To manage risk, insurers advised to take multi-pronged approach
September 04, 2010 | BY
clpstaff &clp articles &Insurance regulator aims to develop discipline of risk management and mitigation
Insurance companies need to adopt a multi-pronged approach to better control risks and maintain close supervision on key matters to ensure a diversified investment portfolio, say counsel.
China's insurance regulator has expanded the scope of investment products for insurers, while re-emphasising its restrictions on direct investment in the real estate market. Taking effect on August 31, the new rules have set out detailed investment ratios in certain sectors.
There are two overarching themes to the new rules. One is they provide new outlets of investment for insurance companies to diversify and enhance returns. Another is they reflect the government's overall focus of highlighting risk management and mitigation. “It is an equally important theme with the expansion of investment channels,” said Joel Rothstein, a Beijing-based partner of Paul Hastings Janofsky & Walker and head of its China real estate practice.
The China Insurance Regulatory Commission (CIRC) requires insurance companies to “enhance risk controls”. Rothstein suggested a “multi-pronged approach”. This includes mandated procedures and practices such as a “specialised asset administration
and investment management
department”.
“The new rules require the board of directors of the insurance company to assume ultimate responsibility and oversight for ensuring asset allocation and investment policies are in compliance with rules and regulations,” said Rothstein. He recommended that insurers set up a mandatory board of directors to supervise on the restriction of maximum percentage of investment in certain asset classes or categories.
Under the new rules, insurance companies can invest no more than 10% of their assets in property development, up to 20% in the stock market, and a maximum of 5% in unlisted companies. Market observers say the restrictions are consistent with expectations.
Because real estate development is a highly speculative and risky type of investment, the Paul Hastings practitioner notes the new rules prefer investment in the income- producing stabilised grade A real estate projects instead. “While this type of real estate investment might not offer the highest returns, it is consistent with the core investment strategy utilised by insurance companies in other jurisdictions, which have well-established property investment activities.”
Commentators say that the CIRC's new set of regulations is an attempt to introduce the discipline of risk mitigation and management at international standards, and to incorporate and foster its development and implementation in the Chinese insurance industry.
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