The China Banking and Insurance Regulatory Commission (CBIRC), China's banking and insurance watchdog, has issued a draft guideline that seeks to tighten its watch on insurance group companies operating in the country, citing the need to protect against financial risks, and has opened a one-month public consultation on the proposal until October 3.

Experts believe that while the move will drive bigger insurance firms to enhance their risk management capabilities, compliance could be tougher for smaller players.

Ye Kangting,
Cerulli Associates

Among the proposed changes is a requirement for insurance group companies to implement a “clear and transparent” shareholding structure, as well as set up an alert system or dedicated risk management system for potential contagious risks.

“The proposed rules to tighten insurance group governance seek to improve industry resilience by enhancing risk management against financial and operational risks. On the investment side, key investment thresholds didn’t deviate too much, but some details are clarified and modified,” Ye Kanting, senior research analyst from US-based Cerulli Associates, told AsianInvestor.

“For example, the overseas investments cap still stands at 10% of group net assets, but more definitions of investees are clarified. There are more emphases on risk management. For instance, the 2021 version newly imposed requirements on comprehensive solvency adequacy ratios and integrated risk rating,” Ye added.

Total assets managed by China’s insurance industry increased 13.3% in 2020 to Rmb23.3 trillion ($3.5 trillion) despite premiums growing at a slower pace during the pandemic. The growth in insurance assets improved from 12.2% in 2019, largely driven by sound investment returns, Cerulli Associates reported in July.

RISK MANAGEMENT

Fred Wen, Mercer

The proposed new rules mean that insurance groups will need to upgrade their current risk management processes and systems where necessary. This could be challenging for smaller players, Ye noted.

“In the long run, China’s policy enhancement is a progressive and strategic move as it completes the governance and risk management structure of insurance groups, which will now be under closer watch from the governance, risk, transactions, investment and reporting perspectives, Fred Wen, China’s wealth business leader at Mercer, told AsianInvestor.

“The tightened policy can be a pain point for some in the short run as some organisations will need to undergo restructures, but as we look ahead, we’ll see improved operating efficiency, enhanced management of risks and a positive impact on policyholders,” Wen said.

LESSON

As the country's largest insurer by market value, Ping An has pledged to be more prudent in light of the revelation of its exposure to one of China’s leading property developers.

A 15.5% fall in the insurance company’s net operating profit to Rmb58 billion in the first half of the year was a direct result of its Rmb54 billion exposure to China Fortune Land Development, which defaulted on $530 billion of dollar-denominated debt in March.

“Despite the China Fortune incident, Ping An’s investment assets remain safe and sound,” group CIO Timothy Chan said when he briefed the media on the results last month, noting that short-term fluctuations won’t change Ping An’s long-term investment strategy, which is to combat cyclical risks by extending the duration of assets to close the gap between liabilities.    

Changes to the policy will lead to lower investment risk preference and more centralised risk management functions, as well as related procedure reinvention, restructure and even capital raising activities, Wen noted.

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