The insurance industry in China is calling upon regulators to widen the array of assets in which they are allowed to make long-term investments. However, market analysts say there is a big problem – there is a dearth of appropriate assets that fit the bill, at least in China.

Life insurers in China have a sizeable difference between the duration of their liabilities (the policies they collect) and their assets (the instruments they invest this capital into). Ping An said in March that its liability duration was 6.9 years longer than its assets, a level that Moody’s analyst Zhu Qian said at the time was largely in line with industry average.

Cao Deyun, executive vice chairman and secretary general of Insurance Asset Management Association of China (IAMAC), a self-regulatory body, said insurance funds "are under pressure in their asset allocation due to a lack of available medium and long-term assets in the country". 

“Regulators should study the possibility of allowing insurance funds to invest in more types of assets; [those] with better liquidity and growth potential over the long term such as Reits, gold and other commodities,” he told AsianInvestor.

The companies are looking to buy longer dated products, particularly after the then-named China Insurance Regulatory Commission (CIRC) released an overarching framework for asset-liablity management (ALM) in March. The new framework pressurised insurers to reduce their duration gaps, or the difference between the average tenor of their assets and liabilities. CIRC has then merged with the banking regulator to become the China Banking and Insurance Regulatory Commission.

But China has a relative lack of long-term bonds, so local insurers including market leaders Ping An and China Life have had to seek out alternative long-term investments.

INVESTMENT LIMITATIONS

Cao’s advocacy for Reits is to some extent already being met. Some local investment trust plans are structured in a similar manner to real estate investment trusts, and use property as their underlying assets. Some Chinese insurance companies have invested into them, Terrence Wong, director for insurance at Fitch Ratings, told AsianInvestor.

However the trust plans don’t greatly help insurers’ ALM needs. The plans typically last for five to 10 years, whereas long-term investment assets are typically defined as having a duration of 20 to 30 years, Wong added.

Commodities, the other long-term investment option mentioned by Cao, also offers difficulties for insurers. For one, the volatility of commodity prices are relatively high. One example is copper, one of the most commonly traded metals. Its value on the London Metal Exchange has tumbled more than 15% since hitting a 4.5 year high of $7,348 per tonne in June.

Also, individual commodities sometimes lack liquidity, which can be a concern for insurers that need regular income streams to meet their liabilities. Wong noted that Fitch has not seen any Chinese insurers invest into commodities. Even large insurers in developed markets tend to allocate small amounts to the asset class because it’s deemed too risky, he added.

ADDING FUND OPTIONS

Cao also believe the asset management arms of insurers should be able to create more investment options for their parent companies.

Most large Chinese insurers have asset management divisions, and the parent insurer often invests into a lot of the products that they issue. These fund companies could help out the ALM needs of their owners by creating long-term investment products.

Regulators should encouarge the fund house subsidiaries to “issue more debt investment plans and equity investment plans, and to expand their business in asset-backed schemes”, he said.

In China, debt investment plans, equity investment plans and asset-backed schemes specially refer to products that are issued by insurers’ asset managers. Debt investment plans tend to directly invest into portfolios of private debt, equity investment plans buy equity stakes in unlisted companies, while asset-backed schemes are essentially asset-backed securities.

Insurance asset managers are required to register their investment plans with IAMAC. Between January and June this year, 19 insurance asset managers registered 33 infrastructure debt investment plans with a combined Rmb78.49 billion (11.54 billion) in value, plus 37 real estate debt investment plans worth Rmb60.51 billion. However, no equity investment plans were registered.

The combined values for these investment plans fell 31.45% for the first six months, compared to the same period of last year. The size of debt investment plans into real estate fell by 31.87%, although debt investment plans into infrastructure rose by 20.58%.

The drop in equity investment plans followed the release of new rules that are designed to prevent insurers’ asset management subsidiaries from making “fake equity, real debt” investments, or loan-like equity investments into non-listed corporates.

Some equity investment plans used to invest into the equity of unlisted corporates in return for receiving a pre-agreed rate of return and certainty of payment. Other shareholders in the company committed to make up repayment shortfalls in the event of any problems.

But under the new rules, any new form of equity investment plan would likely need to be exposed to the full risk of investment, including a potential loss of the entire capital.

For more insights on investing in China, AsianInvestor is hosting its 5th China Global Investment Forum in Beijing on September 13. For more details, visit the website or contact us on +852 2122 5262.