Insurance AMCs and Risk Control Guidelines: New Rules Aim to Meet Industry Demand

By Stuart Valentine and Ben Leung, Clifford Chance, Hong Kong

Premium income of insurance companies in China has been increasing at a rate of more than 25% annually in recent years, with total annual premium income reaching nearly Rmb1 trillion as of the end of 2003. This strong growth has resulted in heavy pressure on Chinese insurance companies to control their investment risks and to achieve better yields. Most insurance companies manage their assets through their internal asset management departments. To date, we are aware of only two Chinese domestic insurance companies, PICC Property & Casualty and China Life, that have obtained licences to set up their own specialized insurance asset management companies (Insurance AMCs). As the insurance industry expands rapidly with higher investment volume and more diversified portfolios, there is an increasing demand for the establishment of specialized Insurance AMCs to ensure proper management of insurance funds by professional institutions.

In response to industry demand, the China Insurance Regulatory Commission (CIRC) promulgated the Administration of Insurance Asset Management Companies Tentative Provisions (保险资产管理公司管理暂行规定)(the Insurance AMC Provisions) on April 21 2004, and they became effective on June 1 2004. This long-awaited piece of legislation provides the rules relating to the establishment and regulation of Insurance AMCs. Shortly after the promulgation of these provisions, on April 28 2004, the CIRC promulgated the Risk Control Guidelines for Use of Insurance Funds (Trial Implementation) (the Guidelines). The Guidelines also became effective on June 1 2004. It is expected that the Insurance AMC Provisions and the Guidelines will help Chinese insurance companies and Insurance AMCs to properly manage insurance funds and to strengthen their control over investment risks associated with insurance funds.¹ Here we will look at the salient features and the key provisions of these two important regulations.