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New amendment to insurance law

The Insurance Law of the People's Republic of China was promulgated on June 30 1995 and first amended on October 28 2002. On February 28 2009, the Insurance Law was amended again by the NPC Standing Committee (the Amendment) and the Amendment will come into effect on October 1 2009.

The Amendment makes big changes to the rules governing insurance contracts. The purpose of the changes is to provide clearer rules on the rights and obligations of the parties to an insurance contract. Most revisions reflect the legislators' intent to protect the interests of the insured. For example, the Amendment introduces the "incontestable clause" into the Insurance Law for the first time, stating that an insurer is not entitled to terminate an insurance contract after two years of the formation of such contract by claiming that the insurance applicant fails to perform the obligation of faithful disclosure when negotiating the contract. The application of the "incontestable clause" to insurance contracts restricts an insurer from abusing the right of termination and protects the interests of the insured, especially under a long-term life insurance policy.

The Amendment also makes revisions on the operation of insurance companies to accommodate the need of economic development in recent years. The permitted business scope of insurance companies is enlarged, allowing insurance companies to carry out new businesses upon approval by CIRC. The Amendment broadens the investment channels of insurance funds as well. Besides traditional categories such as bank savings and government bonds, investment in stocks and real estate is explicitly allowed. Although other permitted forms of investment are subject to further regulation by the State Council, the clause in the previous Insurance Law that prohibits insurance companies from investing to establish security operation companies or non-insurance companies is deleted in the Amendment. This implies that insurance companies may in the future be permitted to engage in other types of financial businesses and invest in companies who conduct non-insurance business.

Furthermore, the supervising power of the regulator (CIRC) over insurance companies is further strengthened by the Amendment. It provides for detailed measures which CIRC may adopt when an insurance company fails to meet the solvency requirements.

Liu Linfei

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