Mainland insurers win nod to invest in financial derivatives for hedging

New rule helps widen investment channels for insurers to hedge against slump in stock market

PUBLISHED : Wednesday, 24 October, 2012, 12:00am
UPDATED : Wednesday, 24 October, 2012, 4:01am

Mainland insurers have been given permission to invest in financial derivatives, including stock index futures, which could help them hedge against a downturn in the stock market.

The China Insurance Regulatory Commission (CIRC) has widened investment channels for insurers, many of which are suffering from a bearish stock market.

The regulator said in a new rule governing insurers' investments that they could buy stock index futures only on the domestic market and only for hedging purposes.

The liberalisation comes as profits at mainland insurers are being squeezed by the poor performance of the A-share market.

Last week, China Life Insurance, the country's largest life insurer, warned it could post a loss in the third quarter of this year.

Mainland insurers can invest up to 20 per cent of their combined 6.6 trillion yuan (HK$8.18 trillion) of assets in stocks.

The benchmark stock index lost 14.3 per cent in 2010 before tumbling 21.7 per cent last year. It is now 3.9 per cent off last year's close as investors worry about worsening corporate earnings.

Stock index futures could help insurers hedge against risks if the market continues to go downhill.

Beijing launched the futures in April 2010, but insurers were barred from trading the equity-based derivative as the CIRC feared speculation in the product could result in huge losses of their massive insurance assets.

It is believed that CIRC chairman Xiang Junbo, a former Agricultural Bank of China chairman who took the helm of the insurance regulator late last year, wished to further liberalise the sector by allowing the firms to channel more assets into more types of investments.

On Monday, the commission also said insurers could invest in 45 countries, including the United States and Japan, in pursuit of better returns. Previously, they could invest in the mainland or Hong Kong only.

The insurers were also, for the first time, given permission to invest in wealth management products, trust products and mortgage-backed securities.

"It showed the regulator's intention to drastically widen insurers' investment options, helping them to chase profits," Z-Ben Advisors chief researcher Howhow Zhang said.