The latest update of the asset-liability management framework for Chinese insurance firms may leave them less sure of which types of investments they can make because the approach to assessing ALM capabilities will be more discretionary and less specific, suggests an industry expert.

The new rules, announced with immediate effect on August 7, seek to strengthen insurers’ control of their ALM and give the regulator more flexibility in how it assesses their ALM approach, Terrence Wong, senior director for insurance at Fitch Ratings, told AsianInvestor.

The move further underlines the importance of ALM in China’s insurance industry, the chief investment officer of a Shanghai-based joint-venture insurer told AsianInvestor on condition of anonymity.

The China Banking and Insurance Regulatory Commission (CBIRC) said it would now would now take into account insurers' ALM sophistication when it assesses their investment capabilities in private equity, real estate and derivatives. 

Terrence Wong, Fitch

In a consultation paper on ALM rules issued in 2017, the watchdog had said that insurers regarded as having less strong ALM capabilities would not be allowed to register their investment capabilities for private equity, real estate and derivatives (see also box below). 

That presumably means they could not invest or face certain investment restrictions in such assets, whereas the latest change suggests they will be able to do so as long as they demonstrate their ALM capabilities. 

CHANGE IN ASSESSMENT APPROACH

Ultimately, the CBRIC has updated the rules as it felt the previous scoring method may not have fully captured how well insurers conduct their ALM. The regulator also now has more discretion in how it determines insurers’ ALM capabilities; and will do so more qualitatively.

However, the new approach will mean less certainty for insurance firms.

Under the rules introduced last year, insurers self-evaluate their ALM capabilities by scoring them in quantitative and qualitative categories to produce an aggregate mean score.

The regulator places local insurers into four categories based on their scores, from A to D. Those ranked A will be allowed to invest in and offer the widest array of assets and products, while those receiving a D will face the tightest restrictions.

Under the new framework, insurers’ ALM capabilities will be categorised as “good”, “quite bad” and “bad”, instead of A, B, C and D, while the scoring methods and restrictions remain roughly the same.

Insurers classed as having good ALM will receive policy support in areas such as capital deployment and launching of insurance products. Those considered "quite bad" will face on-site inspections, stress tests or other corrective measures. The CBRIC said it would escalate regulatory controls for insurers classed as "bad" in their ALM.

LESS CERTAINTY

Insurers will now be less sure about which categories they will be placed in under the new rules, but the new method also has its benefits, Fitch’s Wong said.

Using the score alone is too rigid in assessing insurers’ ALM proficiencies, Wong said, as insurers with a certain score were automatically put into a certain category. Now regulators have more discretion to consider the nature of each insurer’s business and other idiosyncratic factors when determining their ALM, he said.

Meanwhile, Wong pointed out another change. The CBIRC has made an exemption under the latest changes that is likely to mitigate the compliance costs of implementing ALM-related changes for smaller firms. 

Under the existing rules, insurers had to set up an ALM committee under the board and an ALM execution committee under senior management. But under the updated rules property insurers with total assets of less than Rmb100 billion ($14.15 billion) are now only required to set up an ALM execution committee. Smaller property insurers have shorter-duration portfolios, so may not need a high-level ALM committee reporting directly to the board, Wong said.

CHINA’S ALM EVOLUTION

Asset-liability management is the process by which insurers seek to match their assets (investments) as closely as possible to their liabilities (payout obligations). Mismatches can be created by differences between the two sides in elements such as duration, returns and cashflow.

For a long time, Chinese insurers’ operation models have been asset-driven. The new rules aim to help to strengthen the interaction between their assets and liabilities, said the chief investment officer at a Shanghai-based insurance joint venture.

ALM rules are relatively new in China. The CBIRC consulted market participants on ALM regulation in December 2017 and launched its overarching framework in March last year.

Investors interested in the strategies of China’s asset owners can learn more at AsianInvestor's sixth Institutional Investment Forum China on September 18 in Beijing. Please click here for more details.