CIRC Prepare New Investment Reforms for China Insurers
By Marius | Published February 09, 2012
China’s fast-growing insurance sector could be subject to further regulatory reforms this quarter, after the nation’s industry regulator unveiled a raft of new initiatives on their website.
The China Insurance Regulatory Commission (CIRC) released a statement this week outlining several new restrictions on property investments for domestic insurance groups. Under the proposed regulatory requirements, the combined book value of a given insurance company’s fixed-assets and property investments would be capped at 50 percent of their net asset value. In addition, domestic insurers could be forced to place their self-use property assets and those used for construction and investment into separate asset management accounts. The CIRC has been looking to strengthen its oversight over insurer’s financial positions in China to diminish the threat of risk spreading from the insurance industry to the banking sector and vice versa during this period of ongoing global financial market volatility. The South China Morning Post noted that such moves would be necessary to ensure that insurer’s core business interests and, most importantly, their policyholders are protected from additional property market risks.
The CIRC also announced new limits on insurance company banking activity. According to the regulator’s statement, Chinese life insurance groups with total assets of at least CNY10 billion (US$1.59 billion) or more will no longer be allowed to deposit more than 20 percent of their holding capital into any individual non-national bank. For the country non-life and reinsurance sectors, the asset value cap on companies is set at CNY2 billion (US$320 million). These measures are aimed at diversifying the risks of insurers capital and to strengthen supervision of operations. The CIRC are confident that these moves will also work to lower the default risk present in the domestic insurance industry, and prevent contagion between the banking and financial services sector. Encouraging larger insurance companies to diversify their capital holdings across multiple institutions is intended to reduce risk and will strengthen operational oversight as well, the CIRC advised. Higher reserves could also help companies survive unexpected catastrophe losses, a pressing issue given 2011 record disaster losses, and give them more leeway in their margins to better protect and serve their existing policyholders
In addition to increased financial regulatory oversight, the CIRC plan to revise insurance agent accreditations in China to better conform with best international business practices. The regulator is currently in the process of drafting new rules to better regulate insurance sales personnel behaviour in China. These new reforms will likely include lifting entry requirements for insurance agent licenses and tightening the regulations governing insurance companies responsibilities in monitoring and curbing the miss-selling of their policies by sales personnel. The CIRC remains concerned about certain domestic insurance companies and their struggle to make payments to policyholders on time and are exploring ways to help them replenish their capital base, including reforms geared at engaging the offshore yuan market in Hong Kong for supplementary funds.
Increasing supervision over China’s contentious insurance intermediary market has become a key goal for the CIRC in 2012. Addressing the sector’s poor service standards and ethics has been at the forefront of the regulator’s planning, with claims settlement difficulty and mis-sold insurance policies accounting for over 90 percent of overall consumer complaints that the CIRC has received over the past five years. There have also been problems with sales management mechanisms as most of the sales persons in the industry remain under qualified for their positions. Newly appointed CIRC chairman Xiang Junbo made special mention of this in his annual address, saying that unprofessional business practices had become the key concern for the industry and that the regulator needed to shift its focus from gross premium growth in 2011 to improving overall service quality and promoting agriculture and catastrophe insurance this year. According to Xiang, the Chinese insurance industry’s pre-eminent focus on expansion has come at the expense of improved management structures and service innovation, and this has failed to satisfy customer demand. Xiang further explained that increased professionalism and product innovation within the industry would be the best way to address these challenges, otherwise Chinese insurers will be unable to keep pace with the profound changes in the market going forward.
Reforming China’s insurance sales models will also enable the regulator to gradually reduce the entrenched multi-tier insurance sales system, which segregates markets and product lines almost arbitrarily in some parts of the country. CIRC furthermore plans to give insurers more scope to establish exclusive sales networks and will encourage domestic companies to explore new distribution channels such as internet sales, tele-marketing sales and cross-marketing bancassurance schemes, according to their 2012 prospectus. Overall, the regulator may acknowledge that relaxing certain insurance restrictions may work to promote new channels of business growth in China. Amongst these upcoming regulatory changes will likely be the introduction of foreign insurers into the country’s motor insurance market, lending their international expertise to a large but claims-heavy market for the first time.
According to the latest CIRC data, Chinese insurance companies reported CNY1.4 trillion (US$226 billion) in premiums last year, up by 10.4 percent on 2010’s results. Broken down by sector, the country’s general insurance sector recorded an 18.5 percent annual increase in premium income to CNY461.8 billion (US$73 billion), and the country’s life insurance market posted a 6.8 percent rise in premium income to CNY969 billion (US$153 billion). According to the CIRC, claims payments amounted to CNY391 billion (US$62 billion) in 2011. Total assets held by Chinese insurers meanwhile jumped to a record CNY5.9 trillion (US$930 billion), compared with the CNY5 trillion (US$790 billion) noted in 2010, while the number of insurers failing to meet solvency ratio requirements declined from seven to five.
Despite these strong growth figures, and considerable potential going forward, the Chinese insurance market still faces considerable obstacles, including inflationary pressure, intense internal competition and weak global capital markets. Insurance companies will need to adapt to changes in the Chinese, and indeed world, economy, and adjust their business models accordingly. The regulator meanwhile should remain principally concerned with keeping the domestic insurance industry healthy and closely monitoring the potential risks facing the sector’s sizeable assets on the horizon.