CIRC seeks more option cover for insurers
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E-mail Shanghai Daily, August 17, 2012
China's insurance companies and the industry regulator are undergoing a turning point this year.
From cracking down on illegal insurers to limiting executive salaries and expanding allowable investment options, the China Insurance Regulatory Commission has tried hard to regulate the industry and give it a boost amid slower demand and weaker investment returns.
Chinese insurance premium income from life policies rose a mere 0.23 percent to 516.5 billion yuan (US$81.3) in the first half, while premium income from property insurance increased 13.5 percent to 267 billion yuan, the CIRC said.
Of the listed insurers, China Pacific Insurance last month warned investors that profit in the first half may shrink 55 percent from a year earlier, and China Life Insurance Co said there will be a "notable decrease" in its first-half profit.
China Life blamed the decline on low investment returns and shrinking asset values, due to weak capital markets. That's the same reason given for insurers' poor earnings the past two years.
More options
Analysts are upbeat that wider investment channels for insurers may help them recover.
Since June, the CIRC has issued four measures that include broader financial and real estate investment options for insurers to compensate losses from domestic equities, which have been among the world's worst performers since 2009.
The four measures were part of a first round of 13 new investment rules under study by the regulator to increase insurers' income.
The changes are in line with China's broader financial reforms, which aim to reduce the economy's reliance on banks and the stock market, and make the financial sector more market-oriented.
"In terms of investment, 'relaxation' has become a key word for the regulator," said Peng Yulong, an analyst with Guotai Junan Securities. "This marks the start of a new phase, when insurers will be able to engage in previously off-limits investment options."
Insurers are now allowed to buy exchange-traded, unsecured corporate bonds, the debt of non-financial companies and the unsecured convertible debt issued by commercial banks.
Late July, the CIRC doubled the quota for insurers to invest in private equities, from 5 percent to 10 percent of a company's total investment. The insurance companies are also no longer limited to investment in specific industries such as health care and automobiles, allowing money to be put into other sectors such as energy, resources, agriculture and even venture capital funds.
More insurers will be able to invest in private equity and real estate as the capital requirements for those options are lowered.
Peng estimated that new higher-yield investment channels would increase overall returns - which stood at 3.6 percent last year - by between 0.7 and 1.6 percentage points.
To help smaller insurers that generally lack investment savvy, the insurance regulator is allowing funds and brokerages to manage investments on their behalf.
Helping hand
"More investment fields will be opened up, and policy support for the insurance industry will continue," Peng said.
The regulator is also soliciting public feedback on proposals to allow Chinese insurers to participate in margin trading, short selling, onshore and offshore financial derivatives, asset-backed securities, bank wealth management products and trusts.
Although the proposals lack a timetable and guidelines for implementation, equity investors are already betting they will boost the fortunes of insurers. The share prices of insurers have outperformed the market this year, with gains ranging between 1 percent to more than 20 percent since January 4.
For insurers themselves, the new measures could help, but it will take time to convert new rules into real profits.
"Not much has changed so far," said an insurer's asset management researcher who declined to be identified. "We've already been trading a variety of bonds for some time, and a separate company is taking care of our private equity business. Other options may still take several months to brew."
He said it will be necessary for the industry to acquire expertise in short selling and other financial derivatives.
"But as an asset manager for an insurer, safety is always a priority," he added. "High returns are not our major pursuit."
A wider range of investment options is not a panacea for an industry that needs to improve the quality and array of products it sells and raise public awareness about the benefits of insurance.
Analysts are expecting the industry regulator to step in and give companies a hand on that front, too.
"The life insurance business had a relatively strong rebound in June, but that may not have continued in July," cautioned Tang Shengbo, an analyst with China International Capital Corporation. "In the second half, income from life insurance is not likely to be exciting, and regulatory changes will be key to the performance of insurers in the future."
He said he expects a trial program for tax-deferred pension products to be launched this year, and the regulator may also encourage insurers to participate more actively in the health care sector.
"Financial reforms and changes in the social security system are the best chances for insurers," said Liu Jun, an analyst with Changjiang Securities. "Insurers need new markets and new investment opportunities."
It seems that this year may become an even more interesting watershed for the industry.
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