The Best’s Briefing, titled, “Mutual—A New Insurance Organizational Structure in China,” states that in early 2015, the China Insurance Regulatory Commission (CIRC) issued a trial regulatory scheme on the supervision of mutual insurance organizations. The minimum start-up capital requirement for a mutual insurance company license is based on the type of mutual (e.g., general, professional, or regional). For general mutual insurers, that requirement is CNY 100 million, with a minimum of 500 members. For professional and regional mutual insurance companies, required start-up capital is CNY 10 million, with a minimum of 100 members.

Owned by policyholders, mutual insurance companies have a distinct operating philosophy aimed at maximizing the company value and issuing policyholder dividends in the forms of lower renewal costs, cash dividends, better services or more robust insurance benefits. According to the International Cooperative and Mutual Insurance Federation, global mutual premium comprises 27% of the total global insurance premium; however, in China, mutual premium comprises just 0.3% of the country’s total premium income.

A year after the announcement of the CIRC’s trial scheme, all 30-plus mutual insurance license applicants still are waiting for approval. It is generally thought that the CIRC is giving time to the interested applicants to study mutual insurance operations while the CIRC at the same time develops regulatory knowledge through studying how other regulatory bodies supervise this structure. However, some non-insurance online platforms have started using terms such as “mutual” or “cooperative” in marketing campaigns to attract members for insurance contributions. In April 2016, the CIRC issued a warning to the public about these illegal insurance operations, as they remain unlicensed and noncompliant with the solvency requirement. The industry believes there is a need to speed up the mutual license approval process and educate the general public about the characteristics of mutual insurance companies to avoid a major market failure.

A.M. Best believes fulfilling the capital requirements issued by the CIRC might be a challenge for start-up mutual insurance companies in this market, and it will take years and a sizable group of participants to determine whether China’s mutual results will be comparable with the established U.S. mutual market. Mutual insurance companies cannot raise capital by issuing stock like shareholder-owned insurance companies do. With this in mind, mutual insurance companies may be able to raise capital through a third party via the issuance of a surplus note (a subordinated liability) or capital support from investors. In the case of China, the CIRC has not yet explicitly stated its view on permitting member assessment.

To access a copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=249603.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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