Lucky Number 13

New policies will make China’s insurance industry market-oriented By Lan Xinzhen

Lucky Number 13

New policies will make China’s insurance industry market-oriented By Lan Xinzhen

Investment restrictions will be loosened on the country’s 6-trillion-yuan ($944.4 billion) insurance funds with the release of 13 new policies. These policies, which are being formulated by the China Insurance Regulatory Commission (CIRC), will soon be implemented.

During a training class from June 11-12 for senior managers of insurance assets management companies, the CIRC promised to make the sector more market-oriented by breaking up institutional obstacles, increasing investment instruments and optimizing the assets management platform.

The new policies will broaden the overall investment territory, covering both domestic and overseas investment, and increase the types of financial products insurers can buy, including bonds, commercial banks’ financial products, financial derivatives and private equity investment.

This means insurance funds investment will march toward a totally market-oriented and more flexible operation pattern, said Chen Daofu, a research fellow of the Development Research Center of the State Council.

The new policies will cover almost all investment instruments that insurers have had their eyes on for years. Under the new policies, insurers can start margin trading businesses, trade domestic and foreign financial derivatives, broaden their overseas investment scope and expand the domestic investment scope in equity and real estate.

At the end of the first quarter of 2012, the insurance sector’s bank deposits totaled 2.07 trillion yuan ($325.82 billion) and the amount of insurance funds used for investment was 3.82 trillion yuan ($601.27 billion), according to the CIRC. In 2011, the average return rate of insurance funds investment was only 3.6 percent.

Today, assets of insurers are managed by affiliated assets management companies, ending up with a low rate of return due to the lack of competition. Under the new policies, insurers can entrust securities companies and fund companies to manage their assets, which can enhance the return rate after the introduction of competition in the area, said a report from Orient Securities Co. Ltd.

New regulatory mindset

Xiang Junbo, CIRC Chairman, has reiterated on many occasions that CIRC will loosen restrictions for insurance funds investment by broadening the investment scope of insurers and simplifying approval procedures. Insurers will make independent decisions, conduct independent investment and shoulder risks by themselves. The new policies are considered a watchdog’s resolution.

The policies show CIRC’s regulatory mindset has changed, according to a report of Zero Power Intelligence, an industrial research agency based in Shenzhen, Guangdong Province.

Insurers previously granted 80 percent of their assets to the asset management platforms they established. The whole sector combined independent investment, asset management companies and entrusted investment. Over the past several years, CIRC has successively expanded the investment scope and played a vital role in bolstering the sector’s robust development, according to the report.

The insurance sector, like most other industries and business environments, has not been immune to the backlash from the global financial crisis. In the first four months of 2012, the insurance premium increased 3.75 percent, a relatively slow speed. The return rate was only 1.21 percent. The profit of the whole sector was 24.8 billion yuan ($3.9 billion), a 19-percent year-on-year drop.

China’s insurance sector now has 10 groups, 156 large insurance companies, over 100 small and medium-sized ones and 13 assets management companies. The lagging investment ability of insurers has become a major obstacle for the sector’s future development.

How should China increase the investment ability of insurers? The CIRC has chosen a more open way, said the report of Zero Power Intelligence.

This requires insurance assets management companies to use differentiated competition strategies and fully utilize different instruments. CIRC should fully support product innovation, help those companies get access to the real economy and government resources to lower costs and expand the scope of their entrusted businesses, according to the report.

For CIRC, the bottom line is to avoid regional and systematic risks. It can intensify supervision while at the same time loosening restrictions. The ultimate goal is to enhance insurers’ ability to manage assets, said the report.

While most insurers and investors applaud further opening up, some industry insiders remain cautious to the simmering risks.

“The new regulation has put forward a higher requirement for the supervision ability of regulatory bodies, and the risk control ability of insurers,” said Pan Cheng, an analyst at the China Securities Co. Ltd.

FREE UP INSURERS: A client at the Peoples Insurance Co. of China’s branch in Qingdao, Shandong Province, in September 2011

The 13 policies allow investment in stock index futures and Treasury bond futures. If the investment is used for arbitrage or speculative activities, the risks will be huge. If not well supervised, it’s hard to control the risks, said Pan.

For insurers, choosing investment instruments will be easier but they will face more complicated and a larger number of risks than before. It will put forward a higher requirement for their risk control ability.

Insurers shouldn’t conduct aggressive investment as soon as the policies come out but should take into consideration its own investment and risk control ability. “They need a process to enhance themselves to meet the higher requirements of the new policies,” said Pan.

Overseas investment

Insurance funds will be invested in more countries and regions, such as the bond market in developed countries and emerging economies. Among the 13 policies, the regulation for overseas investment, which has been in the making for three years, is expected to be implemented before others.

As the implementation rules to the 2007 edition of regulation on insurance funds’ overseas investment, the new regulation will specify not only the qualified market but also products that insurers can invest in. There are 45 qualified countries and regions, covering developed markets such as Australia, the United States, Japan, Germany, France and Greece, and emerging markets such as Brazil, Indonesia, Turkey and the Philippines. Qualified products consisting a total of 15 include commercial paper, money market funds, bank deposits, bonds, convertible bonds, stocks, equity products and America depositary receipts.

The new regulation also gives the green light to real estate investment for the first time. Insurers are allowed to invest in commercial and office properties that foreign companies possess in China by acquiring shares of those companies.

CIRC sets the ceiling of overseas investment at 15 percent—more than 900-billionyuan ($141.66-billion) insurance funds are available for overseas investment.

Chinese insurers used to be extremely cautious in overseas investment. China Ping’an Insurance, one of the top three insurers in the country, has been emphasizing that its liabilities are settled by the yuan. Overseas investment will face not only market risks but also exchange rate fluctuations. Therefore, overseas investment of China Ping’an is focused on projects that are closely related to the mainland, mainly the Hong Kong stocks.

With CIRC’s new resolution to loosen investment restrictions, China Ping’an will embark on investing in developed markets and emerging economies in the future, according to a staff member of the company’s information department.