China steps up scrutiny of insurers’ deals with affiliate companies

China’s top insurance regulator has ratcheted up its scrutiny of insurers’ transactions with connected or affiliate companies to stem what it called the “illicit transfer of benefits” – the latest sign of strengthened policing of the rapidly growing sector.

Regulatory procedures are commonly put in place to ensure that such transactions between companies that have close relationships do not lead to any conflict of interest, or might negatively affect value for shareholders.

Insurers will now be required to report any deals between related companies, including those done through trust and complicated assessment deals, to the China Insurance Regulatory Commission (CIRC), and the people in charge could face hefty fines if any irregularities are found.

They are also required to set up a designated panel with no less than five members – led by an executive director and including senior management figures such as a compliance head – to oversee such deals, the watchdog said on its website on Friday.

The new measures apply to all classes of insurer, including asset management firms and emerging mutual insurance companies.

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The strengthened scrutiny is aimed at effectively closing the door on insurers manipulating insurance funds to finance hostile takeovers, for instance, through layers of complicated affiliates or subsidiaries, said Tian Dan from Soochow Securities’ insurance research team.

“This reflects the continuing aftershock of its stepping-up of supervision, first signalled late last year,” said Tian.

“We have seen the frequent release of notices or addresses indicating more scrutiny,” he said, adding that the market can expect even tighter scrutiny in the remaining of the year.

The CIRC’s former chairman Xiang Junbo was removed from his post in April for what’s claimed to be serious violation of Communist Party discipline, becoming the highest-ranking financial regulatory official to be toppled in China’s anti-corruption fight.

During his time in charge, China’s insurance sector has been growing at breakneck speed, but the rampant sales of essentially short-term wealth management products and insurers’ aggressive acquisition attempts at listed companies attracted the government’s attention.

The two practises triggered concerns of not only undermining the stability of the industry, but also that risk was extending to other…

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