2014 is expected to be another growth year for China’s insurance asset management sector following its initial boom in 2010. In this article we highlight a number of recent developments and historic changes in the sector.
Proposal to adjust the general rules
On January 8, 2014, the China Insurance Regulatory Commission (CIRC) issued a draft notice (Draft Notice) for public consultation aiming to revise the Interim Measures on Use of Insurance Funds (the Interim Measures), which took effect in late 2010 when CIRC first set about reforming the insurance asset management sector. According to the Draft Notice, CIRC proposes replacing the clause setting out detailed investment ratio requirements on insurance funds with a more general clause stating that CIRC would separately regulate and/or adjust relevant investment ratios of insurance funds.
By way of background, since late 2010, CIRC has taken several steps to liberalise investment restrictions on insurance funds and provide greater flexibility in asset allocation. In addition to the Interim Measures, CIRC has already issued several implementation rules regulating investment ratios of insurance funds investing in various product categories. These regulations show some inconsistency with the Interim Measures. By proposing a more general clause in the Interim Measures CIRC would be able to adjust investment ratio requirements in specific areas and, therefore, avoid any potential conflicts.
Unifications of the investment ratios
Also in January, further to the Draft Notice, CIRC formally issued the Circular for CIRC to Strengthen and Improve the Regulatory Requirements on Ratios of Use of Insurance Funds (the Circular). The Circular 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 identified in the Circular: 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 self-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 rights of credit of or equities 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 Circular also requires insurance companies to establish internal control measures to be further disclosed to CIRC. Such internal control measures shall both include an insurer’s investment ratio requirements and risk monitoring and warning measures. Any investments triggering risk monitoring ratio shall be reported to CIRC.
In future, CIRC will require insurance firms to focus more on the overall investment limitation on each category of assets rather than any specific asset. This may help firms to achieve better economic returns while retaining control of risks.
Other potential reforms
The vice chairman of CIRC discussed recently three other strands to facilitate reform that will be implemented this year. These are:
- establishing a centralised registration and trading system for insurance asset management products for the ease of investors’ entry and exit;
- setting up an asset management association administrating the registration matters for insurance asset management products; and
- reforming the investment scale and scope of insurance funds such as broadening infrastructure investment, refining policies on investment in equities, real estate and overseas investments.
According to an earlier report, CIRC had announced that it would consider allowing insurance companies to invest in the Second Board at the Shenzhen Stock Exchange where the shares of start-up companies are listed, and permitting insurance companies to invest premium received on policies sold at least 15 years ago into blue-chip stocks in a trial programme. CIRC is trying to reduce unnecessary prior administrative approval of insurance funds by strengthening post-risk prevention such as ongoing supervision of disclosure, internal control and solvency maintenance, among others issues.
The evolving insurance asset management landscape
In terms of historic changes CIRC has, in recent years, been dedicated to reforming the insurance asset management sector. In late 2010, CIRC permitted insurance asset managers to act as professional third party asset managers.
In 2012, in view of low investment returns and asset depreciation suffered by insurers, CIRC allowed qualified fund houses and securities firms to manage entrusted insurance funds by investing them domestically in mutual funds, listed bonds and stocks. Further, CIRC issued several new regulations to liberalise investment restrictions on insurance funds and provide greater flexibility in asset allocation, including but not limited to:
- insurers being allowed to invest in hybrid and convertible bonds;
- insurers being no longer required to meet annual profit making requirements for equity or real estate investments; and
- caps on aggregated investment by insurance funds in unlisted equities and equity investment funds being raised to 10 per cent, and in unsecured bonds being raised to 50 per cent.
In the same year, CIRC issued long-awaited implementation rules to:
- expand the permitted jurisdictions for overseas investments significantly to include 45 countries (including 25 developed markets and 20 emerging markets); and
- widen the scope of approved assets classes to be invested overseas by domestic insurers to cover money market instruments, fixed-income products, equity products, real estate which is profitable and located in central areas of major cities in a permitted jurisdiction, and qualified overseas funds such as mutual funds and privately placed funds.