Having fully reviewed the Rmb3.2 trillion Chinese insurance industry's less than wholesome performance in the year of a global financial crisis in 2008, the China Insurance Regulatory Commission (CIRC) has formally issued a set of new measures aimed at boosting investment returns and enhancing internal risk management mechanisms.
The CIRC's announcements include expanding the investment scope in equities, domestic and offshore fixed income and infrastructure project financing; and guidelines to insurers' internal management, risk management and investment capabilities.
The ability to do more in fixed income will come as a relief to insurance company CIOs, who have lobbied hard to enlarge the types of long-term securities available to buy. The industry is plagued by asset/liability mismatches, due to the lack of long-duration instruments onshore, and by poor access to new issues or to market liquidity compared with bank treasuries.
With the new openings, insurers can now invest up to 5% in a single issue of offshore debt instruments issued by state-owned enterprises in Hong Kong; and up to 20% in municipal bonds issued by provincial governments in the name of China's Ministry of Finance.
These are done under the condition that insurers must build up their own internal credit assessing capability. There are four domestic credit rating agencies whose service is sporadic, while Fitch and Standard & Poor's are invested in mainland joint ventures that also lack the necessary scope.
For now, the investments in Hong Kong must be at least single-A rated and exposure to any issuer must remain under 1% of the insurer's AUM as of the latest quarter. Within China, investments in debt instruments without guarantees will have to have a minimum of triple-A ratings, with maximum allocation up to 5% of the insurers' AUM.
The CIRC is also drawing a line in banning insurers who cannot meet a minimum 150% statutory solvency ratio from holding debt without guarantees.
In infrastructure investments, insurers will be free to choose between infrastructure funds packaged by trust companies or insurance asset management companies. In China, these will increasingly dominate such products over foreign-affiliated private equity. Allocation limits can be up to 6% of AUM for life companies; and 4% for non-life insurers. Maximum funding in a single investment scheme should not exceed 50% of funds of a product; 60% of the funds all funds invested for insurers within a same group.
Go-aheads in infrastructure investments must be counter-signed by the insurers' chairman and board. These projects are also subject to a solvency test of a minimum 120%.
Meanwhile, where previously smaller and newer insurers were forced to outsource equity portfolios to one of the nine insurance asset management companies in China because of the CIRC's rule of qualifying experience and minimum asset size, these companies will now have a chance to run their own equity strategies, provided that their latest solvency ratio meets a minimum 150%.
The CIRC is attempting to introduce a more crude risk-based capital model among insurers by requiring these companies to de-risk the equity component of their assets if their solvency drops below 150% to 100%. Once the indicator number dips below 100%, the insurers will be required to freeze all buys in equities.
And with a particular eye on the chronically understaffed situation in the industry -- as demonstrated by China Life at one point in 2007, whose equity investment team added up to only four portfolio managers -- the CIRC has made it a point to let insurers know the minimum number of staff they need to hire for equity investments.
Insurance asset managers must now have at least three investment managers, five analysts, two traders, one dedicated risk manager and one dedicated person for clearing and settlement.
Wu Dingfu, chairman of the CIRC, is currently visiting various insurance companies to promote risk awareness, quality management and solvency control. He is also discussing the need for insurance companies to be profitable -- a goal often overlooked by many companies in their race to grow market share.