New CIRC rules help smaller players

New CIRC rules help smaller players

Although recent rule changes by the China Insurance Regulatory Commission (CIRC) on mergers and acquisitions (M&A) have served to relax certain rules, "the CIRC maintains regulations intended to mitigate information asymmetry", reports the International Law Office in an analysis of the new regulations.

The CIRC released details of the rule changes in March; they came into effect at the beginning of this month. Law firm Anjie observed that the measures followed the March 7 2014 adoption of the Options of the State Council (Chinese cabinet) on Further Optimising the Market Environment for the Merger and Reorganisation of Enterprises".

Those options were "intended to clarify the major purposes and basic principles" of M&A market optimisation – essentially via the removal of market entry barriers.

China's insurance market has been becoming "freer" for many years, with restrictions on entry being lowered, although capital requirements remain strict. A significant change has been a reduction in restrictions on financial institutions from moving outside their original main field. That has seen banks move into insurance, while insurers have moved into banking.

With the latest changes, available financing sources have been broadened. Providing CIRC approval has been obtained, investors in the M&A activities of insurers are permitted to raise funds from M&A loans or by other means, provided the extent of the loans does not exceed 50% of the total monetary requirement. That is a significant relaxation, as previously shareholders of insurers had not been allowed to generate any leverage for M&As.

While in the past 15 years Europe has seen a discouragement of cross-shareholding within the financial system, the CIRC is moderately relaxing the rules. Provided regulatory approval is obtained, insurers can now buy stakes in two peers that compete in the same segment.

Anjie Law observed that this provision was "expected to promote increased M&A activity in the insurance market, especially mergers & acquisitions launched by investors with ample capital and large ambitions".

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source: Lloyd's China Market update, January 2013

State of the market:
In 2013 the five largest Chinese life assurers accounted for 69.5% of the market, while the combined market share of the five largest non-life players was 74.3%. However, the rest of the market is divided among nearly 100 insurers, most of which have a market share of 1% or lower. The measures will allow for the combination of insurance firms competing in the same segment of the market, thereby allowing them to gain market strength to combat larger competitors. It seems likely that this promotion of smaller firms would reduce the potential impact of price wars started by the larger players.



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