China's insurance regulator appears determined to guarantee the solvency of the rapidly growing industry, pledging to close heavily insolvent insurers should they fail to promptly improve their solvency margins.

A senior official at the China Insurance Regulatory Commission said yesterday the commission will not balk at the decision to send insolvent insurance companies into bankruptcy procedures, although no Chinese insurance firm has gone to the wall in the 25 years of the modern Chinese insurance industry.

A recently established insurance protection fund, which is designed to compensate policyholders in the event of insurer bankruptcy, will safeguard social stability under such circumstances, the official said.

"The exit mechanism is an important aspect of a healthy insurance market," said Wang Xindi, deputy director of the commission's accounting department.

"If an insurance company gets seriously insolvent, the China Insurance Regulatory Commission will ask it to take rectification measures," she said. "If it fails to improve the situation after the rectification, or the solvency margin even deteriorates, the commission will agree to its bankruptcy."

China enacted its first insurer solvency regulation to protect the interests of policyholders only two years ago, after more than 20 years that saw an average of 30 percent in annual premium growth.

The domestic insurance industry was suspended for about two decades largely due to political factors, before it was resumed in 1979.

Wang said the vast majority of Chinese insurers are currently up to minimum solvency requirements, "except very few ones that fail to meet them due to reasons like rapid business expansion."

Some of the companies that "had solvency problems" last year have managed to meet these requirements, while others are still "taking active measures," the official said.

The commission sent its first supervision notes to three life insurers last year and ordered them to improve their solvency margins.

According to the solvency supervision regulation, the commission will take different measures against an insurer whose solvency margins falls below minimum requirements, including requiring the insurer to inject additional capital and restricting its business scope.

The commission released a new regulation in January that requires all insurers to put part of their premiums into an Insurance Protection Fund, starting this year.

The fund, which Wang said will total more than 4 billion (US$480 million) at the end of this year and continue to grow by 2 billion yuan (US$240 million) each year, will be used to compensate policyholders in case any insurer goes bankrupt and the assets are not enough to repay creditors.

The regulation confines a policyholder's potential loss from an insurer bankruptcy to 20 percent of the value of insurance contracts, and can mostly cover all losses from non-life policies for individuals, since such losses typically come in below 50,000 yuan (US$6,000). Losses below the number are fully covered by the fund.

The fund covers all insurance contracts sold by insurers operating in China, except policy-oriented business and policies written overseas.

And policyholders are entitled to transfer their insurance contracts to the fund before liquidation procedures are completed.

"The establishment of the Insurance Protection Fund will better protect the interests of policyholders, help reduce potential social unrest in the event of insurer bankruptcy, and ensure social stability," Wang said.

There are currently more than 80 insurance companies, including foreign players and their branches operating in China. The commission recently approved some 20 new Chinese insurance companies, after a freeze on this which lasted for several years.

The official said the commission has maintained strict entry requirements when granting approvals, and will conduct off-site and on-site inspections to ensure the new players are up to solvency margin requirements.

(China Daily March 16, 2005)