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Background
With the further aging of the population, the pension issue has gradually become a focus of attention in CHina, prompting the insurance industry to explore and develop life insurance products with long-term coverage and pension features. Meanwhile, due to the impact of the scheduled interest rate reduction, in addition to developing new products, insurers have also begun to consider converting the coverage of existing life insurance policies to pension annuity or nursing care insurance (hereinafter referred to as "policy conversion").
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Legal Basis for Policy Conversion
In general, from the legal and compliance perspective, PRC1 insurance regulator has only enacted regulations on the conversion of life insurance to long-term care insurance and has not clarified whether life insurance can be converted to other types of insurance products. Currently, there are no prohibitive or restrictive regulations stipulated by PRC insurance regulator towards the conversion of life insurance products to other types of insurance products, nor has the PRC insurance regulator imposed any penalties on insurers due to such conversion. In practice, life insurance products with the conversion option are relatively common in PRC insurance market.
Policy conversion is not a legal concept under PRC laws and regulations. Although it can be understood as a conversion between two insurance contracts (hereinafter referred to as "existing insurance contract" and "new insurance contract"), given that the conversion is based on the legal relationship of the two insurance contracts categorized as civil and commercial contracts, in the absence of explicit provisions in laws and regulations, the conversion between two insurance contracts shall be mainly based on the contract freedom between the contracting parties.
The legal basis for policy conversion can be divided into three categories:
- Based on explicit provisions in laws and regulations
Converting life insurance to long-term care insurance is currently the only type of conversion that has a clear regulatory basis.
When purchasing insurance products for the elderly, many commercial health insurance products are unavailable because the insureds are over the age limit for coverage, or their health conditions do not meet the underwriting requirements. As a result, it is difficult for elderly people to pursue thenursing care protection. In order to improve the supply capacity of long-term care insurance and alleviate the pressure of care costs for the disabled, in 2023, PRC insurance regulators issued the Circular on Launching the Pilot Business for the Conversion of Life Insurance and Long-term Care Insurance/关于开展人寿保险与长期护理保险责任转换业务试点的通知 (the "Circular") and the Rules for Conversion of Life Insurance into Long-term Care Insurance Coverage /人寿保险与长期护理保险责任转换业务规则 (the "Rules"), which encourage insurers to make full use of their existing life insurance policies to carry out the pilot program for conversion between life insurance and long-term care insurance.
- Based on the conversion option provision under the existing insurance contract
From market practice we have learned so far, many life insurance products contain a conversion option clause which entitles customers the right to apply for policy conversion under certain circumstances. It can be understood that as long as the customer applies for policy conversion, the insurer shall cooperate with the policy conversion in accordance with the existing insurance contract, otherwise, it will constitute a breach of contract.
- the insurer and the customer can negotiate the policy conversion in case of the existing policy without the conversion option clasue
If there is no conversion option clasue in the existing insurance contract, policy conversion is still feasible for the following reasons:
Firstly, from the legal perspective, policy conversion is essentially the termination or alteration of an existing insurance contract (i.e. surrendering the policy or reducing the sum insured), followed by the conclusion of a new insurance contract (i.e. purchase of a new insurance product). Even if the existing insurance contract does not contain a conversion option clasue, the policyholder may also rescind or change the existing insurance contract in accordance with Articles 152 and 203 of PRC Insurance Law (the "Insurance Law"), and then voluntarily enter into a new insurance contract by negotiation with the insurer in accordance with Article 114 of the Insurance Law.
Secondly, from the insurance regulatory perspective, there is a view that if the existing insurance contract does not include a conversion option clause and the insurer additionally grants the customer the right to convert the policy, such grant may be regarded as a change to the original insurance terms. However, according to Articles 355 and 366 of the Administrative Measures on Insurance Clauses and Premium Rates of Life Insurers/人身保险公司保险条款和保险费率管理办法, and the Administrative Judgment (Yue 19 Xing Zhong [2023] No.354)7 issued by the Dongguan Intermediate People's Court of Guangdong Province, if there is no change to the standard insurance terms filed within or approved by PRC authority, premium rates or other filing/application materials, but only supplementary agreements on matters not included in the standard insurance terms, no re-filing or re-approval procedure is required for insurers. In other words, if there is no conversion option clause in the existing insurance contract, and both parties have made negotiations with respect to matters not stipulated in the existing insurance contract, which have not materially changed the standard insurance terms and premium rates filed within or approved by PRC authority , there is no need for re-filing or re-approval.
In addition, with reference to the Rules, PRC insurer regulator states that insurers may select certain type of life insurance products for conversion, without mentioning whether these products must be life insurance products that already contain a conversion option. To some extent, it can be observed that using existing life insurance policies without conversion option clause to carry out policy conversion is also acceptable to the regulator.
Meanwhile, when process such conversion, insurer shall not take advantage of its market power to exploit the insurance consumer or to abuse its market power.
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Conclusion
Converting existing life insurance policies to pension annuity insurance or long-term care insurance can effectively relieve the pressure of elderly care, however, the policy conversion has not been popularized and there are many gaps in regulations. Therefore, when carrying out policy conversion , insurers should prudently design the conversion model and be cautious to the regulatory redline.
Footnotes
1. The People's Republic of China, for the purpose of this Advice, exclusive of Hong Kong SAR, Macao SAR and Taiwan.
2.Article 15 of Insurance Law: Unless otherwise stipulated in this Law or otherwise agreed in an insurance contract, upon conclusion of the insurance contract, the policyholder may rescind the contract but the insurer shall not rescind the contract.
3. Article 20 of Insurance Law: The policyholder and the insurer may negotiate on amendments to the contents of the contract. For amendments to an insurance contract, the insurer shall insert a remark on the insurance policy document or any other insurance certificate or attach a rider thereto, or the policyholder and the insurer shall enter into a written agreement on the amendments.
4.Article 11 of Insurance Law: Conclusion of an insurance contract shall be subject to negotiation and agreement, and the rights and obligations of the parties shall be determined pursuant to the principle of fairness. Except where insurance is stipulated by laws and administrative regulations, the conclusion of an insurance contract shall be voluntary.
5. Article 35 of Administrative Measures on Insurance Clauses and Premium Rates of Life Insurers: If an insurer amends any insurance clause or premium rates having been examined and approved or recorded, modifying its insurance liability, type or pricing, it shall submit the revised insurance clause and premium rates for examination and approval and record.
6. Article 36 of Administrative Measures on Insurance Clauses and Premium Rates of Life Insurers: If an insurer amends approved or recorded insurance clauses and premium rates without any change to insurance liability, type or pricing, it shall submit the following documents to the regulator for record within 10 days beginning from the date of amendment:
- List of Documents Submitted for Record Amendments
- Comparison on amendment reasons and major amendments;
- Approved or recorded insurance clauses;
- Relevant amended documents;
- Statement of Chief actuary;
- Statement of Legal Principal; and
- Other documents required by the regulator.
If personal insurance naming is modified due to name change of an insurer without amendments to others, such insurer may not submit the documents as required in the aforesaid 3, 4 and 5.
7. The court held that according to Article 18(2) of the Insurance Law: "The policyholder and the insurer may agree on other matters relating to insurance", the policyholder and the insurer have the right to agree on matters relating to the insurance contract. It is not improper for both parties to agree in the insurance policy that tin houses, simple buildings, temporary buildings or tin houses and simple sheds attached to the main building, as well as the property placed in the above buildings, are not covered by the insurance liability of this policy. The aforesaid special agreement clause is a specification of the subject matter of the insurance and does not change the content of the filed insurance terms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.