Authored by Dr. Zhan Hao (

During the last two years, the China Insurance Regulatory Commission (CIRC) has issued several new policies for insurance proceeds investment, but the distribution is unclear at this stage, leaving insurance companies seeking guidance.

Declining profits in the insurance business is the leading incentive for CIRC to issue new investment policies for insurance proceeds. According to reports for the first three quarters of 2012, three of the four major listed insurance companies in China faced declining performances and suffered huge losses. In the third quarter, the loss of China Life Insurance Company stood at Rmb 2.207 billion ($3.54 million) and its net profit in the first three quarters declined by 56% year-on-year. The situation of China Pacific Insurance was similar, as its net profit of the third quarter was around Rmb 0.5 billion, down by 58.7% year-on-year. For New China Life Insurance, the net profit of the third quarter also declined by 15% year-on-year.

Both the authority and insurance companies are desperate to find a way to reverse the negative situation. Among all the possibilities ways, insurance proceeds investment seems the most feasible but may not be that effective. According to reports from the third quarter, the total return rates on investment of China Life, China Pacific and New China Life were only 2.17%, 2.12% and 2.20%, respectively. This raises issues about how to effectively take advantage of the insurance proceeds to generate substantial profits.

In April 2012, when the new Chairman of CIRC Xiang Junbo conducted research in Wenzhou, he pointed out that the Commission would appropriately adjust the percentage of insurance proceeds allowed to be invested and perfect the relevant regulations. It is common knowledge that Xiang was the former CEO of Agricultural Bank of China, which is one of the Top Four PRC banks. The insurance industry predicts that the new chairman wants to enlarge the size of insurance market. Even though the market has seen improvement, but the entire insurance proceeds market just equals the assets of one large PRC bank.

According to the Tentative Measures for Investment in Equity with Insurance Proceeds promulgated in September 2010, insurance proceeds can be invested in the equities of enterprises directly or indirectly. The vice president of CIRC Chen Wenhui, who oversees insurance proceeds regulations, put forward that in order to prevent risks, the framework of the regulation needs to be perfected. Risks do need to be kept under control, but those overseen needs to be entitled to some freedom as well. The CIRC’s attitudes towards the investment of insurance proceeds have been largely reversed, which has brought about many regulatory changes in this field. This has led to a series of drafts on insurance proceeds investment issued in June 2012 and finally in July and October, new policies were formally promulgated.

Deregulating PE and real estate investment

The Circular on Investment in Equity and Real Estate with Insurance Proceeds, was promulgated by CIRC on July 25th 2012 and deregulates insurance proceeds in PE and real estate. The Circular means insurers are not required to be profitable during the last fiscal year and the basic requirement for the net assets of the insurers at the end of last fiscal year is adjusted to Rmb 0.1billion. The Circular also requires the solvency adequacy ratio at the end of last quarter to not be less than 120% instead of 150%. The Commission has adequately considered the holes in the PE and real estate markets before issuing the Circular, causing an increase in insurance proceeds in these markets.

Fields where insurance proceeds can be invested under current legislation:

1. Bank deposits

2. Financial bonds: Central-bank financial bonds, policy bank subordinated bonds, commercial bank financial bonds, commercial bank subordinated bonds, commercial bank subordinated term debts, insurance company subordinated term debts and international development institution renminbi-denominated bonds

3. Government bonds

4. Corporate bonds, convertible corporate bonds and short-term financing bonds

5. Financial products: Wealth management products of commercial banks, credit asset-backed securities of bank-type financial institutions, pooled trust plans of trust companies, specific asset management plans of security companies, infrastructure investment programs of insurance asset management companies, real estate investment plans, project asset-backed plans and so on

6. Securities investment funds

7. Stocks investment funds

8. Domestic financial derivatives: Financial forwards, financial futures, financial options and financial exchanges

9. Stock index figures

10. Real estate: Acquiring property rights, creditor’s rights or equities

11. Equities: Direct and indirect

12. Infrastructure debt investment plans

Expanding investments in financial products

The Circular on Investment in Relevant Financial Products with Insurance Proceeds allows proceeds to be invested in seven types of financial products. These include: wealth management products of commercial banks, credit asset-backed securities of bank-type financial institutions, pooled trust plans of trust companies, specific asset management plans of security companies, infrastructure investment programs of insurance asset management companies, real estate investment plans and project asset-backed plans.

Previously, only the infrastructure and real estate investment programs could be invested in, the other five are new target products for insurance proceeds.

New provisions on overseas investment

Many countries have already issued policies on insurance proceeds investment. The policies in UK are the loosest, because the laws and regulations do not impose any restrictions on the investment of insurance companies. The applicable target products for the most part include all the products available in the market. UK insurance companies attach great importance to overseas investment, which could effectively avoid domestic risks. There is also an obvious preference for the investors. Only 20% of the investment are in bonds, while the proportion invested in equities is much higher. In the US, the types of applicable target products are restricted to bonds, equities, mortgage loans, real estate, policy loans. In Japan, the insurance proceeds are mainly invested in securities, loans and real estates. Insurance companies in Japan tend to invest in foreign securities, avoiding any potential risks from the domestic insurance industry. Japan oversees investment continues to increase annually.

