According to the Administration of Stock Investments by Insurance Institutional Investors Tentative Procedures issued by the CIRC on December 24th 2004, institutional insurance investors may engage in or entrust a qualified institution to engage in the trading of stocks, convertible corporate bonds and a range of other securities.
On the evening of April 7th 2009, five documents concerning the investment channels of insurance funds were published on the CIRC homepage. This clarified that if the solvency rate of an insurance company conforms to the standard provided by the CIRC, the company may invest in permitted securities.
These five documents include:
1) Notice of the CIRC to Expand the Investment of Insurance Funds in the Bond Market;
2) Notice of the CIRC to Standardize the Investment of Insurance Funds in the Stock Market;
3) Notice of the CIRC for the Plan of the Investment of Insurance Funds in Infrastructure Project Bonds;
4) Notice of the CIRC on Issuing the Guideline for the Investment of Insurance Funds in Infrastructure Project Bonds;
5) Notice of the CIRC to strengthen the Administration of the Assets of Insurance Company.
According to these five documents, the bonds which may be invested by insurance funds have been expanded. They include; local treasury bonds issued and cashed by the Ministry of Finance; debt financing instrumentality issued by non-financing businesses such as middle-term notes in the domestic market; bonds issued by large state-owned enterprises on the Hong Kong Stock Exchange; and unsecured convertible bonds. Importantly, unsecured bonds issued by companies and enterprises are excluded from the permitted investments.
The Plan of the Investment of Insurance Funds in Infrastructure Project Bonds (point 3 above) will soon begin. On the basis of what is stated in the above five documents, insurance companies whose solvency rate is 120% over the past two years may invest in securities as permitted. Additionally, Life Insurance Funds may invest within 6% of their total assets of the preceding quarter; Property Insurance Funds shall be within 4%.
In general, the solvency rate will determine the range of permitted investments. If the solvency rate is 150%, an insurance fund may invest in all available options provided by the laws and regulations; if the solvency rate is between 100% – 150% over four straight quarters the authority will require the insurance fund to change its investment tactics; if the solvency rate is below 100% over 2 straight quarters the fund will be forbidden to invest in securities, the fund must also take immediate measures to protects its assets and report to the CIRC. According to these documents, the supervisory system of the CIRC concerning the investment of insurance funds will be changed from an approval system to a register system.
As we wait to see the results of the incoming changes, it is without a doubt an exciting time for China’s insurance industry