Circular on the Investment of Insurance Funds in Infrastructure Bond Investment Plans

Repealed on October 12 2012: http://www.chinalawandpractice.com/Article/3131477/Circular-on-Investment-in-Relevant-Financial-Products-with.html

(Issued by the China Insurance Regulatory Commission on March 19 2009.)

Bao Jian Fa [2009] No.43

Insurance companies and insurance asset management companies:

With a view to regulating the investment of insurance funds in infrastructure projects and guarding against management and operational risks, we hereby notify you on matters relevant to the investment in infrastructure bond investment plans (Bond Investment Plans) by insurance companies and insurance asset management companies (hereafter collectively referred to as Insurance Institutions) as follows:

1. An Insurance Institution may, in accordance with relevant provisions of the Trial Measures for the Administration of the Indirect Investment of Insurance Funds in Infrastructure Projects (the Measures) and the Guidelines for the Administration of the Indirect Investment of Insurance Funds in Infrastructure Bond Investment Plans (Trial Implementation), invest in Bond Investment Plans promoted and established by professional management institutions such as insurance asset management companies and trust companies.

2. If an insurance company wishes to invest in a Bond Investment Plan, it shall, in addition to complying with Article 23 of the Measures, satisfy the following conditions:

(1) having maintained a solvency adequacy ratio of at least 120% during the most recent two financial years;

(2) having a board or board authorised resolution approving the investment in Bond Investment Plans, which resolution shall specify the risks known and borne, and a risk awareness letter signed by the chairman of the board or the authorised representative of the board of directors for each Bond Investment Plan;

(3) having a sound decision making and authorisation mechanism, risk control mechanism, business operation procedure, internal management systems, internal auditing system and accountability system for investment in Bond Investment Plans;

(4) having an asset management department organisational structure under which duties are clearly defined and responsibilities rationally divided and one in which functional positions such as research, investment, trading, settlement, credit assessment and risk management are rationally established;

(5) having not less than five persons who engage in fixed return investments, among whom not less than one person shall be a mid or higher-level manager with at least five years of bond investment experience and relevant professional qualifications and not less than two persons shall have at least three years of bond investment experience, and having persons designated with the responsibility for management of investments in Bond Investment Plans;

(6) its credit risk management and internal credit rating capabilities satisfying regulatory standards; and

(7) if the investment funds are in the custody of a custodian, the custodian and its stock asset custody institution being the same institution.

If an insurance company appoints an insurance asset management company to invest in Bond Investment Plans, the restrictions set forth in Items (4), (5) and (6) of this Article shall not apply.

3. An insurance asset management company that invests in Bond Investment Plans upon appointment shall satisfy the following conditions:

(1) having the business capabilities to manage third party assets entrusted to it;

(2) having a sound business operation procedure, risk control mechanism, information disclosure rules, internal management systems, internal auditing system and accountability system for investment in Bond Investment Plans;

(3) having established a firewall mechanism among the business engaged in for its own account, business carried out upon appointment by others and asset management product development business with strict separation of their respective accounts, funds, accounting and management personnel;

(4) having not less than 15 persons who engage in entrusted investment business with fixed returns, among whom not less than five persons shall be mid or higher-level managers with at least five years of bond investment experience and relevant professional qualifications and not less than seven persons shall have at least 3 years of bond investment experience, and having persons with at least three years of project investment and/or credit management experience designated with the responsibility for management of investments in Bond Investment Plans; and

(5) its credit risk management and internal credit rating capabilities satisfying regulatory standards.

Fee rates for the management of investments upon appointment shall be specified separately by the China Insurance Regulatory Commission.

4. An insurance company shall decide at its own discretion based on its investment management capabilities and risk management capabilities the method by which it will invest in Bond Investment Plans and report the same to the China Insurance Regulatory Commission for the record.

