On 3 March 2016, the China Insurance Regulatory Commission (“CIRC“) released the amendments to the Interim Measures for the Administration of Utilization of Insurance Funds (the “Draft Amendments“) for public comment until 31 March 2016. The current version of the Interim Measures for the Administration of Utilization of Insurance Funds (the “Insurance Funds Measures“) has been effective since 1 May 2014. Although some key revisions under the Draft Amendments are already referred to in various Opinions and Notices previously issued by CIRC (as referred to below), the Draft Amendments consolidate and confirm such changes as part of a legal document with higher standing.
- Strengthened supervision of outbound investment utilizing insurance funds
In addition to CIRC’s prior approval which is required for insurance funds’ outbound investments under the current version of the Insurance Funds Measures, the Draft Amendments provide that the relevant regulations and requirements of the People’s Bank of China (the Chinese central bank) and the State Administration of Foreign Exchange (the “SAFE“) shall also be complied with. In the meantime, we have noted that SAFE has, during the past few months, strengthened its scrutiny and supervision of the foreign exchange settlement and remittance for outbound investments by Chinese companies.
Except for the above, the current restrictions and requirements on outbound investment utilizing insurance funds remain unchanged. In particular, balance of overseas investments of an insurance institution shall not exceed 15% of its total assets as of the end of the last quarter.
- Insurance funds are permitted to invest in asset securitization products
Although the current Insurance Funds Measures do not permit insurance funds to be invested in asset securitization products, such investment has already been encouraged and proposed by previous notices and opinions issued by Chinese authorities, such as Certain Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry (the “State Council Opinions“) on August 10, 2014 and documents issued in connection with the Shanghai Free Trade Zone.
More specifically, CIRC released the Interim Measures on the Management of Asset-backed Schemes Business on August 25, 2015 in relation to asset securitization. They define asset-backed schemes as business activities where a scheme is set up by a professional management institution (including an insurance asset management company) as the trustee, with cash flows generated from the underlying assets used for repayment to the qualified investors (including insurance companies). These Interim Measures further require the asset-backed schemes to be reviewed and approved by CIRC when they are set up, with a filing requirement applying to follow-up structures in respect of similar assets. The Draft Amendments confirm that insurance funds may be invested in asset securitization products, while also indicating that detailed rules for such investments will be formulated by CIRC separately.
- Prohibition on insurance funds’ investment in venture capital funds is removed
Although the investment of insurance funds in venture capital funds (the “VC Funds“) is prohibited under the current version of the Insurance Funds Measures, it has already been proposed under the State Council Opinions. Further to the State Council Opinions, CIRC issued its Notice on Insurance Funds’ Investment in Venture Capital Funds (the “VC Funds Notice“) on December 12, 2014, setting out various regulatory requirements and restrictions for the investment of insurance funds in VC Funds. The VC Funds Notice requires that the total amount of outstanding investment in VC Funds of an insurance company shall not exceed 2% of its total assets as at the end of the last quarter, and the outstanding amount of investment in a single VC Fund shall not exceed 20% of the amount raised by such VC Fund. The Draft Amendments confirm that insurance funds may be invested in VC Funds.
- Insurance funds are allowed to invest through professional insurance asset management institutions
Similar to the investment in asset securitization products, the State Council Opinions and other documents have already proposed and encouraged insurance funds to be invested through insurance asset management institutions specializing in sectors including real estate, infrastructure and construction. Such professional insurance asset management institutions can further set up mezzanine funds, M&A funds, real estate funds and other private equity funds. The Draft Amendments now confirm these items as permitted investments for insurance funds.
Detailed requirements are already set out in CIRC’s Notice on Matters relating to Insurance Funds’ Establishment of Private Funds (the “PE Funds Notice“) issued on September 10, 2015. Regarding the proportion of insurance funds which are allowed to be invested in PE funds, the PE Funds Notice further refers to CIRC’s Notice on Strengthening and Improving the Supervision and Regulation over the Percentages of Various Uses of Insurance Funds (effective since January 23, 2014), which requires that (i) the total book value of investments in equity linked assets (such as publicly traded shares and unlisted shares) shall not exceed 30% of the total assets of the insurance company as of the end of the last quarter, and (ii) the book value of investments in each single specific equity linked investment product shall not exceed 5% of the total assets of the insurance company as of the end of the last quarter.
- Broadened scope of investment manager
The current version of the Insurance Funds Measures provides that insurance group (holding) companies and insurance companies may only use an insurance fund management institution to make their investments. The Draft Amendments now also include securities companies, securities asset management companies, securities investment fund management companies and their subsidiaries under the definition of “investment manager” who can carry out investment activities. Prior to the Draft Amendments, such entities and companies have already been defined as the investment manager of insurance funds under other CIRC regulations, so this amendment serves again as a confirmation and consolidation of the regulatory position.
- Expanded scope of prohibited investments utilizing insurance funds
Investment in equity interest or real estate assets which does not comply with the national industrial policies is newly added into the list of prohibited investments utilizing insurance funds.
- Revised definition of “material equity investment” subject to CIRC’s prior approval
The current version of the Insurance Funds Measures defines a “material equity investment” subject to CIRC’s prior approval as an investment in insurance or non-insurance financial business giving rise to a controlling interest. Under the Draft Amendments, the definition is widened to include equity investments reaching a certain threshold below the control level, and other investments determined by CIRC. The Draft Amendments also indicate that CIRC will specify detailed criteria and standards for “material equity investments” in a separate document.