Insurance capital reform

4. Tentative Measures for Investment in Immovable Assets with Insurance Capital (保险资金投资不动产暂行办法) (the IA Measures)

The Legislation provides a legal framework for the utilisation of insurance funds and also sets out guidelines for insurance companies to follow in making and managing their investments of insurance funds. The purpose of the Legislation is to broaden the investment channels for insurance funds and regulate investment activities with insurance funds. In addition, the Legislation is intended to ensure that there are sound risk management and internal control systems in place to prevent insurance companies from making risky investment decisions and that the insurance funds are administered with care under appropriate management supervision.

Set out below are brief overviews of each of the Legislation and for each, the main provisions are highlighted.

Main legislation

The Measures were promulgated by the CIRC on August 5 2010 and came into force on August 31 2010. The Measures form the backbone of the legal framework governing the use of insurance funds by insurance companies.

The Measures consist of six Chapters and 70 Articles. The main content includes 1) the forms of investment open to insurers; 2) the scope of investment; 3) modes of usage of insurance funds; and 4) the managment structure and responsibility.

The Measures expanded the investment channels and set out the prescribed ratios for permitted investments. Under the Measures, insurance companies are permitted to use their insurance capitals to make investments in bank deposits, bonds, shares, security investment funds, real estate and equity interests.

One of the biggest breakthroughs of the Measures is that the channel for investments with insurance funds has been broadened to include real estate and private equity investments.

Since the Measures have come into effect, insurance companies are permitted to invest in each of the below forms of investment according to the ratio requirement prescribed in the Measures:

• the book value of the total investment(s) in bank deposits, government bonds, central bank bills, bonds of policy-oriented banks, money market funds, etc. shall not be less than 5% of the total assets at the end of the prior quarter;
• the book value of any unsecured corporate / enterprise bonds and debt instruments of non-financial enterprises at anytime shall not exceed 20% of the total assets as at the end of the prior quarter;
• the book value of any shares and any interests in any funds invested in shares at any time shall not exceed 20% of the total assets as at the end of the prior quarter;
• the book value of the investment in equities in unlisted enterprises shall not exceed 5% of the total assets at the end of the prior quarter and the book value of any financial products relating to equities in unlisted enterprise shall not exceed 4% of the total assets at the end of the prior quarter; the aggregate of the aforesaid two investments shall not exceed 5% of the total assets at the end of the prior quarter;
• the book value of any real estate investments shall not exceed 10% of the total assets at the end of the prior quarter; the book value of the financial products relating to real estate shall not exceed 3% of the total assets at the end of the prior quarter; the aggregate of the aforesaid two shall not exceed 10% of the total assets as at the end of the prior quarter; and
• the book value of any investments in debt investment plans including infrastructure shall not exceed 10% of the total assets at the end of the prior quarter.

Under the Measures, insurance companies are expressly prohibited from making certain investments. For example, insurance companies cannot deposit insurance funds with non-bank financial institutions, purchase shares under “special treatment”, invest in enterprises' equities or real estate which have no prospects for a stable cash return or value of asset gain, invest in heavy-pollution projects not in conformity with the national industrial policies, directly engage in real estate development and construction, or conduct venture capital investment.

The Measures also require two special committees to be set up under the supervision of the Board of Directors of an insurance company: an asset and liability management committee / investment strategic committee and a risk management committee. When making any material investments, such as investments in unsecured bonds, shares, equity interests and real estate, an insurance company will have to obtain prior approval from the Board of Directors. The intention is to put in place checks and balances to monitor investment risks.

The below table compares the percentages prescribed for permitted investments with insurance funds pre- and post- implementation of the Measures:

Supplementary legislation

i. Circular on Issues Relevant to the Revision of the Investment Policies of Insurance Capital

Under the Circular, insurance companies are required to improve fluidity management and adjust the balance of assets such as bank deposits, central bank bills, government bonds, policy bank bonds, and currency market funds so that the balance of such assets is no lower than 5% of the total assets of such insurers as at the end of the previous quarter.

