Infrastructure Projects: A New Frontier for Insurance Funds Investment

Features of the Measures

Insurance funds safety

Protection of insurance funds is not only crucial for the survival of insurance companies but also of great importance to social stability and security. Therefore, the Measures emphasize that "the safety of insurance funds" is of the utmost concern in order to "promote the stable and healthy development of the insurance industry" (Article 1). The Insurance Law and other insurance related laws and regulations have similar objectives.

Indirect investments

Under the Measures, insurance funds are only permitted to engage in indirect investments in infrastructure projects. Insurance companies must channel their money into investment plans offered by trust investment companies, insurance asset management companies and industrial investment funds management companies, or other professional management organizations, in order to make indirect investments (for example, see Articles 2 and 28). This suggests that investments are managed by professional organizations so as to avoid otherwise possible risks due to the lack of insurance companies' experience in infrastructure investments.

Investment ratio and scope

Stringent restrictions regarding the investment ratio and the investment scope of insurance funds in infrastructure projects have been put into place. Pursuant to Article 25 of the Measures, the investment balance of a life insurance company and a property insurance company, calculated according to the cost price, must not exceed 5% and 2% of the company's total assets at the end of the preceding quarter respectively; the investment balance in a single infrastructure project of a life insurance company and a property insurance company, calculated according to the cost price, must not exceed 20% and 5% of the total budget of such project respectively. Additionally, the investment scope is limited to key national infrastructure projects in transportation, communication, energy sources, and environmental protection (Article 10). According to CIRC officials, investments are confined to completed projects to avoid risks at the initial stage of the pilot programme.

Investment plan

A risk monitoring and controlling system based on a separation of assets, custody of assets and independent supervision under the legal framework of an investment plan has been established under the Measures. The investment plan manages indirect investments of insurance funds in infrastructure projects, under which the entrusting party, the trustee, the beneficiary, the custodian and the independent supervisor jointly form a mechanism of "entrustment, operation, benefits and supervision" of insurance funds utilization. The reasoning behind the use of an investment plan is so that insurance funds can be better utilized by the professional and experienced operations of a trustee. Furthermore, the safety of the insurance funds can be guaranteed by the custodians of such funds, the independent supervision over the trustee's management of the investment plan and the specific operating circumstances of the project party by the independent supervisor. To ensure that the various concerned parties to an investment plan can properly carry out their duties and responsibilities, the Measures set down specific qualification requirements and behaviour rules for each concerned party.¹

The Measures also provide detailed provisions regarding information disclosure, and supervision and administration regarding indirect investments in infrastructure projects with insurance funds, so as to construct a long-term effective mechanism against risks.

Based on the developmental circumstances of the domestic financial market and with reference to advanced international experience, the Measures establish an overall risk management framework for indirect investments in infrastructure projects with insurance funds, including control of the investment scope and the total investment scale, the qualification examination and the approval of various concerned parties, work division and cooperation, as well as checks and balances among the various concerned parties, information disclosure, and supervision and administration.

Room for further developments

While giving first priority to the safety of insurance funds, the Measures have also left much room for possible further developments. This is most obviously reflected in Article 93 of the Measures, which states that the CIRC may, in accordance with the circumstances of market changes and investment operations, adjust the provisions of the Measures in a timely manner regarding the qualification conditions of the relevant concerned parties, the investment scope and the investment ratio of investments in infrastructure projects with insurance funds.

In light of CIRC's ability to use administrative discretion, as displayed over the course of the ongoing development and reform of China's insurance industry; and as long as China's macro-economy, especially the infrastructure investment market, continues to run healthily, it is likely that restrictions on indirect investments in infrastructure projects with insurance funds will be relaxed. Moreover, Articles 95 and 96 of the Measures authorize the CIRC to enact separate detailed rules for insurance funds' investments in infrastructure projects using entrustment, industrial investment funds and other forms. Therefore, the means for insurance funds' investments in infrastructure projects can be expected to be diversified even further in the near future.

Impact of the Measures

Insurance industry

Besides the traditionally accepted bank deposits and purchase of government or financial bonds, insurance funds can be invested in a much wider variety of bond products,² securities investment funds and stocks. Foreign exchange insurance funds engaging in overseas investments are also permitted. However, with the exception of securities investment funds and stocks, these means for insurance funds utilization are all products of the financial market and are mainly low-yielding interest-earning products. For the insurance industry, the utilization of such products presents three major problems.

Firstly, there is an unbalanced utilization structure for insurance funds. An excessive amount of insurance funds have already been invested in bank deposits and bonds, both of which are fixed-income products and highly sensitive to the interest rate. Statistical data shows that by the end of 2005, total insurance funds' utilization reached Rmb1.43 trillion (US$162 billion), out of which 34.42% went into bank deposits and 52.3% went into various bond investments. From another perspective, nearly 90% of all the insurance funds that could be utilized were used for interest-earning products.

Secondly, the low income ratio for insurance funds utilization is problematic. Income on investments is essential to insurance companies' profitability. According to relevant data from foreign insurance industries, insurance companies in many countries suffer losses from their insurance businesses. However, incomes on insurance fund investments can make up for such losses and help insurance companies meet their profit targets. But in recent years, the investment ratio of insurance funds in China has been quite low. For example, from 2001 to 2005, the comprehensive income ratio of China's insurance funds utilization was 4.3%, 3.14%, 2.68%, 2.87%, and 3.6% respectively. For the past few years, the People's Bank of China (PBOC) has reduced the interest rates applicable to bank deposits and loans eight times consecutively. With so many funds being placed in bank deposits and bonds, it is easy to understand why the income ratio for insurance funds utilization has continued to be relatively low. Although the PBOC increased the interest rates for one-year bank deposits³ and loans⁴ in October 2004, and again in April 2006,⁵ this has done little to help redress the overall imbalance of insurance funds utilization, unless a more balanced utilization structure for insurance funds is formed.

Thirdly, there is great difficulty encountered by insurance companies in matching their assets and liabilities. Insurance companies, especially life insurance companies, which make up most of the total assets of the insurance industry,⁶ are eager for long-term investments to match their long-term liabilities. According to Samir Atassi, the managing director of Merrill Lynch Group (Asia Pacific), the average term for the liabilities of China's life insurance companies is 15