Industry experts expect the China Insurance Regulatory Commission to announce the Detailed Rules for Investment in Unlisted Companies’ Equity by Insurance Companies and the Detailed Rules for Investment in Real Estate by Insurance Companies in October 2009. It has already published five sets of rules concerning insurance funds’ investment channels and their investment in infrastructure projects, which were issued on April 7 2009.

The National Development and Reform Commission had completed a draft document entitled "Temporary Administrative Provision on Private Equity Funds", which will ultimately regulate private equity investment generally. The draft was filed with the State Council for approval at the end of June. The National Development and Reform Commission is likely to release the text of the provision for comment following the entry into force of China’s new Insurance Law at the start of October. Before the provision is officially published, the China Insurance Regulatory Commission will invite public comments on its two rules, which are understood to have been circulated for internal feedback already. Its announcement on September 7 2009 that it was inviting a third round of public comments on the Administrative Provision on Insurance Companies’ Equity has been taken as an indication that more rules concerning equity investment are likely to follow in October, perhaps including private equity investment rules.

It seems certain that the China Insurance Regulatory Commission intends gradually to expand the channels in which insurance funds may invest. However, insurance companies contemplating private equity investment should consider the following:

The forthcoming sets of rules are expected to limit an insurance company’s capital for private equity investment to 8% of its investable assets – an indication of the regulator’s prudential supervisory policy. In addition, the rules are likely to restrict insurance companies to investing from their own reserves, with capital from insurance product accounts – especially unit-linked life insurance and universal life insurance accounts – being excluded from private equity investments.

Due to the highly technical nature of private equity investment, insurance companies that plan to invest in the equity of unlisted companies will probably be required to establish a subsidiary to conduct and manage such investments independently. The rules will probably require that such subsidiaries have at least 10 to 20 professionals specializing in private equity investment, which would represent a significant barrier for many small and medium-sized insurance companies.

The rules may leave small and medium-sized insurance companies the option of entrusting private equity investment to qualified insurance asset management companies, although it is understood that the rules contain no explicit statement on this point. The investment model for small and medium-sized companies may ultimately be copied directly from the infrastructure investment rules.

For many large Chinese insurance companies, the development strategy is to build a suitable financial platform. Insurance group Ping An offers a possible model for them to follow. In order to invest in private equity, property and infrastructure, Ping An Group established the Ping An Trust, Ping An Asset Management and Ping An Securities, respectively. In turn, Ping An Trust established a wholly owned subsidiary, Shen Zhen Ping An Innovation Capital Investment Co Ltd, which focuses on investing in banks and financial assets. Together with another leading insurer, Ping An has now applied to the China Insurance Regulatory Commission to approve Ping An Trust’s establishment of a private equity investment company so that it can launch its private equity investment program as soon as possible after official publication of the rules.

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