On December 2, 2013, the CIRC issued the "Notice on Matters Concerning the Regulation of Captive Insurers" (hereinafter the "Notice"),and the head of the relevant CIRC department answered reporters' questions on related issues.

I. What is the purpose of issuing the Notice?

Captive insurance is an important means of risk management for large international enterprises and an important component of the international insurance market, but China's insurance market has never had this organisational form. In recent years, the CIRC has actively explored the development and regulation of captive insurers and, in accordance with the relevant requirements of the State Council, standardised various forms of self-insurance. On the basis of fully drawing on international regulatory experience and taking into account the realities of China's insurance market, the CIRC formulated this Notice. 

The Notice is China's first regulatory document specifically governing captive insurers and an important measure by which the CIRC is accelerating the pace of reform and innovation in the insurance market. It resolves the problem that the development and regulation of captive insurers previously had no legal basis. Following the principle of "being active yet prudent, innovating moderately, isolating the market and preventing risks", the Notice sets out clear provisions on the establishment, operation and regulation of captive insurers, introduces certain innovations in their regulation, and lays a foundation for standardising corporate self-insurance practices and promoting the development of captive insurers. 

II. What are the conditions for establishing a captive insurer? 

For a captive insurer, the parent company is both a shareholder and the main recipient of its insurance services. Regarding the establishment conditions, in addition to requiring the parent company to meet the basic conditions for investors, the Notice also sets special requirements on the parent company's capital scale, business and risk characteristics, and demand for insurance protection. The main purposes are: first, to ensure that the captive insurer has a certain level of management capability and premium scale, thereby reducing operational risk; second, to help expand the scope of the enterprise's risk management protection, further broadening its original self-insurance coverage; and third, to standardise self-insurance practices in industries such as petroleum and railways by bringing various self-insurance funds under insurance regulation.

III. What are the procedures for establishing a captive insurer?

The Notice divides the establishment of a captive insurer into two stages: preparation and opening. At the preparation stage, the review focuses on the parent company's risk profile, potential business scale, the proposed company's business plan, operating model and management structure, and its separation from existing insurance business, emphasising the captive's special advantages in professional services. At the opening stage, since a captive insurer does not need to provide insurance services to the general public, the requirements for the business and financial aspects of its information systems are appropriately simplified, with the review focusing instead on aspects such as outsourcing service management and reinsurance arrangements. 

IV. What is the business scope of a captive insurer? 

The Notice defines the business scope of a captive insurer as property insurance for the parent company and its controlled subsidiaries, as well as short-term health insurance and short-term accident insurance for their employees. This is mainly based on two considerations: first, to increase the captive's business income so that it reaches a certain scale and maintains stable normal operations; second, to expand captive coverage as much as possible and, through multi-line operations, avoid risk concentration and diversify the captive's risks. Taking into account captive insurers' need to diversify risk, the Notice allows captives to cede business, subject to the CIRC's relevant reinsurance regulations. The owners of subjects insured under assumed business are limited to the parent company and its controlled subsidiaries, so as to prevent risks from the commercial insurance market from being transmitted to the captive insurer. 

V. Does a captive insurer need to contribute to the insurance security fund? 

Since a captive insurer mainly provides risk protection for its parent company, its business is confined to the parent company itself and it does not underwrite insurance subjects outside the parent company, and since the captive's operational risks are ultimately borne by the parent company, there is no need for the insurance security fund to rescue it. The Notice therefore provides that "captive insurers shall not contribute to the insurance security fund and shall not be included in the insurance security fund management system". 

VI. What special provisions does the Notice contain on captive insurers' reserve provisioning?

The Notice provides that "in addition to setting aside liability reserves in accordance with the relevant provisions of the CIRC, captive insurers may set aside special reserves for catastrophe prevention and loss mitigation in accordance with relevant state provisions". This is mainly based on two considerations: first, under the relevant provisions of the Ministry of Finance's "Financial Rules for Financial Enterprises", reserves for catastrophe prevention and loss mitigation may be set aside in the profit distribution process; second, allowing captive insurers to set aside catastrophe prevention and loss mitigation reserves in addition to liability reserves can further enhance their capital accumulation and risk protection capacity.