Countries have different conditions and should adopt policies accordingly. However, there are many similarities when considering the developed countries of the world. They have all broadened the scope of investment gradually, with overseas investment playing a prominent role. China’s new policies fit this tendency. The applicable target products have been further specified and increased. At the same time, the regulations on overseas investment of insurance proceeds have been amended and become less restrictive.

In 2010, CIRC issued a document called the Circular on the Issue Relevant to the Revision of Investment Policies of Insurance Proceedswhich stipulates that the balance of overseas investment of insurance companies must be no more than 15% of its total assets at the end of the previous year. The same document also stipulates that insurance proceeds can only be invested in certain types of products in the Hong Kong market. This strict regulation means the overseas investment percentage of the whole insurance industry is only around 1%. This is far below the expected upper limit set in the Circular. The CIRC has acknowledged this shortcoming and realized overseas investment should not be as restricted. If the restrictions on the scope of overseas investment could be partly removed, then the domestic insurance industry could efficiently find its best target products in the international markets.

In the exposure draft of Implementing Rules for the Tentative Measures for the Administration of Overseas Investment of Insurance Proceeds published in March 2012, overseas investment will be broadened to 25 developed markets and 20 emerging markets. This covers the major foreign markets and target products will include equity instruments, like depository receipts and money market instruments, like bank drafts. The maximum percentage of overseas investment is still 15% and the balance of overseas investment in emerging markets should not be more than 5% of the insurance company’s total assets at the end of the previous year. Among all the different opinions on the draft, the percentage of insurance proceeds invested in emerging markets was generally criticized for being too small. After the Rules were promulgated in October 2012, the percentage was raised to 10%.

As far back as 2007, the CIRC promulgated Tentative Measures for Overseas Investment of Insurance Proceeds. However, due to the international financial turmoil which broke out and spread later, overseas investment make little progress. Since 2007, Ping An Insurance has been an investor in in Belgium’s Fortis Group, until Fortis was nationalized and finally sold. Ping An suffered giant losses. Since then, there has not been much overseas investment of Chinese insurance proceeds. The promulgation of the implementing Rules will definitely accelerate and improve overseas investment.

Simplifying the approval process

The Tentative Measures for the Administration of the Use of Insurance Proceeds for the first time stipulates that the insurance assets management products should be filed for approval by CIRC. Then the issuance of congeneric products will be reported to CIRC after. This makes the procedures to issue relevant congeneric products much simpler, which simplifies the regulations on the use of insurance proceeds.

Insurers are required to periodically adjust their investment policies and adopt effective measures to control the relevant risks as soon as their solvency adequacy ratios fall below 120%.

Mixed results

Legislation from 2012 also allowed non-insurance financial institutions to participate in the use of insurance proceeds. This imposes competitive pressures on insurance asset management companies. Fund companies, securities companies, trust companies and banks are all open to competition with insurance asset management companies as they use insurance proceeds. According to the Circular on Matters Relevant to Insurance Asset Management Companies, the CIRC allows insurance asset management companies to provide services with non-insurance proceeds, which will create more opportunities for survival, given the fierce competition. Insurance asset management companies are now faced with both opportunities and challenges.

The new policies minimize restrictions on target products, but for most insurance companies, the requirements to investments in financial products are still difficult to meet. For example, Article 9 of Circular on Investment in Relevant Financial Products requires the solvency adequacy ratios of the insurance companies planning to invest in financial products cannot be less than 120%. Generally, CIRC requires insurance companies to keep their solvency adequacy ratios above 100%. Once its ratio falls below 100%, the company will be listed as the key regulatory object. In reality, many companies cannot meet this requirement. According to the annual reports of the insurance companies, in 2011, there were a few insurance companies, like Chinapost Life and Minan Property and Casualty whose solvency adequacy ratios were just above 100%. The ratio of Dubon Insurance was -37%. The requirement of solvency adequacy ratio for the insurance companies to invest is up to 120%, which is much higher than expected. Many insurance companies cannot invest in financial products with such a high percentage.

The new policies are comprehensive, but there are still problems which are not addressed in the series of regulations issued. For example, seven types of financial products can now be used for investments, some of which include investments in equities, which are regulated by two different pieces of legislation: the Circular on Investment in Relevant Financial Products and the Tentative Measures for Investment in Equity with Insurance Proceeds. Both documents specify the maximum percentages of investment in the certain product. According to Circular for Financial Products, the total insurance proceeds invested in wealth management products, credit asset-backed securities, pooled trust plans, specific asset management plans and project asset-backed plans should not be more than 30% of the total assets of the insurance company at the end of the previous quarter. This creates a problem as, assuming the insurance proceeds invested in pooled trust plans are finally invested in equities, should this part of insurance proceeds be included in the proportion invested in the five types of financial products or in the proportion invested in equities? The answer to this question is so important that it will directly affect the distribution of insurance proceeds for investment. From the current legislation, there is still no clear answer. Specific and clear regulations are expected to be released soon.

2012 saw a series of innovations in the field of insurance proceeds investment. The CIRC has made a decision to make this business perform. We believe that there are some minor faults to be addressed. However, considering China’s insurance industry is just starting to develop and the authorities are learning how to formulate a model which fits the countr, these faults are inevitable. We have enough confidence in the CIRC to solve these problems and there is a promising future for this industry.