Regulatory requirements for different insurance asset management products are currently scattered across multiple regulations but the China Banking and Insurance Regulatory Commission (CBIRC) is putting an end to it with a unified set of rules that will come into effect on May 1.
Most big insurers in China have asset management subsidiaries and the alternative investment products issued by the latter are heavily subscribed by their parent companies. These products invest mostly in private equity (equity investment plans) or infrastructure and real estate loans (debt investment plans).
Under the new regulations, insurance asset managers’ eligibilities and compliance requirements have been clarified. Their products are subject to a clear set of standards, while the qualifications and duties of custodians, investment advisers, distributors and the like have also been refined, Melody Yang, partner at international law firm Simmons & Simmons, told AsianInvestor.
But the most important change in the new rules is that qualified individual investors are allowed to invest in these products. Previously insurance asset managers could only manage institutional money, CG Zhou, Hong Kong-based chief executive of CPIC Investment Management, explained to AsianInvestor.
Even though they have always invested in them, the new rules also confirm that pension funds are eligible investors of these products.
The regulator has clearly outlined the investment scope of insurance asset management products and the required risk management measures, most importantly the set-up of a risk reserve. Investors can have higher protection when they invest in these products and will be more willing to allocate to them.
"It allows you [insurance asset managers] to do more things, but at the same time make sure that their capabilities in risk [management] are not bad. The whole industry can only develop healthily in this way," said Terrence Wong, senior director of insurance at Fitch Group, in an interview with AsianInvestor.
At the moment, insurance asset managers’ assets under management come mostly from their parent insurers. Non-insurance funds mainly come from pensions or banks. At the end of last year, insurance asset management products had an outstanding amount of Rmb2.8 trillion ($390 billion).
Market observers believe that the new rules will drive demand from pension funds for these products, while wealthy individuals will warm to them.
The regulations formally stipulate that pension funds such as basic pensions, social security funds, and enterprise annuities are qualified investors for insurance asset management products. Wealthy individuals that possess assets of more than Rmb30 billion, or an average annual income of more than Rmb400,000 in the last three years, are also eligible.
Insurance asset managers can also entrust their products to other qualified financial institutions to distribute, which widens the distribution channels of these products.
This will effectively promote pension investment in insurance asset management products which, Yang said, highlights the strength of insurance asset managers in the management of long-term products.
Similar to insurance funds, pension funds are commonly characterised as funds that are large in scale and invest for the long term. Both pension funds and insurance funds receive steady fund inflows and their investments must be able to deliver a stable stream of returns too, she said.
For wealthy individuals, these insurance asset management products give them access to areas like infrastructure, which are not commonly seen in mutual funds, Zhou said.
But because individuals are not yet familiar with insurance asset management products, insurance asset managers have to build up the distribution channels and ramp up marketing efforts to grow the business in this space, he noted.
HIGHLIGHTS OF THE RULES
1. Insurance asset management products are now broadly classified into four types: fixed income, equity, commodity and financial derivatives, and multi-assets. They can invest in a variety of assets that include Chinese central and local government bonds, interbank bond markets, securitised products, equity and other assets approved by CBIRC.
2. Asset management products’ leverage ratio, investments into non-standard credit assets and durations have to match the respective rules. For example, an insurance asset manager cannot invest more than 35% of its net asset value of its entire portfolio into non-standard credit assets.
3. Insurance asset managers should place 10% of their management fee income into a risk reserve to compensate investors for any unforeseen events. Provisions can stop when the risk reserve reaches 1% of a product’s outstanding amount.
4. In accordance with an overarching set of rules governing all types of asset management products released in 2018, the new rules prohibit implicit guarantee of investment returns, multi-layering of investment products, among others. A “look through” method of fund supervision is also required, in which the actual investors and underlying assets of the fund products should be identifiable at any time.