Investing using insurance proceeds

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Expanding investments in financial products

The Circular on Investment in Relevant Financial Products with Insurance Proceeds (关于保险资金投资有关金融产品的通知) allows proceeds to be invested in seven types of financial products. These include: wealth management products of commercial banks, credit asset-backed securities of bank-type financial institutions, pooled trust plans of trust companies, specific asset management plans of security companies, infrastructure investment programmes of insurance asset management companies, real estate investment plans and project asset-backed plans. Previously, only infrastructure and real estate investment programmes could be invested in, the other five are new target products for insurance proceeds.

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New Provisions on overseas investment

Many countries have already issued policies on insurance proceeds investment. The policies in UK are the loosest, because the laws and regulations do not impose any restrictions on the investments of insurance companies. The applicable target products for the most part include all the products available in the market. UK insurance companies attach great importance to overseas investment, which could effectively avoid domestic risks. There is also an obvious preference for the investors. Only 20% of the investments are in bonds, while the proportion invested in equities is much higher. In the US, the types of applicable target products are restricted to bonds, equities, mortgage loans, real estate and policy loans. In Japan, insurance proceeds are mainly invested in securities, loans and real estate. Insurance companies in Japan also tend to invest in foreign securities, avoiding any potential risks from the domestic insurance industry. Japan's overseas investment continues to increase annually.

Countries have different conditions and should adopt policies accordingly. However, there are many similarities when considering the developed counties of the world. They have all broadened the scope of investment gradually, with overseas investment playing a prominent role. China's new policies fit this tendency. The applicable target products have been further specified and increased. At the same time, the regulations on overseas investment of insurance proceeds have been amended and become less restrictive.

In 2010, the CIRC issued a document called the Circular on the Issue Relevant to the Revision of the Investment Policies of Insurance Proceeds (关于调整保险资金投资政策有关问题的通知), which stipulates that the balance of overseas investment of insurance companies must not be more than 15% of its total assets at the end of the previous year. The same document also stipulates that insurance proceeds can only be invested in certain types of products in the Hong Kong market. This strict regulation means the overseas investment percentage of the whole insurance industry is only around 1%. This is far below the expected upper limit set in the Circular. The CIRC has acknowledged this shortcoming and realised overseas investment should not be as restricted. If the restrictions on the scope of overseas investment could be partly removed, then the domestic insurance industry could efficiently find the best target products in international markets.

In the exposure draft of the Implementing Rules for the Tentative Measures for the Administration of Overseas Investment of Insurance Proceeds (保险资金境外投资管理暂行办法实施细则（征求意见稿）) published in March 2012, overseas investment will be broadened to 25 developed markets and 20 emerging markets. This covers the major foreign markets and target products will include equity instruments, like depository receipts and money market instruments, like bank drafts. The maximum percentage of overseas investment is still 15% and the balance of overseas investment in emerging markets should not be more than 5% of the insurance company's total assets at the end of the previous year. Among all the different opinions on the draft, the percentage of insurance proceeds invested in emerging markets was generally criticised for being too small. After the Rules were promulgated in October 2012, the percentage was raised to 10%.

As far back as 2007, the CIRC promulgated the Tentative Measures for Overseas Investment of Insurance Proceeds. However, due to the international financial turmoil which broke out and later spread, overseas investments made little progress. Since 2007, Ping An Insurance has been an investor in Belgium's Fortis Group, until Fortis was nationalised and finally sold. Ping An suffered huge losses. Since then, there has not been much overseas investment of Chinese insurance proceeds. The promulgation of the Implementing Rules will definitely accelerate and improve overseas investment.

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Simplifying the approval process

The Tentative Measures for the Administration of the Use of Insurance Proceeds (保险资金运用管理暂行办法) for the first time stipulates that insurance assets management products should be filed for approval by the CIRC. Then the issuance of congeneric products will be reported to the CIRC after. This makes the procedures to issue relevant congeneric products much simpler, which simplifies the regulations on the use of insurance proceeds.

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Mixed results

Legislation from 2012 also allowed non-insurance financial institutions to participate in the use of insurance proceeds. This imposes competitive pressures on insurance asset management companies. Fund companies, securities companies, trust companies and banks are all open to competition with insurance asset management companies as they use insurance proceeds. According to the Circular on Matters Relevant to Insurance Asset Management Companies (关于保险资产管理公司有关事项的通知) the CIRC allows insurance asset management companies to provide services with non-insurance proceeds, which will create more opportunities for survival, given the fierce competition. Insurance asset management companies are now faced with both opportunities and challenges.

The new policies minimise restrictions on target products, but for most insurance companies, the requirements to investments in financial products are still difficult to meet. For example, Article 9 of the Circular on Investment in Relevant Financial Products requires the solvency adequacy ratios of insurance companies planning to invest in financial products cannot be less than 120%. Generally, the CIRC requires insurance companies to keep their solvency adequacy ratios above 100%. Once the ratio falls below 100%, the company will be listed as the key regulatory object. In reality, many companies cannot meet this requirement. According to the annual report of the insurance companies, in 2011 there were a few insurance companies, like Chinapost Life and Minan Property and Casualty whose solvency adequacy ratios were just above 100%. The ratio of Dubon Insurance was -37%. The requirement of solvency adequacy ratio for the insurance companies to invest is up to 120%, which is much higher than expected. Many insurance companies cannot invest in financial products with such a high percentage.

The new policies are comprehensive, but there are still problems which are not addressed in the series of regulations issued. For example, seven types of financial products can now be used for investments, some of which include investments in equities, which are regulated by two different pieces of legislation: the Circular on Investment in Relevant Financial Products and the Tentative Measures for Investment in Equity with Insurance Proceeds (保险资金投资股权暂行办法). Both documents specify the maximum percentages of investment in certain products. According to Circular for Financial Products, the total insurance proceeds invested in wealth management products, credit asset-backed securities, pooled trust plans, specific asset management plans and project asset-backed plans should not be more than 30% of the total assets of the insurance company at the end of the previous quarter. This creates a problem as, assuming the insurance proceeds invested in pooled trust plans are finally invested in equities, should this part of the insurance proceeds be included in the proportion invested in the five types of financial products or in the proportion invested in equities? The answer to this question is so important that it will directly affect the distribution of insurance proceeds for investment. From the current legislation, there is still no clear answer. Specific and clear regulations are expected to be released soon.

2012 saw a series of innovations in the field of insurance proceeds investment. The CIRC has made a decision to make this business perform. We believe that there are some minor faults to be addressed. However, considering China's insurance industry is just starting to develop and the authorities are learning how to formulate a model which fits the country, these faults are inevitable. We have enough confidence in the CIRC to solve these problems and there is a promising future for this industry.

Zhan Hao, AnJie Law Firm, Beijing