CIRC facilitates fund investments

Among such new provisions, the Circular on Regulating Stock Investments of Insurance Institutions (关于规范保险机构股票投资业务的通知) (New Circular) regulates insurance companies on their investment in the domestic Chinese stock market.

Under the Administration of Stock Investments by Insurance Institutional Investors Tentative Procedures (保险机构投资者股票投资管理暂行办法), promulgated on October 24 2004, an insurance company is permitted to engage in or entrust an insurance asset management company (IAMC) to engage in stock investments. But it still has to meet certain requirements (such as having an independent transaction department, in line with solvency margin rate, etc.) and obtain approval from the CIRC before it is permitted in the stock market.

Approval is considered to be time consuming and difficult to obtain so the CIRC promulgated new provisions. This had the aim of shortening approval procedures, further standardising insurance companies' stock investment activities, and strengthening the administration of stock investments.

Filing system

One of the key changes is the adoption of a filing system to replace the approval mechanism for stock investment by insurance companies. Under the New Circular, a company shall carry out filings with the CIRC. However, the New Circular is silent on implementation details.

Solvency margin rate

The New Circular stipulates that (1) if the solvency margin rate of an insurance company is 150% or above, the company is eligible to directly engage in stock investment; (2) if between 100%-150% in the past four consecutive quarters, it shall adjust its stock investment strategy; and (3) if below 100% in the past two consecutive quarters, it shall not increase its stock investment, and shall report the market risk promptly.

Corporate governance

As one of the five newly released provisions, the Standards of Stock Investment Management Capability of Insurance Companies (New Standards) sets out requirements with regards to the organisational structure, investment professionals, investment rules, system construction, and risk control, on the insurance company that intends to directly engage in stock investment. Some key requirements are:

1) Organisational structure

An insurance company shall establish an independent asset management department that shall (1) maintain posts of stock investment analysis, investment, trade, risk control, performance assessment, liquidation, accounting and system support; (2) have qualified stock investment managers; and (3) set up a firewall system among stock investment personnel, such as blocks between stock investment manager and fund investment manager, and blocks between investment managers and trading staff, etc.

2) Investment professionals

An insurance company shall allocate adequate investment professionals. For example, where stock investment is between Rmb 500 million to Rmb 1 billion, the insurance company shall have at least 12 full-time investment professionals (three of whom shall be investment managers, five research staff – of which no less than two are principal research staff), two trading staff, one risk control and one liquidation specialist. Where it is above Rmb 1 billion, the number of key business professionals (including investment managers, researchers and trading staff) shall be no less than 12.

Furthermore, the New Standards also require the chief stock investment officer to possess at least five years' experience in stock investment or at least eight years' experience in the finance or securities industry. The investment manager is required to have at least three years of stock investment management or at least five years' experience in the finance or securities industry. And the principal research staff shall have engaged in research work for three years or above or have work experience in the research industry for at least three years.

The New Circular has given insurance companies the opportunity to directly engage in stock investment. But the solvency margin rate for small and medium sized companies may be difficult to achieve partly due to the global financial crisis. It's common for such companies to entrust an IAMC to engage in stock investment. This is because the management fees payable are significantly lower than the operating fees incurred for having in place the organisational structure and investment professionals as specified by the New Standards.

But by entrusting an IAMC to manage stock investment, such companies might find it difficult to directly control their stock investment activities. In the long-run, they will likely directly invest in the stock market.

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