Latest regulatory trends on the use of insurance funds

Since the second half of 2015, insurance funds have become one of the few “hot spots” in the capital market. Insurance companies frequently buy the shares of listed companies, which not only leads to the resistance by the management of some of these listed companies, but also gives rise to the criticism of investors. The regulatory authorities take this problem seriously and make public comment about the issue. This article summarizes and explains the regulatory rules and trends on use of insurance funds in 2016 (especially universal insurance funds).

On 28 December 2016, the China Insurance Regulatory Commission (CIRC) issued on its official website the Notice on Further Strengthening the Supervision of the Universal Insurance and Promoting the Development of Universal Insurance in an Orderly Way, in which it decided to “suspend the internet insurance business of Huaxia Life Insurance and Soochow Life Insurance and prohibit them from product application within three months due to their failure to make proper rectification of universal insurance”. The notice also emphasizes that, “The CIRC will study and improve the regulatory system, fully implement the current policies to strengthen the monitoring and guidance on major companies, and impose tough supervisory measures on the offending companies to regulate the market order.” The notice reiterates the policy philosophy and regulatory cornerstone that the “insurance industry should focus on the insurance business”.

The notice not only responds and implements the principle that “the insurance companies should focus on the insurance business, and the CIRC should focus on the supervision”, but also confirms the application of the supervision means and trends about the insurance funds (especially the universal insurance funds) since 2016.

As early as March 2016, the CIRC issued the Circular on Matters Concerning the Standardization of Medium- and Short-term Life Insurance Products, and redefined the “scope of medium- and short-term products” – the actual duration of the product was increased from less than three years to less than five years – and annual premium income targets (within twice the invested capital or the net assets of the companies, whichever is larger), and requested insurance companies that do not meet the comprehensive solvency adequacy ratios to stop selling medium- and short-term life insurance products of which the scale exceeds the limit and the duration is less than one year. The CIRC introduced these measures for the purpose of enhancing the stability of the insurance fund, and preventing the short-term funds from damaging the protection function of the insurance.

Soon afterwards, from May to August 2016, the CIRC carried out special inspections on universal insurance of insurance companies that have large volumes of universal insurance business, and especially a large proportion of medium- and short-term products. Regulatory letters were issued to the companies that failed to comply with the applicable rules. The notice issued on 28 December 2016 reinforces the continuous follow-up monitoring on the special inspections.

In September 2016, the CIRC issued the Notice on Relevant Issues Concerning Strengthening the Actuarial Management of Personal Insurance Products, and the Notice on Relevant Issues Concerning Further Strengthening the Supervision on the Personal Insurance Products. These two notices further improve the regulatory measures on the medium- and short-term insurance products, and adjust the standard of the calculation method of insurance coverage, insurance amount and management of universal insurance etc., thus preventing the financial risk that may be caused by the insurance companies, or that arise from “turning the short-term insurance to the long-term one”.

According to media reports, the CIRC issued the Circular on Matters Relevant to Strengthening the Oversight of the Investment in Shares by Insurance Institutions and Persons Acting in Concert Therewith (Draft for Comment) in August 2016, which requires the disclosure of relevant information, regulates the source of funds and increases the approval and filing procedures etc., so mitigating and dissolving the financial risks that may arise from hostile takeovers utilizing the insurance as a leveraged finance platform.

However, the regulatory rules did not prevent or reduce the enthusiasm of insurance companies investing in capital market and listed companies. In the second half of 2016, insurance companies frequently bought the shares of listed companies, which eventually caused the China Securities Regulatory Commission (CSRC), CIRC and other regulators to make public comment and introduce the above-mentioned specific regulatory measures.

At present, the CIRC and other regulatory authorities mainly supervise the insurance funds, especially universal insurance, from the following two aspects: (1) in terms of the insurance products, on one hand the product form and pricing of the insurance products has been standardized to prevent the insurance companies from launching short-term products to increase premiums, thus triggering the impulse to make high-risk investment; on the other hand, the internet insurance business has been verified and rectified to control the scale of insurance products from the sales channel; and (2) in terms of the investment direction, the information disclosure has been strengthened and the source of funds strictly restricted in order to regulate and limit the malicious acquisitions that may have occured frequently in previous attempts, thus guiding insurance funds to make long-term financial investment and eventually ensuring that “the insurance industry should focus on the insurance business”.

The author also believes that the above-mentioned regulatory trend does not intend to restrict the insurance funds from entering into the capital market, or restrict the insurance companies from buying listed companies. On the contrary, the construction and perfection of the use of the insurance funds by regulatory rules can better regulate the use of insurance funds and curb the intention and impulse of short-term speculation, which not only reflects the essence of “insurance”, but also guides the insurance funds to play a role as stabilizer in capital markets.

At the time of writing, the CIRC had announced the revised Administrative Measures for Equities of Insurance Companies (Draft for Comment), which regulates the investment and shareholding of insurance companies from the aspects of shareholder access standards, shareholding ratio, source of funds, etc., to prevent the insurance companies from changing into mere investment tools at the root. The key principle and philosophy of such regulation is still that “the insurance industry should focus on the insurance business”.

Jason Xia is a partner at Wintell & Co