The Insurance Law of the People's Republic of China became effective on October 1, 1995. The PRC's first insurance law consists of eight chapters with 152 articles, covering the following items:

• Principles
• Insurance Contracts
• Insurance Company
• Operation Rules for Insurance Company
• Supervision and Management of Insurance Industry
• Legal Responsibilities
• Attachments

Since China has never had an insurance law before, the new law provides both breadth and depth in issues of insurance. For example, Chapter Two has three sections -- property insurance contracts, life and health insurance contracts, and general regulations for contracts. Property insurance entails property Joss insurance, liability and credit insurance. Life and health insurance includes life insurance, health insurance and accident injury insurance. According to the law, an insurer can only be involved in either the property insurance business or life and health insurance business -not both, as are some Western insurers.

In terms of ownership, the Insurance Law allows an insurance company to be either state-owned or a limited liability corporation. To set up an insurance company, a minimum registered capital of RMB 200 million (US$ 24.1 million) is required. At least 20% of the registered capital must be deposited in designated banks and a portion of the capital set aside for a safeguard fund in the event of defaults on large payments.

The Law sets up very strict regulations on companies involved in life insurance. These companies may separate from their parent company or merge with another company, but they can never be disbanded. If a life insurance company is shut down or pronounced bankrupt by the courts, its contracts and safeguard fund must be transferred to other life insurance companies.

Chapter seven defines the legal responsibilities for both insurance companies and customers. Customers who attempt to defraud insurance companies by reporting a non-existent accident; by deliberately causing death, injury, sickness or property loss; by providing false documents and evidence about accidents, are liable for criminal prosecution. An insurer is responsible for legal suits if he/she commits crimes such as fraudulent coverage, refusal to pay liabilities, among others. Fines on insurance companies can range from RMB 5,000 (US$ 602.40) to RMB 500,000 (US$ 60,241).

Changes in Regulations on Foreign Insurers

By the end of 1995, there were 77 foreign insurers from 13 countries with representative offices in China, showing keen interest in China's insurance market. Since then, the Chinese government has changed its regulations and policies to make the market more accessible.

According to government regulations, a foreign insurer must first establish and hold a representative office for three years in China before applying for an operating license.During this period, foreign insurance representative offices are not allowed to write insurance policies. However, the Chinese government recently approved a provision that allows foreign insurers to apply for a license after two years. The government also promised to speed up the license granting process.

The People's Bank of China, the governmental regulatory body for the insurance industry, intends to organize a new department to standardize the insurance market to meet the unprecedented flurry of insurance business. It also will change taxation policies on insurance companies. The taxation rates for different kinds of insurance varies, causing some concerns about the competitive advantage enjoyed by certain insurers. To bring a greater degree of discipline to the insurance market and to provide a more equitable playing field, the bank is formulating new regulations on taxation for licensed insurance companies and brokers, both domestic and foreign.

So far only three foreign companies have been granted operating licenses but they are limited to business in Shanghai and southern China. The new insurance law allows Chinese insurance companies to have foreign equity.