Following the implementation of the Interim Measures Governing the Use of Insurance Funds in 2010, major insurance companies have taken action, intending to scramble for a share in the market by investing insurance funds in the immovable property sector, in areas such as infrastructure.
However, these investments have not proceeded as smoothly as expected since the measures were introduced two years ago. To address the issues that arose during implementation of the measures, the China Insurance Regulatory Commission (CIRC) published the Notice on Matters Related to the Regulation of the Use of Insurance Funds on 7 May 2012.
The notice identifies and describes prominent issues encountered by insurers when they invest in equity, infrastructure and other immovable property businesses. It also expands the scope of investment for insurance funds. The notice was timely for insurance companies who were still feeling their way with these investments.
The central government is launching a programme to clean up local funding vehicles, and the notice is intended to provide a new channel for financing infrastructure construction in different localities.
Chapter 5 of the measures is dedicated to describing a regulatory mechanism that the CIRC must abide by when conducting compliance and a procedural examination of the application of insurance funds. However, a lot of approval principles are rather vague, and this makes it difficult for insurance companies to master and apply these principles.
One of the problems is with the approval of products that are similar to insurance asset management products. The so-called insurance asset management products currently comprise infrastructure bond investment plans and immovable property investment plans. Paragraph 2 under Article 54 of the measures provides that insurance asset management products launched, or initiated and established, by insurance asset management institutions are subject to initial reporting and approval, and that similar products need to be reported afterwards. However, the measures do not specify what these similar products are, and this has resulted in operational problems.
But the notice clarifies that similar products are products with core components – such as investment target, structure of deal, debt service source, credit enhancement and liquidity facility – that are basically identical to those of insurance asset management products, and that are re-launched by insurance asset management institutions after the products initiated and established by such institutions are filed for the record. For similar products that have been initially approved, insurance asset management institutions are not required to submit them to the CIRC for examination again. They only need to make a report afterwards.
The CIRC will continue to revamp and establish various mechanisms for product launch, registration, custody, transaction flows, information disclosure and risk control corresponding to insurance asset management products and in line with needs for market development.
What to examine
Although the measures have been in force for two years, the CIRC, insurance companies and insurance asset management institutions are still not clear about what particular items of an insurance fund investment project are subject to examination. In practice, regulatory authorities impose different approval criteria on different projects at different times and this has fuelled criticism from insurance companies and insurance asset management institutions.
The notice clearly defines for the first time what particular items the regulatory authorities should examine. For the initial reporting of a major equity investment or an insurance asset management product, the CIRC should conduct a compliance and procedural examination.
A compliance examination focuses on whether the matter concerned is in compliance with laws, regulations, industrial policies and regulatory ratio, and whether there is anything prohibited under the regulatory requirements. A procedural examination places emphasis on whether the matter concerned has gone through research, trial, risk assessment and investment decision making procedures.
A procedural examination reflects that the CIRC is acting with caution in the deregulation of insurance funds during the early stages. In fact, the items subject to examination are matters that should be handled by a company’s own risk control system, so this suggests that the government once again is acting as a corporate nanny.
The measures provide that insurance funds can invest in unsecured bonds issued in open tendering. The notice has broadened the scope, saying insurance funds may invest in listed unsecured corporate bonds, non-financial corporate debt financing instruments and unsecured convertible corporate bonds issued by commercial banks, all of which are issued to the public and documented under a book-keeping system. This initiative should significantly enhance the yield of insurance assets.
There is a small proportion of corporate bonds issued by public tendering in China. Insurance assets have a low rate of return because they are to a large extent directly related to the low returns and little types of bond assets available for investment. International experience suggests that insurance assets and the bond market have a positive interaction. US life insurers hold 17% of corporate bonds across the nation. The general accounts of US life insurers held US$1.61 trillion worth of corporate bonds in 2010, accounting for 46.6% of their invested assets.
The notice has expanded the scope of investment to cover products documented under a book-keeping system. This means more unsecured bonds will be included, enabling insurance companies to invest in bonds carrying a higher level of investment risk and return.
Many other problems have been encountered during the process of investment by insurance funds. The notice only solves the problems at the tip of the iceberg. It is understood that the CIRC is stepping up its research and preparing to introduce a series of documents and take measures to further improve the monitoring of investment by insurance funds, such as the conduct of dynamic supervision of insurance companies by category, further adjustment of the investment ratio of insurance funds available for use, and gradual detailing of business rules.
Nevertheless, sharp-eyed insurers such as Ping An Insurance, Anbang Insurance and China Reinsurance have already made their moves, hoping to seize the high ground in the new round of opportunities for infrastructure and other immovable property investments.
Wang Jihong is the managing partner at V&T Law Firm, and Gao Lei is a lawyer at the firm
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