Insurers in China Given Increased Investment Range

Posted on Apr 30, 2012 by Sergio Ulloa (G+)

Published April 30, 2012

China’s insurance companies could soon be given greater investment opportunities and simplified approval procedures after the country’s insurance regulator claimed it would consider such procedures in a bid to improve the industry’s overall contribution to the nation’ economic growth and development going forward.

In a statement released online last week, the China Insurance Regulatory Commission (CIRC) claimed they will begin to gradually increase both the type and scale of unsecured corporate bonds that domestic insurers can invest with this year. As these investment restrictions lift, the regulator will then also work to adjust percentage ceilings on different asset classes within company portfolios, all in order to tighten CIRC supervision over the market and ensure that insurers still maintain their capacity to settle claims. This release was based on remarks made by CIRC Chairman Xiang Junbo during his routine trip to Wenzhou in eastern Zhejiang province over the past week.

According to the CIRC statement, these new investment rules could be tested in Wenzhou city through a pilot scheme at first, and if successful would then be rolled out to the rest of China. Under this scheme, qualified private investors in the city could be encouraged by local authorities and the CIRC to set up and aid regional insurance companies. Wenzhou is already well regarded throughout the country as a promising business centre and has been selected by the State Council for similar financial reform testing initiatives. In the statement’s closing remarks, CIRC Chairman Xiang called on domestic insurance companies to support Wenzhou’s pre-eminent role in the nation’s overall economic development by introducing innovative new insurance products and improving their services there, particularly towards local small and medium enterprises. Products that could be developed and introduced in Wenzhou under this scheme include export credit insurance, domestic trade credit insurance and mortgage insurance.

The revised investment quota is but the latest reform put forward by the CIRC in the past year to improve domestic insurance sector performance. Last month, the regulator announced several new rules governing property investments for domestic insurers. Through these proposals, the combined book value of a given insurance company’s assets and property investments could no longer exceed 50 percent of their net asset value. Domestic insurers will also have to separate their self-use property assets from those used for construction and investment and file separate asset management accounts. The CIRC introduced these rules to strengthen its oversight capabilities over insurer financials in China and to diminish the threat of risk contagion spreading from the insurance industry to the banking sector and vice versa during this period of pervasive global economic volatility. These moves could prove necessary to ensure that insurers’ core business interests and, most importantly, their policyholders remain protected from global market risks.

The CIRC have also brought forward new limits on insurance company banking activity. Going forward, Chinese life insurance groups with total assets of at least CNY10 billion (US$1.59 billion) will no longer be allowed to deposit more than 20 percent of their holdings into any non-state run bank. For the Asian nation’s general insurance and reinsurance companies, this asset value cap is set at CNY2 billion (US$320 million). The CIRC are convinced 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 spread their capital holdings across multiple institutions will reduce risk and will strengthen operational oversight as well. Holding greater reserves also grants insurance companies an added buffer against unexpected catastrophe losses, a pressing issue given the record-setting disaster losses of 2011, to better protect and serve their existing policyholders

In addition to increased financial oversight, the CIRC plan to revise insurance agent standards in China to better conform to best international business practices. These new reforms include lifting entry requirements for insurance licenses and tightening monitoring efforts to prevent fraudulent sales practices. The CIRC remains concerned about certain domestic insurance companies and their inability to make payments to policyholders on time, and are exploring ways to help them replenish their capital base in order to do so. One solution has been to encourage firms to tap the offshore yuan market in Hong Kong for additional funds.

Increasing supervision over China’s insurance market has become a key goal for the CIRC in 2012. Tackling the sector’s lax service standards has been at the forefront of the insurance regulator’s planning because claims settlement problems and miss-sold insurance policies have accounted for almost 90 percent of the consumer complaints received by the CIRC 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. CIRC Chairman Xiang Junbo made special mention of this in his annual address, saying that unprofessional business practices had become the main 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 agricultural and catastrophe insurance this year. According to the CIRC Chairman, the Chinese insurance industry’s preeminent focus on expansion has come at the expense of improved management structures and service innovation, and this has failed to satisfy customer demand. Increased professionalism and product innovation within the industry may be the best way to address these challenges, otherwise China’s emerging insurance powers will be unable to keep pace with the market going forward.