Under the terms of the Closer Economic Partnership Arrangement (Cepa), Hong Kong-based companies can invest in the mainland but mainland companies cannot invest in Hong Kong or elsewhere. However, it is anticipated that with the implementation of Cepa in January next year these restrictions will be relaxed gradually. The terms stipulate that any insurance company investing on the mainland must have US$5 billion in capital, a minimum of 30 years of industry experience and have had a representative office on the mainland in place for at least three years. Under Cepa, failure to meet these requirements renders a company ineligible for entry. Asia Insurance president and Legislative Council member Bernard Charnwut Chan says these prerequisites are so restrictive that even if all Hong Kong-based insurance companies joined together they would not be able to raise the US$5 billion and would be shut out of the mainland. 'There is also an acknowledged basic requirement of investment of 24.9 per cent from Hong Kong-based companies, which would allow investors the flexibility/leverage within the mainland company structure, for example, the ability to negotiate some role at management level in a company, possibly at directorship level,' Mr Chan says. 'An investment that only equalled 3, 4 or 5 per cent, for instance, would be just that, an investment only, with no input into company policy or direction.' PICC Property & Casualty is the largest non-life insurance company on the mainland. AIG, for instance, has a stake of about 10 per cent in PICC. AIG's investment is viewed as substantial by PICC as it also brings to the table years of industry expertise and an ability to assist PICC's further growth and expansion in the marketplace. Likewise, American International Assurance (AIA), another international industry leader, has invested about 1 per cent to 2 per cent in PICC. It also has eight established branch offices on the mainland and is ideally positioned for further growth and expansion due to the Cepa initiatives. Nigel Hazell, regional director, finance and operations for CMG Asia, says: 'It is certainly the case that returns achievable by life insurers in China are likely to be modest in the short term given the low interest rates. 'However, the [China Insurance Regulatory Commission] has demonstrated a very responsible approach by preventing life insurers from providing significant investment guarantees on the policies they sell. Accordingly, unlike in some other countries, life insurers are far less likely to find themselves unable to meet the guaranteed level of benefits.' The Hong Kong Trade Development Council says that under Cepa, restrictions in the mainland market will be removed gradually for Hong Kong insurance companies in geographic, business scope and customer terms, while restrictions on foreign equity ratio will be further relaxed and non-life insurers will be allowed to establish wholly foreign-owned enterprises. However, restrictions will remain rather stringent despite the lowering of the market access threshold for Hong Kong insurers under Cepa. Besides this, Hong Kong players are facing keen competition from a large number of foreign insurers in the mainland market. For instance, in November last year, Standard Life Insurance of Britain, Liberty Mutual Insurance of the US and Sompo Japan Insurance of Japan were given the green light to operate in China. The Beijing branch of AIA was the first wholly foreign-owned insurance company in the city. Following closely, Sun Life Assurance of Canada teamed up with Everbright Group to form Sun Life Everbright Life Insurance, the first joint-venture insurer in Tianjin. Meanwhile, foreign insurance companies are also seeking to increase their shareholding of mainland insurers. HSBC recently entered into an agreement in Shanghai to acquire 10 per cent of shares in Ping An Insurance for US$600 million. Hong Kong insurance companies have a number of options for entering the mainland market and gaining market share by teaming up with mainland partners, such as by forming a joint venture. As for re-insurance, since the business is not subject to any specific restrictions in the mainland, joint-venture insurers can use Hong Kong as a base of operation. 'China will open its insurance business to the outside world on a full scale after its accession to the World Trade Organisation,' Meng Zhaoyi, deputy director of the International Department of the China Insurance Regulatory Commission, said at the International Summit on China's Insurance Market and WTO held in Beijing in January last year, following the mainland's entry into the WTO. He said the Chinese government had made commitments regarding aspects of market access by foreign investors such as the form for enterprise establishment, geographical limits, business scope and business licences. The main commitments of the Chinese government in opening the insurance business were listed as follows: Immediately after WTO accession, non-life insurers from abroad will be allowed to set up branches or joint ventures in China; Foreign firms will be allowed to hold 51 per cent of a joint venture; Two years after entry, non-life insurance firms from abroad will be allowed to set up solely funded sub-firms in China, with no restriction on the form of enterprise establishment; Immediately after entry, foreign life insurers will be allowed to set up joint ventures in China, and hold no more than 50 per cent stake in such ventures; They will be allowed to choose their partners independently; Investors of the joint ventures are allowed to make joint venture clauses independently within the scope committed; Immediately after accession, the foreign stake in Sino-foreign joint venture insurance brokerage companies may reach 50 per cent, and the proportion may not exceed 51 per cent within three years after the accession; Five years after WTO entry, foreign insurance brokerage companies will be permitted to set up solely funded sub-firms; With the gradual cancellation of geographical limitations, foreign insurance companies that have received the requisite approvals will be permitted to set up branches, and; The qualification conditions for initial establishment do not apply to the setting up of internal branches within the mainland.