China’s insurance watchdog yesterday identified mainland insurers’ foreign, equity and property investments as key risks, signalling yet tighter supervision of the industry. Smaller players are tipped to be hit particularly hard.

The move came after the China Insurance Regulatory Commission (CIRC), on Thursday, vowed on to toughen up its supervision and admitted shortfalls in its regulatory framework and addressing of malpractice.

On Sunday the CIRC specified 10 areas of risk* it would be scrutinising more closely. Investments fell under the area of insurance capital utilisation management. 

For overseas investments, the regulator said insurers must carefully study global economic and political situations and conduct such allocations carefully, to ensure their risks are under control.

As for equity investment, the CIRC said insurers must improve their investment procedures and assess their risk tolerance. In respect of property, insurers must closely monitor their investments in major projects and geographies.

The CIRC had already made several moves since late 2016 to clamp down on riskier investments, such as domestic leveraged buyouts and aggressive long-term stock investments

And the latest guidance looks set to further impact Chinese insurers’ ability to invest offshore, which has already been hit by Beijing’s capital controls tighter capital controls in the past two years.  

China Life, the largest mainland insurer, cited these constraints as one reason for its slower-than-expected increase in overseas exposure in the second half of 2016, to 2.43% from 2% of its total AUM.

‘Heavy criticism’

The strong, self-critical tone of the CIRC statement on Thursday showed that the regulator had been severely criticised by its supervisory body, the State Council, for not being strict enough in regulating malpractice, said a senior executive at a large Asian insurer.

Former CIRC chairman Xiang Junbo was placed under investigation earlier this month for alleged corruption, and then dismissed shortly afterwards. Zhou Mubing, chairman of state-owned Agricultural Bank of China, is likely to replace Xiang, reported Tencent Finance. But no official confirmation has been announced yet.

Moreover, stricter regulation will mean insurance products in China become increasingly similar, with less space for innovative products, said the unnamed executive – something he saw as a positive development.

A strong insurance business is built on good investment management and sound asset-liability matching, he noted, and the industry will go back to these fundamental issues for insurance businesses.

Small players to struggle?

However, it will be more difficult for smaller players to grow, an executive at a large Chinese insurer told AsianInvestor.

Smaller insurers will no longer be able to make aggressive investments to cover the costs of paying high returns to investors and high commissions to distributors. It will therefore be more difficult for smaller firms to compete with big established names, he noted.

*The regulator outlined 39 points across the 10 areas of risk where it will intensify scrutiny. They are liquidity management, insurance capital utilisation, corporate governance, new insurance business, management of external risks, consumer protection, data for key business areas, insurers’ overall capital management, reputation management, and risk management mechanisms.