A clampdown on short-term products; new asset liability management rules; incoming solvency and accounting standards – China’s life insurance industry is undergoing large-scale change on multiple fronts.
The reforms are part of a broadside by the China Banking and Insurance Regulatory Commission (CBIRC), the industry’s watchdog, to raise industry standards to international norms after some embarrassing scandals, most particularly the collapse of Anbang. It is doing so by introducing a new round of the China Risk Oriented Solvency System (C-Ross), and implementing the International Financial Reporting Standard (IFRS) 9, over the coming few years.
By doing so the regulator essentially wants to discourage China’s insurers from selling risky investment products and refocus them on providing protection to policy holders.
Some of the changes relate to one another. Cracking down on insurers’ ability to sell short-term investment products would lengthen the average duration of their liabilities. That in turn would force them to invest into longer term assets, to better match these liabilities.
However, some of the new rules are complicated; they risk creating conflicting investment motivators. For example a new phase of C-Ross, which is China’s equivalent of capital rules for insurers, will discourage them from making long-term investments into equities. But IFRS 9 is seen to encourage such investments.
Insurers will need to better understand their own characteristics and strategic goals if they are to adapt to this changing environment. And they need to do so quickly; more rules surrounding corporate governance, investment mandates and matching investments to solvency standards are expected to be introduced in the coming years.
“Regulations will become more detailed and stricter. This is the broad direction, the trend in the coming few years,” said the chief investment officer of a Shanghai-based domestic insurance company who declined to be named, told AsianInvestor.
ADDING TO ALM
One key change that China’s insurers have had to embrace is a commitment to asset liability management (ALM).
The process, which matches the projected returns and duration of an insurers’ investments to its expected obligations to policyholders — was for a long time not particularly emphasised by the country’s insurance companies. But that all changed after Anbang and other insurers escalated their duration mismatch risks while pursuing high-risk asset growth.
On March 1, shortly after it arranged the forced state takeover of Anbang, China’s insurance regulator introduced an overarching framework to rein in insurers’ ALM risks. The new approach is intended to discourage insurers from similar malpractice and high-risk growth strategies, Zhu Qian, senior credit officer at Moody’s, told AsianInvestor.
“It will prevent insurers from taking an aggressive investment approach by investing in long-term illiquid assets for higher yields, while boosting scale by selling short-term savings products with high-crediting rates (yield),” she noted.
The new rules were initiated in trial phase this year and will be officially introduced next year. Insurers’ ALM capabilities are assessed over a set of quantitative and qualitative categories, with their final score consisting of a mean of these scores.
The regulator will ultimately place the local insurers into four categories based on their scores, from A to D. Those ranked ‘A’ will enjoy the widest array of investment and product offerings, while those receiving a ‘D’ facing the highest restrictions in areas like sales channels.
“There is the carrot and stick approach, which the regulator is taking based on the fact that they are scored … Behavior of the industry changes when you either incentivise it or disincentivise it,” Yezdi Chinoy, Asia chief investment officer for Italian insurer Assicurazioni Generali, told AsianInvestor.
“Three years ago if you read the news, you would see Chinese insurers investing everywhere, especially globally into areas which are not necessary,” he said. “[The CBIRC is now] trying to redirect the insurers’ focus to their core functions as an insurer.”
In addition to pulling back from inappropriate offshore investments, the new rules are causing insurers to change their investment plans in other ways. In particular, they are seeking more long-dated assets to better match the durations of their longer-term insurance products.
China Life, the country’s biggest life insurer by assets, said in March that it planned to increase its investments in non-standard debt to lengthen its asset duration. Ping An has also stated its plans to reduce the duration gap in its investment portfolio, in part by raising its exposure to infrastructure project debt. It is doing so by buying debt investment plans from its fund management subsidiary.
The CBIRC is also trying to close a loophole in the solvency system of C-Ross, the insurance capital adequacy system that the regulator introduced in 2016 and has said a new phase will be finalised before June 2020.
C-Ross phase II seeks to reduce such shortfalls as opaque underlying assets in investments and inadequate protection against risk, a spokesman at Ping An told AsianInvestor.
Currently the risk charge for long-term strategic equity holdings under C-Ross is only half of that for publicly-traded equities. The capital rules define such stakes as those large enough for the buyer to secure a board seat and take part in the company’s direction. This approach led insurers including Anbang in 2015 and 2016 to try and grab majority shareholdings in banks and real estate companies, Eunice Tan, senior director on insurance ratings at S&P Global, told AsianInvestor.
S&P considers such long-term equity positions to be riskier than public investments. Insurers have to buy these stakes in bulk and it’s hard to liquidate them quickly when the market goes south, Tan said.
“C-Ross phase II acknowledges that this is a loophole and one area that needs to change. So one of the working groups of C-Ross phase II is to re-evaluate this risk charge on long-term equities,” she added.
If the working group makes the risk charge for long-term equities higher, as it’s expected to do, it would help to curb aggressive takeovers by insurance companies because they would become more capital-intensive, Tan noted.
“If the risk charges go up, it means you need more capital if you are keeping to your same investment amount. [Otherwise] their regulatory solvency ratio goes down,” she said.
This is the first part of a longer feature that was published in the October/November issue of AsianInvestor magazine. Watch out for the second part in coming days.