Watchdog warns operators that efforts to cushion crisis impact point to big challenges Mainland insurers will face tremendous challenges in the next two years and must broaden their portfolios to tide them over the deepening economic crisis, the industry regulator has warned. Wu Dingfu, the chairman of the China Insurance Regulatory Commission, said the meltdown might dampen demand for insurance policies and endanger domestic insurers linked to troubled overseas financial institutions. 'The global financial crisis has not hit the bottom. Its impact on the real economy is deepening. The widely open insurance sector faces a real challenge next year and probably the year after,' said Mr Wu at the CIRC's annual meeting on Saturday. Amid the worsening credit crunch, insurers should diversify their income sources by investing in infrastructure construction projects, acquiring stakes in companies and financial institutions, and expanding in rural areas, he said. 'We should closely monitor the risks of life insurance policy returns and the insolvency of loss-making insurers,' Mr Wu said. The official noted with concern the limited choices in overseas investments, higher prices quoted by international reinsurers, reduced willingness of domestic firms and households to buy or keep policies, and lower bond yields after the interest rate cuts since mid-September. 'We face a grave situation and must take measures to ensure a stable and healthy development of the sector next year,' Mr Wu said. In the first 11 months of this year, insurers' premiums exceeded 915 billion yuan (HK$1.04 billion), up 42 per cent year on year. Premium income growth was 17.6 percentage points faster than in the same period the previous year. But while premiums have grown rapidly, investment income has been shrinking. Insurers earned about 93 billion yuan from their investments from January to November, down more than 60 per cent year on year as the Shanghai Composite Index slumped 67 per cent this year. Of the investments, 86 per cent is in bank deposits and bonds, 11.7 per cent in stocks and mutual funds, and the rest unspecified. Mr Wu said insurers should expand infrastructure project spending and support the nation's key construction schemes by putting their money in the transport, communications and resources industries to widen their investment channels. RSA Insurance Group, Britain's second-largest non-life insurer, saw 'special opportunities' following Beijing's announcement of a 4 trillion yuan stimulus package last month, said Greater China chief executive Mike Jakeman. Railway, toll road and port projects in the package backed by the central government were expected to bring stable returns to investors, said Guo Tianyong, a professor with the Central Financial and Economic University in Beijing. He said insurers were also being encouraged to buy stakes in financial and medical institutions, launch pilot schemes to invest in company stakes 'at a proper time', and research on policies about investing in commercial property. However, striking a different note, Patrick O'Sullivan, a vice-chairman of the Switzerland-based Zurich Financial Services management board, said insurers should focus on their core business. 'I'm not a fan of conglomerates. I don't think equity participation in other fields is the strength of an insurance company,' Mr O'Sullivan said.