Regulatory changes regarding foreign investment are likely to benefit the position of China’s emerging life insurance industry, according to Standard & Poor’s. With the recent news that Ping An Insurance, the country’s largest life insurer by gross premium, has obtained formal approval to invest $1.75 billion outside of the mainland, the rating’s agency stresses that the industry is expected to see benefits over the long term in terms of investment diversification and improved performance.
Although S&P acknowledges that the regulatory move by China’s State Administration of Foreign Exchange come with potential risks, it believes that that the newly acquired ability to invest abroad will enable what could potentially become the world’s largest life insurance market to gain access to higher quality securities with greater yields and provide a greater range of duration than is currently offered in the domestic space.
Under the change to regulation, insurers are now allowed to invest offshore up to 80% of their outstanding foreign currency assets at the end of the previous financial year. The Ping An approval is limited to the bond and money market asset class in overseas markets
The process does however require official approval but marks a significant inroad for the investment capabilities of the industry that was previously restricted to purely domestic investments.
According to the S&P, the relaxation of investment regulations for Chinese insurers may improve investment profiles and performances of operating insurers, but will unlikely nurture significant medium-term improvement to the nation’s insurance arena. The rating’s agency points to the weak capitalisation of the overall sector compared with more developed markets and the amount available in the sector for foreign investment. With 10 insurers out of the mainland's 70-strong life insurancemarket qualified for overseas investment, the amount is tiny compared to the more established insurance markets. As of June 2004 the investable amount stood around $9.8 billion in foreign currency assets, or 7% of the sector’s total assets.
The announcement comes as the industry continues to rake in higher levels of premium amid an ongoing liberalisation process. The move to allow insurers to invest certain proceeds offshore follows the October 2004 announcement that stipulated that companies were permitted to invest up to 5% of total assets directly into the local equity markets, an avenue that was previously available through indirect investment through funds.
Following the introduction of new regulations and Ping An’s formal approval to invest offshore, S&P has also warned insurers to minimize the blow of potential investment risk (market and currency risk) by employing competent and experienced investment managers.
The past year was a bumper one for the Chinese insurance sector with total industry premiums jumping 11.3% on 2003 to clock in at RMB431.8 billion ($52 billion) and total assets held climbing 30% year-on-year to end 2004 at RMB 1.18 trillion (around $142 billion).