The China Insurance Regulatory Commission (CIRC) is voicing its concern on the risk exposure of Chinese insurers and demands that they open their books to show how they manage insurance assets.

The insurance regulator says it is sending out a team of regulatory officers to conduct on-site inspections of all Chinese insurance companies and their underlying asset management companies between now and November.

Insurers are required to stress-test their domestic portfolios straight away and file the extent of their asset exposures by Monday, August 25. They are required to file more detailed studies on August 31 on how they are running their asset management companies.

The CIRC seems to be nervous about Chinese insurersÆ involvement in the ongoing unwinding of the US subprime crisis. It is asking insurers to come clean with their exposures to Freddie Mac and Fannie Mae debt as well as current allocation to structured products denominated in foreign currencies.

The CIRC wants to contain any impact of external risks on ChinaÆs domestic financial system. The regulator is uncertain about the outlook of the US dollar and Hong KongÆs Hang Seng Index and wants insurers to apply special stress tests on their overseas assets under different scenarios to find out how specific situations will impact these assets.

Bearing in mind JPMorganÆs takeover of Bear Stearns û where the investment bank was deemed to be too big a player in the overall financial system to fail ûthe CIRC is looking into potential crisis points within ChinaÆs domestic capital system. The regulator wants insurers to investigate their counterparty risks and look into potential problems with cash flows in trading and settlement in the event of a liquidity crisis.

Even though a liquidity crisis is not an imminent threat, the CIRC is keen to pre-empt cases similar to that of Bear Stearns, given that ChinaÆs fixed-income market is still highly fragmented and many times more illiquid even in normal market circumstances.

Overall, the CIRC is trying to re-familiarise itself with the asset management activities of insurance companies. It is asking insurers to open their books to reveal basic information such as their asset allocation, currency exposures, trading activities and settlement procedures. It also wants information on more important issues such as whether insurers are really matching their assets and liabilities under different product portfolios, such as traditional or universal life insurances.

Because of the lack of long-dated instruments in ChinaÆs domestic fixed-income market, duration and asset/liability mismatching are a fundamental issue with Chinese insurers. The insurance regulator is asking insurers to detail where these situations are most rampant.

The CIRC is also uneasy with insurance companiesÆ funding levels when they conduct investments under insurance structures and when they outsource the portfolios to external fund management companies or their asset management arms.

The CIRC urges all insurers to make the inspections a top priority, and in the event that it uncovers irregularities, it will punish those responsible to protect consumer interests.

For now, however, the regulatorÆs spokesperson in Beijing maintains the inspections are intended as preventive measures in urging insurers to improve internal operations procedures and strengthen insurersÆ risk control mechanisms.

Market players laud the CIRCÆs efforts in attempting to stay on top of the insurance market, but some observers suspect Ping An InsuranceÆs report of weaker earnings after a year of flamboyant buyout binges might have triggered the regulator's latest move.