China's insurers look forward to easing of restrictions on investment of funds

Heavy regulation still an obstacle despite gradual relaxation of investment rules

PUBLISHED : Monday, 03 February, 2014, 10:52am
UPDATED : Tuesday, 04 February, 2014, 4:46am

Despite Beijing's gradual relaxation of investment caps on various assets for insurance funds, regulatory intervention remains a hindrance to the industry, analysts said.

Nonetheless, they expect regulation to become less heavy-handed and the authorities to grant more liberty for insurers on where to invest the funds they manage.

Further relaxation of investment ratios by itself would not be a significant step, said Barry Man, an insurance sector leader for China at Deloitte Touche Tohmatsu. "Insurers in other markets can invest without limitations in various assets according to their assessments of capital and solvency conditions, but mainland insurers are barred from investing in particular areas," he said.

For instance, mainland insurers were allowed to invest in real estate but barred from residential projects because of the government's concern about speculation in property prices, he said. "This kind of restriction has limited insurers in seeking investment opportunities that offer good returns."

With market forces playing an increasing role in the mainland's financial markets, the China Insurance Regulatory Commission has gradually eased controls since 2012, when it allowed insurers to invest more funds in the capital markets.

The regulator said last month that it was seeking opinions on insurance fund management and considering revising rules on investment ratios.

The move hinted at a further loosening of the caps on insurance funds' investment in various assets, said Wang Xujin, a professor with the Beijing Technology and Business University.

"For instance, the current 25 per cent cap on the proportion of equity investment to insurers' total assets could be raised to 30 per cent," Wang said.

Mainland insurers are also prohibited from investing more than 20 per cent of their assets in real estate and infrastructure, and a 10 per cent cap is set on private equity and funds.

Considering the investment risks and mainland insurers' prudent investment strategies, they were unlikely to pour a lot of money into the capital or real estate markets even if they were allowed to, Man said.

Shrugging off the relaxation of investment ratios, Rita Xiao, a consultant at pension and investment adviser Stirling Finance, said the strict requirements for regulatory approval remained an obstacle. "Although the caps in investment ratios have been easing, insurers still need to seek the CIRC's approval case by case, while there are no clear rules [on what can be invested in]."

However, as the industry became more market-oriented under the country's financial reforms, Xiao said the regulator would likely unveil more details on areas that insurers were allowed to invest in.

Man also said fine-tuning existing rules to provide more details would give insurers more autonomy over where to invest.

"The investment restrictions due to administrative orders will gradually decrease, so as to allow insurers to invest their funds based on risk assessment and market forces," he said.

The increasing flexibility would encourage insurers to seek opportunities in private equity and infrastructure projects that offer reasonable returns, Man said. "Long-term investment in infrastructure assets can fit insurers' strategies in use of funds, and they can invest in more diversified assets," he said.