-Party Co-operation
The Notice on Strengthening Network and Data Security Management in Third-Party Co-operation issued by the NAFR requires insurance institutions to diligently fulfil their network and data security protection obligations. This involves conducting self-inspections, supervising outsourcing risks, and enhancing emergency response mechanisms.
The insurance industry is an important pillar of the financial system and social security system. China’s insurance industry has experienced substantial growth in recent years. As of April 2023, there are 347 members of the Insurance Association of China (IAC), among which are 13 insurance group (holding) companies, 86 property insurance companies, 93 life insurance companies, 14 reinsurance companies, 18 insurance asset management companies and 69 insurance intermediaries. In fact, beyond the IAC members, additional asset management companies and insurance intermediaries actively participate in the market.
According to data released by the National Administration of Financial Regulation (NAFR), the original insurance premium income for the first three quarters of 2023 totalled RMB4.3 trillion, an increase of 11% compared with the previous year. The continued expansion of the insurance industry has led to a notable rise in the demand for insurance-related legal services. As of July 2023, the China Judgments Online Database recorded approximately three million insurance litigation cases. These predominantly involve property insurance and life insurance, along with a number of subrogation cases, and a smaller number of insurance premium dispute cases and reinsurance dispute cases. In addition, the market demand for non-litigation services is also on the rise, with the popularisation of insurance compliance and related consulting services.
Trends and Developments of Insurance and Reinsurance in China
Navigating the realm of insurance policies presents challenges across various stages, from policy formation to execution. These challenges involve assessing contract validity, interpreting liability exclusion clauses, determining indemnifiability for occurrences under insurance policies, and establishing the amount of insurable loss. Such issues are frequently encountered in the landscape of insurance litigation.
Beyond traditional domains like vehicle and life insurance, emerging categories like cyber insurance, D&O liability insurance, and green agriculture insurance introduce novel legal intricacies. Unlike conventional insurance disputes, these cases often entail intricate legal relationships, posing challenges for legal professionals, including attorneys and adjudicators.
This section analyses the legal aspects of several emerging insurance offerings, examining both litigation and non-litigation challenges in the dynamic field of insurance and reinsurance.
Increased uptake of D&O liability insurance
The adoption of Directors and Officers Liability insurance (“D&O insurance”) in China has witnessed a significant rise following the heightened disclosure duties imposed on public-listed companies by the PRC State Council and the NAFR. Historically, D&O insurance was primarily a niche foreign practice and there was limited uptake by China-based C-level executives.
The official implementation of the new Securities Law of the People’s Republic of China in March 2020 marked a turning point, as PRC regulatory bodies clarified the scope of liability for directors and officers and strengthened recourse against the actual controllers of listed companies. As of January 2023, 337 A-share listed companies announced their purchase of D&O liability insurance, reflecting a 36% increase compared to the previous year. Stricter regulations have subjected publicly listed companies to higher disclosure standards, and their directors and officers face more stringent scrutiny of fiduciary duty performances. D&O liability insurance disputes present unique challenges, with fewer referable precedents, complex legal relations, and intricate law applications compared to other liability insurance disputes.
The complexity of D&O liability insurance disputes increases further when foreign dispute resolution procedures come into play. Many Chinese companies opt to be listed on overseas stock exchanges such as the National Association of Securities Dealers Automated Quotations (NASDAQ), New York Stock Exchange (NYSE), and Hong Kong Exchanges and Clearing Ltd. (HKEX), among others. This global exposure subjects insureds to class actions and investigations in those jurisdictions, adding additional challenges to claims arising from D&O insurance policies.
Key issues that have garnered significant attention within the legal community include whether penalties imposed by a foreign regulator are covered under D&O policies, the application of foreign law to allocate loss when both covered and uncovered/under-covered insureds are co-defendants, and determining the reasonableness of settlement amounts awarded in another jurisdiction when the dispute is tried or heard by a PRC court or arbitration tribunal, among others.
Insurance disputes in the Internet Plus era
With the rapid evolution of the web economy, online sales of insurance products are expanding swiftly, creating novel opportunities for the growth and development of the insurance industry.
According to the Interim Measures for the Supervision of the Cyber Insurance Business issued by the China Banking and Insurance Regulatory Commission ( CBIRC, formerly the China Insurance Regulatory Commission, now under the State Financial Regulatory Administration), insurance companies can engage in cyber insurance business in several areas, such as personal accident injury insurance, term life insurance and whole-life insurance, household property insurance, liability insurance, etc. In 2016, nearly 80% of Chinese insurance companies have started their cyber insurance business through diverse business models such as constructing their own websites or co-operating with third-party platforms.
The industry’s rapid growth has outpaced regulatory developments, leading to a mismatch that has created space for conflicts and disputes. In 2018, the CBIRC and its branches received 10,531 consumer complaints about cyber insurance, which resulted in a surge of litigation cases related to cyber insurance policies. The formation of cyber insurance policies is different from that of traditional policies, so the disputes are usually related to the policy formation process.
Emerging legal challenges in the green insurance market
The surge in demand for green insurance within the growing green financial market underscores the pivotal role of agricultural insurance in China’s green insurance landscape. China is now a key player in terms of agricultural insurance premium income, recording a total original premium income of RMB129.2 billion as of September 2023 – a significant 19.4% increase from the previous year. In the face of challenges posed by global environmental pollution, climate change, and natural disasters, agricultural insurance policies are generating a growing array of legal considerations. In navigating this landscape, the legal intricacies extend beyond disputes and encompass various facets.
