In order to further regulate and supervise the insurance industry, deepen the reform of insurance companies and prevent risks from their source, the China Insurance Regulatory Commission (“CIRC”) has promulgated four regulations early this month - Guidelines for the Risk Management of Insurance Companies (for Trial Implementation) (the “Risk Guidelines”), Interim Measures for the Administration of Related-Party Transaction by Insurance Companies  (the “Measures for Related-Party Transaction”), Interim Measures for the Administration of Independent Directors of Insurance Companies (the “Measures for Independent Directors”) and Guidelines for the Internal Audit of Insurance Companies (for Trial Implementation) (the “Internal Audit Guidelines”), all of which are supporting rules of Guiding Opinions on Regulating the Corporate Governance of Insurance Companies (for Trial Implementation) (the “Guiding Opinions”) issued last year by the CIRC.  The promulgation of the above five regulations is an important milestone indicating the further enhancement of the system regulating the corporate governance of insurance companies.

At present, the major corporate form of Chinese insurance companies is the mixed ownership with joint stock system as its main feature.  As the completion of shareholding reform of state-owned insurance companies and the overseas listing of PICC, China Life and Ping An (three insurance companies maintaining a 70% market share), the enhancement of corporate governance of insurance companies, which is the importantly systematic guarantee for the sound development of insurance industry, has become the central task for deepening the reform.

The Guiding Opinions issued last January (presently effective) are a general guiding document with regard to the enhancement of the corporate governance of insurance companies, the contents of which include seven parts: enforcing obligations of shareholders, enhancing construction of board of directors, giving play to board of supervisors, regulating operations of management level, strengthening the administration of related-party transactions and information disclosure and supervision on corporate governance, and supervising the corporate governance.  The purpose of the Guiding Opinions is to, through a strict accountability system, urge insurance companies to establish an effective decision and control mechanism, so as to prevent operational risks, protect legitimate rights and interests of insurant, investors and other related parties.

The newly-issued supporting regulations, however, have specified the administration on the corporate governance of insurance companies from different emphases: risk management, related-party transactions, independent director system and internal audit.

I. The Risk Guidelines aim to push forward the establishment of a risk management organizational system and a formalized management system in all insurance companies, the contents of which include:

1. An insurance company shall establish a risk management organizational system, for which the board of directors shall be ultimately responsible.  The risk management organizational system, which covers all business units, shall be directly led by the management level and relies upon risk management institution and the close cooperation of the relevant functionary departments.  The risk management department shall submit a risk assessment report to the management level and the board of directors at least once every year.

2. Each insurance company shall establish a comprehensive risk management system which covers all business flows and operation links and may conduct continual monitoring and regular evaluation over risks and give accurate warnings, and at the same time, conduct key monitoring over risks in light of the actual situation of the company so as to timely discover, prevent and eliminate risks that may exert great influence on the company’s operation.

3. The Risk Guidelines classify major risks that may be encountered in the operation process of insurance companies as insurance risks, market risks, credit risks and operating risks.

4. The CIRC shall inspect the insurance companies with respect to their risk evaluation and management on a regular basis.  The CIRC may, based on inspection results, issue a risk warning letter to an insurance company which has grave defects in risk management.

The Risk Guidelines will come into force as of July 1, 2007.

II    In recent years, as the broadening of insurance capital utilization channels and the development of group-orientation of insurance companies, transactions related to shareholders become the focus of supervisions.  The Measures for Related Transaction require that each insurance company shall establish a strict management system with regard to related-party transactions, and has laid down detailed rules concerning disclosure and reporting of related-party transactions, the main contents of which include:

1. The term “related party” is defined from the aspects of ownership relationship, operation and management powers, etc.

2. The term “related-party transaction” is defined, and is classified as “material related-party transaction” and “ordinary related-party transaction”.

3. The principle of good faith and fairness should be observed by insurance companies in related-party transactions.  In principal, the prices or charges in the related-party transaction shall not be differentiated from the price or charges offered by an independent third party.

4. It is required in the Measures for Related-Party Transaction that a strict management system with regard to related-party transactions shall be established by insurance companies, details of which include that material transactions shall be examined by an audit committee under the board of directors and shall be submitted to the board of directors for approval; directors relating to such transaction shall withdraw from voting, when the board of directors examines such transaction.

5. A report to the CIRC is required within 15 working days after a material related-party transaction takes place, in which the insurance company shall state the pricing policy of the transaction, the relationship between the concluded price and fair market price, and shall disclose the purpose of such transaction and its impact.

The Measures for Related-Party Transaction have already come into force as of April 6, 2007.

III The Measures for Independent Directors play an important role in enriching the Guiding Opinions.  The Measures for Independent Directors focus on the implementation of the independent directors’ function of decision-making and supervision, so as to protect the legitimate rights and interests of insurants and minority shareholders efficiently.  The main contents of Measures for Independent Directors include:

1. The Measures for Independent Directors have stipulated the qualification of independent directors, such as it is prohibited for a individual whose sole discretion may be affected by his/her connection with the insurance companies from serving as an independent director, including the person (or any of his/her immediate relatives) who has worked for the last three years in any of the shareholders holding 5% or more shares of the insurance company or any of the top ten shareholders of the insurance company or the person (or any of his/her immediate relatives) who is serving as the partner, controlling shareholder or senior manager of any bank, or institution providing legal, consultancy, audit services to the insurance companies, etc.

2. The Measures for Independent Directors have also provided specific procedures concerning the nomination, election and dismissal of the independent directors.

3. The Measures for Independent Directors have made clear the duty, obligation and necessary guarantees of independent directors and provide that proper punishment can be imposed by the CIRC when the independent director is held neglectful for his duties.
The Measures for Independent Directors have already come into force as of April 6, 2007.

IV   Internal audit is an essential part in terms of internal control over insurance companies, which is of great importance and significance for strengthening the risk management ability of insurance companies, safeguarding their assets and realizing operation and management goal.  The Internal Audit Guidelines have made specific requirements regarding the establishment of internal audit system in insurance companies:

1. Insurance companies shall establish an internal audit system which is proportionate to the corporate governance, management and controlling model and the nature and scale of its business and is comparatively independent in terms of budget, operation management and performance assessment.

2. An audit committee shall be established under the board of directors of each insurance company, which shall be composed of three or more directors who are not serving concurrently in the management of the company.  Duties of the audit committee include approving the annual audit plan and audit budget of the company, assessing the performance of persons responsible for the audit and directing the performance of internal audit of the company, etc.

3. Each insurance company shall create the position for a responsible person of audit, who shall be responsible for organizing the work of internal audit system of the company and organizing the implementation of audit projects.

4.   Each insurance company shall establish an independent internal audit department, so as to supervise, examine and assess the authenticity and compliance of all operation, management and financial activities of the company, as well as all affiliate entities.

5.   All problems detected in the internal audit shall be corrected by the company on a timely basis.  The result of the internal audit shall serve as the important ground when assessing the achievement of economic goals and appointing and dismissing responsible persons of affiliate entities.

The Internal Audit Guidelines will come into force as of July 1, 2007.