This week’s move to allow Chinese insurers to invest in venture capital (VC) funds could see as much as Rmb200 billion ($32 billion) flow to small and mid-sized mainland companies. It also reflects the accelerating liberalisation of investment rules for the mainland insurance industry.

The China Insurance Regulatory Commission (CIRC) on December 15 gave insurance companies the right to invest up to 2% of their total assets in VC funds. It is still early days for mainland insurers to invest in alternative assets; it is only since July 2012 that they have been able to put money into private equity and real estate.

The rule change on VC funds is an attempt to both boost insurers’ investment returns and help finance small companies, said Jin Song, analyst at Shanghai-based consulting firm Z-Ben Advisors. Small private firms struggle to secure credit from state-backed banks in China, especially as such institutions are seen to have a tendency to funnel loans to fellow state companies. 

Indeed, in February, the CIRC let insurers invest in small firms listed on Shenzhen’s Growth Enterprise Market.

Investments in VC will help insurers mitigate against the rising cost of liabilities, said Song, adding that such funds’ long-term investment horizons were a good match for insurers’ needs, especially those on the life side.

The new rules let insurers invest in VC funds but not directly invest in VC projects, with a view to allowing them to diversify assets while maintaining risk control, noted Chen Dong, chief executive of China Life Franklin Asset Management, the overseas investment arm of China Life. 

The CIRC has set a number of conditions on which VC funds are eligible for investment by domestic insurers. The asset manager must have been established for at least five years and have total AUM of at least Rmb1 billion. In addition, the manager must have at least five investment officers, each with at least five years’ experience, and to have successfully exited at least 10 investments. Moreover, insurers can only invest up to Rmb500 million in a single VC fund, or 20% of its total AUM.

The potential inflows for VC funds is great, with 2% of insurers’ Rmb9.65 trillion in AUM equating to nearly Rmb200 billion.

The move comes as China’s insurers increasingly move into alternative assets, notably onshore. China Life, the biggest mainland insurer, with total AUM of Rmb1.99 trillion, put Rmb29.2 billion into domestic PE funds and unlisted company equity in the first half, boosting its total allocation into this asset class from 0.89% to 2.3%.

In fact, the CIRC’s rule relaxation is similar to late-November proposals by the country’s National Social Security Fund to boost its allocations to PE funds, noted Song, as the NSSF’s investment objectives are similar to those of insurers.

Relaxation of insurers’ investment channels is due to their fast-rising premium income, which meant they need new avenues to invest in, noted Joyce Huang, director in the Asia-Pacific insurance team at rating agency Fitch.

The growing number of policyholders in China have led to insurers’ premium income hitting Rmb1.73 billion in the first 10 months of 2014, up 18.25% year-on-year, according to the CIRC.