First, agricultural insurance matters often manifest in a series of cases, where different plaintiffs in the same area initiate separate litigation against the same insurer for similar facts and reasons.
Moreover, agricultural insurance products typically have a policy-oriented nature, and local government subsidies are provided for public interest considerations. The PRC Agricultural Insurance Regulations explicitly designate the local financial department as the administrative agency for agricultural insurance, with subsidies determined by this department. Consequently, when PRC courts handle relevant cases, they must not only apply the PRC Insurance Law and the PRC Civil Code but also consider regulations issued by local financial departments.
Furthermore, disputes concerning agricultural insurance policies frequently revolve around the validity of policy terms and the methodology for determining losses resulting from incidents. In practical terms, the primary focal points of disputes often revolve around whether the incurred loss aligns with the coverage criteria specified in the insurance policy and whether the claim was made in good faith or involved fraudulent elements. This highlights the multifaceted nature of legal work in the realm of agricultural insurance and its broader impact on the green insurance sector in China.
Finally, given that policyholders of agricultural insurance policies typically have modest incomes and find themselves in relatively vulnerable positions, PRC courts lean towards safeguarding the interests of these policyholders by considering the principle of equity.
The burgeoning of litigation property preservation liability insurance
Litigation property preservation refers to the protection measures taken by the court to prevent the party (generally the defendant) from transferring, concealing or selling the property before a judgment is issued, so as to ensure the smooth execution of the judgment once it takes effect.
In accordance with the Civil Procedure Law of the People’s Republic of China, when receiving the application for taking preservation measures, the People’s Court may require the applicant/plaintiff to provide a guarantee. In recent years, a litigation property preservation liability (LPPL) insurance policy has been considered a legitimate method of providing a guarantee.
LPPL insurance generally covers the losses suffered by the defendant as a result of a wrongful or improper application for property preservation. When the applicant/plaintiff loses the case, the defendant will sue the applicant/plaintiff and the insurer to seek reimbursement for losses caused by the property preservation measures.
With the wide application of LPPL insurance in civil litigation cases, more and more disputes have arisen out of such insurance policy. The following criterion will be considered in LPPL disputes:
New Laws, Regulations and Trends
The formation of the State Financial Regulatory Administration
On 18 May 2023, the National Administration of Financial Regulation (NAFR) was formed on the basis of the China Banking and Insurance Regulatory Commission (CBIRC). It incorporates the daily regulatory responsibilities of the People’s Bank of China over financial holding companies and other financial groups, as well as relevant responsibilities for financial consumer protection. As of the transfer of said responsibilities, NAFR officially becomes the regulatory and supervisory body of the insurance industry.
The dissolution of the CBIRC takes effect as a result of these changes after over five years of operation.
Changes of territorial jurisdiction
A lawsuit brought in an insurance dispute will fall under the jurisdiction of the People’s Court where the domicile of the defendant or the insured object is located. However, the territorial jurisdiction is subject to some exceptions. For instance, from 26 March 2021, the Beijing Financial Court will hear insurance disputes over which the Beijing Intermediate People’s Court has first-instance jurisdiction. The Beijing Financial Court will also try the appeals for insurance disputes.
New approach to insurance dispute resolution: diversified dispute resolution mechanism
Against the backdrop of the growing complexity of insurance policy types and the surge in disputes, the establishment of diverse dispute resolution mechanisms has emerged as a new trend, supplementing traditional measures such as litigation and arbitration.
On 22 May 2020, the Supreme Court of the People’s Republic of China, along with the Ministry of Public Security, the Ministry of Justice, and the CBIRC, jointly released the Notice on Advancing the Reform of “Integrated Online Data Processing” for Resolving Disputes Arising from Road Traffic Accidents (Law  No 142). This notice aimed to standardise and enhance the mediation mechanism related to such disputes. Subsequently, a series of pertinent legal documents were issued, underscoring the significance of establishing and refining diversified mechanisms for dispute resolution.
The diversified dispute resolution mechanism is characterised by its application in situations where an insured individual and an insurer encounter a dispute that cannot be resolved through mutual agreement. In such cases, the mechanism involves settling the dispute through non-litigious mediation facilitated by insurance industry associations, arbitration institutions, courts, or other third-party entities.
In recent years, there has been a noteworthy accumulation of valuable experience in establishing diversified dispute resolution mechanisms. Nevertheless, certain shortcomings are evident. Firstly, the legal and regulatory system lacks comprehensive development. Despite the issuance of various legal documents by the CBIRC (now the NAFR), the practical legal status of the parties involved in mediation and the consistent application of rules and regulations still necessitate further detailed laws and regulations. Second, there is a need to bolster the publicity and dissemination of diversified dispute resolution mechanisms. Third, the implementation of multiple dispute resolution mechanisms requires increased financial support.
Outlook and Conclusions
China’s insurance industry has demonstrated substantial potential, experiencing swift growth in the insurance market. Consequently, there has been a notable increase in legal advisory services related to insurance, encompassing dispute resolution and compliance, in response to market developments. As the insurance industry matures, there is a continuous enhancement of relevant laws and regulations, accompanied by the establishment of diverse dispute resolution mechanisms. This evolution is poised to facilitate more effective addressing of traditional insurance policy litigation, as well as emerging niche insurance policies, in the foreseeable future.