Abstract: In the legislation concerning insurance company insolvency, establishing and improving the mechanism for protecting policyholders’ rights and interests can not only safeguard their reasonable expectations but also prevent the emergence and spread of systemic risks. Therefore, how to refine this protection mechanism has long been a critical issue. By reviewing the relevant legislative experience of developed countries on insurance company insolvency and combining an analysis of basic legal principles and insurance practices, the system of reasonable policy modification, which is proposed for introduction in the fifth draft amendment to China’s Insurance Law, holds practical significance. The logical development of this specific system can proceed from three dimensions: institutional purpose, institutional framework prototype, and institutional connection. Firstly, the legislative value should prioritize protecting policyholders’ interests while supplementarily maintaining the stable operation of the insurance industry. Secondly, the basic framework of reasonable policy modification can be constructed at three levels: applicable scenarios, applicable procedures, and applicable restrictions. Finally, it is necessary to clarify the logical relationships in application between the system of reasonable policy modification, the existing mandatory transfer system for life policies, and the insurance guaranty fund system, so that the three can jointly form a mechanism for protecting policyholders’ rights and interests in the legislation concerning insurance company insolvency.