An insurance company shall determine its investment rules of procedure, decision-making procedures and management personnel, keep complete records of the decision-making process and results for each investment and achieve prudent decision-making, sound operation and self bearing of risks, gains and losses. If an insurance company appoints a third party to invest on its behalf, it shall formulate the rules and operational procedure for such appointments and the criteria for selecting an institution to be appointed, select at its own discretion the institutions to be appointed based on the market principle, reasonably formulate investment guidelines and bear the risks involved in selecting institutions for appointment, determining investment benchmarks and adjusting the allocation of assets. Where losses are incurred due to an appointment error by an insurance company, it shall bear the attendant liability in accordance with relevant provisions.

5. When an insurance company is to invest in a Bond Investment Plan, it shall, in addition to satisfying the provisions of the Measures, comply with the following percentages:

(1) in general, the balance invested in Bond Investment Plans by a life insurance company shall not exceed 6% of its total assets as at the end of the preceding quarter and by a property insurance company shall not exceed 4% of its total assets as at the end of the preceding quarter;

(2) the balance invested in a single Bond Investment Plan shall not exceed 40% of the assets available for investment in Bond Investment Plans;

(3) the share invested in a single A-type or B-type enhanced Bond Investment Plan shall not exceed 50% of the total issue of such plan; the share invested in a single C-type enhanced Bond Investment Plan shall not exceed 40% of the total issue of such plan; and

(4) the share invested by insurance companies from the same group in a single Bond Investment Plan issued by an affiliated professional management institution shall not, in total, exceed 60% of the total issue of such Bond Investment Plan.

For the purposes of this Circular, the term “investment balance” means the book balance of the financial assets specified in the new accounting rules; the term “credit enhancement methods” means the enhancement methods determined in the Guidelines for the Establishment of Infrastructure Bond Investment Plan Products.

The percentage that may be invested in a single Bond Investment Plan for a major project approved by the State Council may be appropriately adjusted.

6. When formulating its asset allocation plan, an insurance company shall give full consideration to the risk features of, source of funds for, and liability requirements in respect of, Bond Investment Plans, rationally determine the traditional product and investment-type product allocation percentages and mainly allocate Bond Investment Plans to traditional products with relatively long liability terms. Where Bond Investment Plans are allocated to investment-type products, a liquidity arrangement shall be duly made.

An insurance company may create new insurance products based on the term of, returns on and limits on Bond Investment Plans.

7. An insurance asset management company's own funds may be invested in Bond Investment Plans established by the company itself or in Bond Investment Plans established by other professional management institutions. The department in charge of the company's operations for its own account shall be responsible for investments of the company's own funds, and such funds shall be strictly separated from assets managed upon appointment.

The balance of an insurance asset management company's own funds invested in Bond Investment Plans shall not exceed 5% of its own funds. The investments made in Bond Investment Plans by an insurance asset management company upon appointment shall comply with the requirements of the appointing institution's investment guidelines.

8. A Bond Investment Plan invested in by an Insurance Institution shall be subject to credit ratings conducted on an ongoing basis by a credit rating agency approved by the regulatory authority and shall have a credit rating of not less than AA or the equivalent thereof.

9. An Insurance Institution shall track the management and application of Bond Investment Plan assets on an ongoing basis, regularly assess investment risks, compute its risk﹣bearing capacity and revise its investment limits, risk limits and stop-loss limits when appropriate so as to safeguard the security of its assets.

10. An Insurance Institution that invests in Bond Investment Plans shall, in addition to the reports specified in the Measures, report the following matters to the China Insurance Regulatory Commission:

(1) changes in the overall allocation of its assets, including Bond Investment Plans;

(2) its risk control system and risk management position, including stress tests, contingency plans and details of its day-to-day risk management;

(3) its internal credit rating criteria and details of the operation of its credit rating system; and

(4) details of the performance of their duties by management personnel at every level.

11. The China Insurance Regulatory Commission shall oversee the investment by Insurance Institutions in Bond Investment Plans in accordance with the law. If an Insurance Institution or relevant personnel violates this Circular, the China Insurance Regulatory Commission will impose administrative penalties in accordance with the law.