Asset backed plan ("Asset Backed Plan"), a comparatively new method to invest insurance funds in China, was first established by the China Insurance Regulatory Commission (CIRC) in February 2013 by way of issuing the Notice of the CIRC on Matters of Pilot Operation of Asset Management Product Issued by Insurance Asset Management Companies ("2013 Notice"). After a two-year trial period, the CIRC issued the Temporary Administration Provisions on Asset Backed Plan in September 2015 ("2015 Provisions"), which is viewed as a further step in improving this special purpose investment vehicle.
An Asset Backed Plan is one type of asset backed securities (ABS). The overall ABS issued in China up until 2015 was around RMB 759 billion, most of which were issued by banks and securities companies and regulated by the CBRC and CSRC respectively. Asset Backed Plans established by insurance asset management companies are of a smaller scale –there have been 22 Asset Backed Plans in the value of RMB 81billion established from 2012 to 2015. However, as a new trend of investing insurance funds, the percentage of "other investment method" (including Asset Backed Plan) has increased from 23.67% in 2014 to 28.65% in 2015 of the overall insurance fund investment.
The Asset Backed Plan refers to the beneficiary certificates issued by the insurance asset management companies to the qualified investors (insurance companies, insurance group and insurance asset management companies); the payments of the beneficiary certificates are backed by the cash flow arising from the back-up assets.
The key roles in an Asset Backed Plan include the following:
- Beneficiary – qualified investors including insurance companies, insurance group companies and insurance asset management companies who purchase the beneficiary certificates;
- Trustee – the insurance asset management companies act as trustees and their key responsibilities include: establishing, issuing and managing the Asset Backed Plan, allocating profits to the beneficiaries, assisting transferring or buy-back of the certificates and disclosing information of the Plan;
- Custodian—the custodian is to keep the assets of the Plan under custody for the benefits of the beneficiaries. The custodian shall be a separate entity of the trustee and shall not be an affiliate to the trustee. The responsibilities of a custodian include: safely keeping the assets of the Plan under custody, issuing custodian reports and supervising the operations of the trustee;
- Original asset owners – the original asset owners shall transfer the back-up assets to the Asset Backed Plan and maintain normal operation or manufacturing during the duration of the Plan to ensure the continuance of the cash flow arising from the back-up assets;
- Asset management services entity – an asset management services entity may be engaged by the trustee to manage the back-up assets and such services entity can be the original asset owners.
As a special purpose vehicle, the assets of the Asset Backed Plan are independent and separate from the assets of the original asset owner, the trustee, the custodian or of any other service providers. The assets under the Plan shall not be included in the liquidation assets if any of the above entities enter into the liquidation process for dissolution or are revoked of its licence or go bankrupt.
In the 2013 Notice, the investment scope of the Plan was limited to bank deposit, stocks, bonds, securities investment fund, central bank bills, securities backed by bank credit assets, project assets plan, infrastructure investment plan, real estate investment plan and non-finance corporate debt financing instrument. In the recent 2015 Provisions, the CIRC has not specified any limitation of scope of the assets, as long as the assets have clear ownership, truthful transactional background, reasonable considerations and do not have any encumbrance such as a mortgage or pledge.
The initial Asset Backed Plan shall be approved by the CIRC in advance. For subsequent similar Plans, they can be reported to the CIRC after issuance. The CIRC will review the Plan from compliance and procedural perspectives. For a Plan with a complicated structure, the CIRC may also invite external experts for assessment and may reveal the risks to investors.
Other than the above mentioned key terms, the 2015 Provisions also regulate the Asset Backed Plan in respect of risk control, operation and management, and information disclosure. The 2015 Provisions will be the main legislation to refer to when insurance asset management companies issue an Asset Backed Plan.
Given the current domestic investment environment, insurers are keen to explore new investment channels for insurance funds. The Asset Backed Plan is viewed as an innovative product of insurance fund investment. The CIRC mentioned that it would promulgate detailed regulations with regard to the negative list of back-up assets as well as the implementation rules in respect of securities information disclosure, registration and transfer, with a view to facilitating the registration and trading of the securities (i.e. the beneficiary certificates). The insurance ABS market is expected to boom in the near future.