Following our recent reports on CIRC’s proposal to revise the current use of insurance funds regime (Asia Pacific – focus on insurance February 2014), CIRC issued the Notice for CIRC to Strengthen and Improve the Regulatory Requirements on Ratios of Use of Insurance Funds (the Notice) on January 23. The issuance of the Notice aims to unify the investment ratios that were previously regulated in different circulars or notices in one regulatory document which will supersede all previous regulatory requirements on ratios of investments made by insurance funds.
Five categories of assets are highlighted by the Notice: liquid assets; fixed-income assets; equity assets; property assets; and other financial assets. Regulatory requirements on investment ratios are established on the basis of these five categories of assets, for example:
- investment in liquid assets or fixed-income assets by insurance funds is no longer capped;
- investment in equity assets is capped at 30 per cent of total assets in the preceding quarter;
- investment in property assets is also capped at 30 per cent of total assets in the preceding quarter, while investment in own use property may reach 50 per cent;
- investment in other financial assets is capped at 25 per cent of total assets in the preceding quarter;
- total overseas investment in all five categories of assets shall not exceed 15 per cent of total assets in the preceding quarter;
- investment in any single asset is capped at 5 per cent of total assets in the preceding quarter unless the investment is made to domestic central government issued bonds, quasi-government bonds, bank deposits, major equity interests, equity interests of insurance companies by using proprietary funds, self-use properties, or insurance asset management products within the group; and
- investment in any single legal entity is capped at 20 per cent of total assets in the preceding quarter.
In addition to the requirements on investment ratios, the Notice also requires insurance firms to establish and disclose to CIRC their internal control measures. Such internal control measures shall both include an insurer’s investment ratio requirements and risk monitoring and warning measures. Any investments triggering a risk monitoring ratio must be reported to CIRC.
Going forward, CIRC will require insurance firms to focus more on the overall investment limitation on each category of assets rather than any specific asset under each category, which may help insurers achieve better economic returns.