The Circular also sets out the relevant ratio requirement for insurance companies to follow when investing in stock by using insurance funds:

• investment in the shares of the same listed company shall not exceed 10% of the total share capital of this listed company;
• the balance of investment in security investment funds shall not exceed 15% of the insurance company's total assets at the end of the prior quarter; and the balance of security investment funds plus the balance of shares shall not exceed 25% of the insurance company's total assets at the end of the prior quarter; and
• the balance of a single security investment fund shall not exceed 3% of the insurance company's total assets at the end of the prior quarter; investment in one single closed-end fund shall not exceed 10% of the issue quota.

ii. Tentative Measures for Equity Investment with Insurance Capital

The EI Measures took effect on September 3 2010 and is formulated to regulate investment of insurance capital in equity, guard against investment risks, ensure the safety of assets and safeguard the lawful rights and interests of the insurance parties.

Under the EI Measures, insurance companies may make direct investment or indirect investment in financial products such as an equity investment fund set up by an investment institution. The permitted investment extends to include both shares of unlisted joint stock companies and equity interests of limited liability companies. The EI Measures impose clear qualification requirements on insurance companies wishing to make equity investments directly and on investment institutions that are allowed to make indirect equity investments on behalf of the insurance companies.

The EI Measures also set out the ratio requirements which an insurance company should follow when making investments in the equity:

• the book balance of the investments in direct equity investments in unlisted companies shall not exceed 5% of the total assets at the end of the prior quarter; and the book balance of investments in financial products linked to the equity of unlisted enterprises such as equity investment funds shall not exceed 4% of the total assets in private equity funds; but the combined percentage of all such investments cannot exceed 5% of the total assets;
• the book balance of direct equity investments shall not exceed the net assets; and except in the case of a material equity investment, the book balance of its investment in the equity of a single enterprise shall not exceed 30% of the net assets; and
• the book value of their investment in any one investment fund may not exceed 20% of the issue size of such fund.

iii. Tentative Measures for Investment in Immovable Assets with Insurance Capital

The CIRC issued the IA Measures on September 3 2010, which came into force on the same day. Under the IA Measures, insurance companies are allowed to make investments in immovable assets such as real estate and infrastructure. Nevertheless, restrictions are imposed to prohibit insurance companies from investing in residential properties, and real estate property development companies or shares of unlisted real estate companies. Insurance companies must not directly participate in real estate development.

The insurance companies, when making investments in real estate / infrastructure projects, must be satisfied that the immovable assets have obtained the requisite rights and permits (for example, land use rights, infrastructure permits, construction permits, property certificate, etc.).

The IA Measures permit an insurance company, subject to meeting certain qualification requirements, to make investments in real estate of up to 10% of the total assets in the prior quarter and up to 3% of the total assets for investments in real estate-related financial products. However, the aggregated percentage of all such investments cannot exceed 10% of the total assets. Furthermore, an insurance company cannot utilise leverage in making such investments.

Significance

The Legislation further expands the scope of permitted investments by insurance companies and provides further guidance on the scope of such activities. The move is welcomed by the insurance industry as it will open a broader investment pipeline for the insurance industry in China and enable the insurance companies to boost their returns by making new investments. At the same time, unlisted enterprises, financial institutions and the real estate sector will benefit from the implementation of the Legislation from the injection of fresh funding into the market.

As one may expect, the liberalisation of the investment channels may lead to potential issues such as inappropriate management and new control risks. The Legislation was therefore published to curb such management and supervision issues by standardising the modes of investment, enhancing management supervision, monitoring control risks and promoting transparency of the investments. The Legislation prescribes restrictions on the type of companies or institutions which may be invested to ensure that only those that have satisfied certain conditions are qualified to engage in new investments. The Legislation helps to refine the supervision system and provides detailed rules on the duties and responsibilities of the insurers, the custodian institutions and the financial institutions to ensure insurance funds are utilised in a systematic and professional manner.

The release of the Legislation has painted a bright picture going forward for insurance companies that wish to diversify their investments and achieve higher returns. The release of the Legislation has expanded the scope of permitted investments while at the same time sets out the requirements for a full range of risk prevention and control systems which insurance companies must comply with in order to monitor such investment activities and alleviate investment risk. These requirements accord with the principal aim of the Legislation to effectively manage investment risk and maintain industry stability, financial stability, social stability and the rights of interested parties.

Ik Wei Chong and Carrie Yang, Clyde & Co, Shanghai