Chinese insurance companies must have sound asset-liability management (ALM) mechanisms in place to pursue annuities business, according to new rules on tax-deferred pension insurance products.

The new regulations announced on Friday by the China Banking and Insurance Regulatory Commission (CBIRC) is the third set of rules released in two months, showing how the authorities want greater insurance company involvement as China faces up to its huge pension challenge.

Guidelines governing the design of tax-deferred annuity products (liabilities side), as well as interim rules for the annuities business in general, were issued in May. This time around, insurers are being told how they should manage the investment funds obtained from such products (assets side).

In the new interim rules, dated June 22 but released on July 6 with immediate effect, lifers got to know the requirements for building a qualified ALM system.

The latest rules go a long way to protect policyholders. It is a step in the right direction for China’s pension fund regulatory regime as it bids to catch up with international standards, Melody Yang, partner at law firm Simmons & Simmons, told AsianInvestor.

A total of 16 life insurance companies in the last two months have been given the green light by the CBIRC to kick off their annuities businesses. They include China's three biggest lifers by assets (China Life, Ping An Life and CPIC Life), joint-ventures Citic Prudential Life, Generali China Life and ICBC-Axa Life. 

ACCOUNT SEGREGATION

Tax-deferred pension insurance products give policyholders life-long payouts (or at least 15 years) when they retire. This means lifers will be faced with reinvestment risk (the risk that interest income is reinvested at a lower rate than the original investment) and longevity risk (the risk attached to the increasing life expectancy of policyholders) as a result of the longer duration in the liabilities.

Annuity product durations are stretched over longer periods of time, so lifers need a more comprehensive ALM mechanism for better risk control, Terrence Wong, director for insurance at Fitch Ratings, told AsianInvestor.

“One economic cycle can be [easily] predicted, but such a long period may have several economic cycles. So they need to prepare … sound risk controls for different cycles,” he said.

Investment accounts also need to be segregated. In the new rules, funds obtained from tax-deferred pension insurance products can only be invested for matching the corresponding obligation and are strictly prohibited for other purposes, he said.

Insurers are required to manage investments funds from return-guaranteed products and principal-guaranteed products in general accounts, whereas funds from unit-linked plans of higher risks are managed in another set of independent accounts.

They have to report to CBIRC within five business days if investment yields in the general accounts are not enough to match the cash-flow needs for three consecutive months, and if more than 15% of the net asset values have fallen on a 90-day moving average basis in the independent accounts.

CRITERIA FOR FUND HOUSES

Fund houses entrusted with funds from tax-deferred pension insurance products have also to meet the required conditions.

The rules, in general, are relatively relaxed towards insurance companies that plan to launch annuity products but are stricter towards asset managers, Yang said.

To launch annuity businesses, insurance companies were told in May that they needed to have a registered capital and net assets of at least Rmb1.5 billion and a core solvency adequacy ratio of not less than 100%. In contrast, asset managers were told that they need to have a registered capital of at least Rmb500 million or total net assets of at least Rmb1 billion.

Most medium-sized insurance companies are able to meet the capital and staffing requirements. But the criteria for fund managers are much more difficult to satisfy, Yang said.

“In our experience, there are a limited number of domestic fund companies with large pension fund teams. This is also a very onerous barrier for foreign players without an established foothold in China, as it requires a rather substantial commitment,” she said.

HIGHLIGHTS OF THE RULES

Life Insurers Fund Managers
1. Have at least eight staff for ALM and asset allocation, of which at least two are qualified portfolio and investment managers
 
2. Map out a strategic asset allocation plan for at least three years based on the features of the annuity products offered
 
3. Manage long-term interest rate risk with duration gap analysis, scenario simulation, stress test, etc
 
4. Submit quarterly and annual reports to the CBIRC, detailing ALMs and investment performance
1. Have at least 20 investment and research experts, among which at least 10 are qualified portfolio and investment managers
 
2. Map out an annual asset allocation plan based on the insurer’s strategic asset allocation plan
 
3. Allocate 10% of the fee income in a risk provision to offset the investment loss caused by potential illegal practices
 
4. Submit an annual report to the CBIRC, detailing its asset allocation and investment performance

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