China’s life insurance companies will be better regulated on investing in structured financial products and managing underlying risks, as the country’s regulator releases new measures to plug loopholes, experts said.
The asset allocation structure of life insurers will also be optimised as the new regulation allows them to invest in financial products such as wealth management products issued by wealth management companies; single asset management product plans; and debt-to-equity swap plans.
In line with the China Risk Oriented Solvency System (C-ROSS) Phase II that went into effect on January 1, the China Banking and Insurance Regulatory Commission (CBIRC) released another regulation last week to further enhance a “look-through” approach to actively monitor the real risks of complex and opaque structured products that life insurers hold — by looking to the bottom of underlying assets.
“The new regulation helps insurance companies to conduct risk management in accordance with the essence of its investment business,” a spokesperson for Ping An Group said. “Ping An will strictly follow regulatory requirements and further strengthen risk management.”
“To classify financial products based on the underlying assets for investment capability management and asset ratio supervision can help insurers to identify and quantify the actual investment risks more precisely and guide us to invest more in financial products with explicit underlying assets and transparent transaction structures,” said a spokesperson for China Life Insurance.
The new rules also expand the range of financial products that insurers can invest in to wealth management products issued by wealth management companies; single asset management products plans; and debt-to-equity swap plans.
The aim is to optimise the structure of insurance asset allocation and improve the quality and efficiency of insurance assets serving the real economy, CBIRC said.
As of the end of December 2021, the scale of insurance assets invested in financial products was 1.72 trillion yuan ($254.4 billion), accounting for 7.39% of the industry’s assets balance. This includes commercial bank wealth management products, assembled funds trusts, credit asset-backed securities, and other special asset-backed plans.
“This move undoubtedly provides support for optimising the structure of insurance assets allocation and introducing long-term stable funds to the capital market,” said Grace Zhou, head of financials at ICBC International.
“Alongside development of wealth management companies in recent years, the products issued which focus on fixed income portfolios match well with insurance funds’ preference,” she told AsianInvestor.
China Life is particularly optimistic about the prospect of debt-to-equity swap plans for life insurance companies. “It has a long asset duration, large (fundraising) scale, and clear risk-return characteristics, which can effectively solve the financing restriction problem of companies with a high debt ratio,” a spokesperson of China Life told AsianInvestor.
“The financial products that [they] are allowed to invest in under the new regulation match well with the risk appetite of insurers’ asset allocation strategies…It helps to guide long-term insurance capital to give full play to their duration advantages, increase the scale of equity investment, and improve the efficiency of serving the real economy,” the spokesperson said.
“Going forward, insurance assets will make full use of the investment capabilities of professional investment institutions such as securities companies, securities asset management companies, and securities investment fund management companies to improve the return on investment,” a spokesperson for Ping An told AsianInvestor.
However, whether these investments can help life insurers improve returns in the short term on the back of their poor performance in the first quarter is still in doubt, amid current market volatility.
“After financial deleveraging, there’s no guaranteed return for wealth management products. The return of these products is marked to market. Although the basket of investable assets has been enlarged, the returns are highly geared to capital market performance,” ICBC International’s Zhou said.
Although the regulation also aims to ease the allocation pressure of insurance companies under the shortage of long-term fixed income assets in China, a risk manager of a mid-cap Chinese life insurance company told AsianInvestor that he believes the impact will only kick in gradually in future.
“Taking the real estate investment trusts (REITs) market as an example, the total fund raised is just a few dozen billion yuan these days, with limited supply and few life insurance companies entering the market,” the risk manager said.
The pilot scheme of REIT in China kicked off in April 2020, with some 46 billion yuan ($6.8 billion) raised as of April 2022.
Another example is the supply of non-standard debt plans, which has significantly declined, and the median return has lowered to around 4.5% versus 6-7% in the past. The industry used to heavily rely on non-standard debt plans to maintain return targets.
“While there are some interesting developments in REITs and asset-based plans, there are fewer investment opportunities. Under C-ROSS II, there will be a significantly higher capital charge for complex and opaque alternative assets that cannot apply ‘look-through’,” said Rick Wei, head of Asia ex-Japan insurance strategy at JP Morgan Asset Management.
“It takes time for life insurers from accepting one investment target to actively allocate assets to it,” said the mainland-based risk manager.
“The regulation may even have a negative impact [for life insurance companies] in the short term. After all, the regulation is aimed at plugging the loopholes that people have been exploiting, and letting the hidden risk factors to be gradually exposed,” he said.