China’s insurance regulator tightens licence approvals to cool sector

CIRC tightens licence approval and cracks down on short-term policies to curb financing through insurance platforms

PUBLISHED : Friday, 17 February, 2017, 6:16pm
UPDATED : Friday, 17 February, 2017, 10:10pm

China’s insurance regulator is cooling down the sector by tightening the issuance of business licences and cracking down on short-term products players have relied on in the last few years to support their corporate raids and overseas shopping sprees.

After a shadow-financing-backed stock bull run collapsed and wiped out trillions of dollars of market value in just a few days during summer 2015, the regulators are watching closely for risks brought on by deep-pocketed insurance firms, as their engagement with the A-share market intensifies, triggering concerns for insurance fund safety and market stability.

The China Insurance Regulatory Commission (CIRC) has rejected four licence applications so far this year, already matching the total number of rejections in 2016.

As China’s premiums grow at the fastest pace since 2008, a licence for running an insurance business is becoming the hottest financial resource on China’s capital market.

More than 200 applications are in the queue for verification by the CIRC. In 2016, the regulator approved 20 applications, according to official data.

The cool-down of universal life products will be still the main theme of regulatory focus this year
Sally Yim, analyst, Moody’s

“The regulator is working from the ‘source of the system’, to strictly shut capital with ‘unpure motives’ out of the industry, by raising the threshold for licence approvals,” Xinhua news agency quoted an unnamed senior CIRC official explaining the latest policy direction on Tuesday.

Several top commission officials, including chairman Xiang Junbo, have been reiterating since late last year that insurance companies “should not be used as a bank machine or a financing platform”, after several insurance-backed moguls initiated aggressive takeovers that resulted in boardroom raids in China.

Evergrande Life, a life insurer taken over by heavily indebted property giant China Evergrande Group in late 2015, saw its premiums surge by 43 times in the year, and has maintained an impressive growth pace. The premiums were seen as the ammunition that supported the parent company’s raid on rival Vanke late last year.

Foresea Life, the insurance arm of Shenzhen-based conglomerate Baoneng Group, saw its assets swell to 155.36 billion yuan by the end of 2015, from 1.73 billion yuan in 2012 when it was established. They also formed the key capital source that Baoneng used to buy significant stakes in Vanke and several other China-listed companies last year.

Anbang Insurance Group, the most high-profile Chinese acquirer, has completed 13 cross-border merger and acquisition deals worth more than US$13 billion, since it bought the Waldorf Astoria New York hotel for US$1.95 billion in 2014.

Leon Qi, Daiwa Capital Markets’ head of greater China financials research, said China’s financial regulators are “increasingly aware of the related-party transaction issues between some of the ‘platform insurers’ and their major shareholders”, and are working to curb the financing activities through the insurance arms.

“Platform insurers” refer to a group of unlisted insurance companies set up by conglomerates in the past few years, like Evergrande Life and Foresea Life. Through aggressive issuance of short-term policies, mainly via bancassurance channels, these companies quickly raised funds from retail investors.

While carrying ambitious annual return promises to investors, these insurers have been avoiding the traditional insurance investment portfolios, usually dominated by bond investment, for heavier reliance on the riskier equity world with some even using short-term speculation strategies to chase quick returns.

Anbang Life Insurance had a 6.5 per cent stake in Minsheng Bank, and a 14.6 per cent holding in real estate firm Gemdale Corp.

Analysts with rating agency Moody’s said the shift into equity investment, particularly the increasing exposure to large single-name investees in the banking and property sectors, rather than a portfolio approach, is pressuring asset quality, capital adequacy, profitability and liquidity of the insurers.

Sally Yim, an insurance analyst at Moody’s, said the regulator had been alert to the risks, and was working to restrict both product issuance and investment direction of the insurers.

Since early December, the CIRC has suspended online sales by at least eight insurers, including Evergrande Life and Foresea Life, and also suspended several companies from issuing new short-term policies.

On Tuesday, the 21st Century Business Herald quoted a source close to the China Insurance Regulatory Commission as saying that the authority is studying a plan to install a threshold that could block some companies from issuing universal life insurance products.

The changes would restrict the total amount of short duration insurance products, and CIRC may institute a bottom line for the term of insurance policies.

“I think the cool-down of universal life products will be still the main theme of regulatory focus this year. It is indeed possible for the CIRC to set some minimum requirement for a company to sell universal life products, considering the high risk involved,” Yim said, adding universal life sales would inevitably come down this year.