China's insurance market is a pot of gold with a depth of Rmb200 billion ($25 billion). The question is what will insurers do with that huge premium if and when they get to the end of the rainbow.

Repatriating the funds is out of the question. The only option insurers have to invest the premiums the receive in China are bank deposits, government bonds and securities. The interest rates on deposits with Chinese banks at the moment are around 2.25%. The yields on government bonds are in the range of 2%-3%. With securities, they will have to invest through domestic fund managers, capped at 15% of their portfolios.

China's securities markets are among the world's best performers this year. Indexes in Shanghai and Shenzhen, which trade local currency A shares and foreign currency B shares, have gone up by more than a quarter in the past six months. With the other two options seemingly unattractive, one would expect insurers would have taken advantage of the equity markets to the fullest. But no.

Hu Yan, chief representative of Prudential in Beijing, says insurers in China seldom invest more than 10% of their portfolio in securities through managers, which is the only access they have to the capital market. The reason? Quality.

Limited options

To begin with, there are only 10 fund managers in China, with 25 funds. But the largest problem the mainland funds industry faces is the lack of well-trained investment professionals. For insurers, they have the extra problems of finding competent actuaries and scrupulous sales agents.

Just over 30% of workers in the financial industry in China have higher education qualifications, and many of them lack risk management knowledge, according to a joint study by China and the Netherlands this year on the mainland's financial reform.

While Chinese insurers hold over 40% of their total assets in cash and bank deposits, US insurers on average invest 54% of their portfolio in the securities market, and just 5.2% in money markets and cash holdings.

Chen Li, deputy director of the Institute of Restructuring of Economic System and Management in Beijing, says the "large amount of insurance funds" will help the "fast" development of the funds industry once local funds managers are allowed to form joint ventures with foreign firms.

But the maximum stake that foreigners are allowed to take is 33% in the first year and 49% in the third, which for foreign managers is a concern. This is because domestic funds are required to invest 80% of their portfolio in domestic stocks and 20% in government bonds. While the domestic stock markets are soaring, most foreign fund managers prefer stability.

Stuart Leckie, chairman of consultancy Woodrow Millman China, is confident that foreign managers will be able to help steer domestic funds despite their minority stake. And this, for insurers at least, may be good news.