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China’s insurers will ultimately benefit from tighter regulations and rising interest rates

China Insurance Regulatory Commission has been issuing stern words and guidelines since early April, stressing risk control requirements for insurers of all sizes

PUBLISHED : Friday, 12 May, 2017, 12:10pm
UPDATED : Friday, 12 May, 2017, 10:17pm

Tightening regulatory scrutiny and increasing investment yield under China’s interest rate up-cycle will be positive for the insurance industry, analysts say, with some expecting it to drive a series of re-ratings in the sector.

The China Insurance Regulatory Commission (CIRC), the watchdog overseeing the insurance industry, has been issuing stern words and guidelines since early April, stressing risk control requirements for insurers of all sizes.

The latest move came on Tuesday when it announced it would start conducting risk assessment on insurance asset management and investments, to avoid potential systemic risk stemming from overly aggressive investment activity by insurers.

A week ago, the watchdog banned Anbang Life Insurance – one of the country’s largest life insurers and a subsidiary of arguably China’s most acquisitive conglomerates, the Anbang Group – from applying for new products for three months after it found one of its annuity products violated rules governing short-term insurance products.

This sustained industry scrutiny comes after the fall of CIRC’s former chairman Xiang Junbo. He was removed from the post mid-April for alleged serious violation of Communist Party discipline – a term usually used to refer to corruption.

He becomes the highest-ranking financial regulatory official to fall from grace under the latest round of anti-graft moves led by the leadership since late 2016.

Although his specific misconduct is yet to be revealed by the authority, his regulatory style of loosening controls on both new product development and insurance companies’ capital investments has been controversial and criticised for leading to more aggressive by insurers, which trigger higher risk.

Insurance should be a dull and boring business: take in premiums to pay claims. The assets under management need to be stable and grow steadily
Fraser Howie, co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise

Chinese insurance firms have been among the biggest players of both the domestic and overseas mergers and acquisitions markets in recent years, thanks to booming premium income and loosened restrictions.

That rising investment allocation, however, looks to have led to a mismatch of liabilities and assets, according to Fraser Howie, co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise”, which goes against the nature of the business.

“Those very deals are the ones which are failing, due to not enough funding or regulatory issues.

“Either way insurance companies have become a leading source of deal making in China. But that makes little sense to me – insurance should be a dull and boring business: take in premiums to pay claims. Their assets under management need to be stable and grow steadily,” he said.

Since Xiang’s fall from grace, the existing CIRC leadership is showing a “renewed commitment” in strictly enforcing the principal of risk control and updating rules issued since late 2016, adds Leon Qi, a senior analyst with Daiwa Capital Markets in Hong Kong, in a research note issued on Wednesday.

“Intensified regulatory scrutiny on the sales of life insurance products (especially short-term products and universal products) and investment behaviour has been carried out over the past few weeks.

“Such strong enforcement will help curb overly aggressive pricing competition in the sector,” Qi wrote.

His report, however, also highlighted new money yield – a benchmark tracking insurers’ investment returns – increased to 4.4 per cent in April, its highest yield level in the past two years, which has brought the sector’s new money yield back to April 2015’s level.

“We see yield growth as primarily attributable to the rise in the risk-free rates rather than an expansion in the credit risk premium, suggesting that the higher investment returns are a reflection of the generally higher-yield environment in the economy, rather than higher credit risks,” he wrote.

Chinese life insurers will continue to see a significant positive impact from rising interest rates in the first 1-2 years of the current interest rate up-cycle, and face macro headwinds at the latter stage
Leon Qi, a senior analyst with Daiwa Capital Markets in Hong Kong

“We argue that Chinese life insurers will continue to see a significant positive impact from rising interest rates in the first 1-2 years of the current interest rate up-cycle, and face macro headwinds at the latter stage.”

Qi also argues that the continued rise in new money yield and tighter regulations for the sector will continue to drive sector re-ratings, and picked New China Life as a top pick.

S&P Global Ratings credit analyst Eunice Tan, in a report issued on Tuesday, adds that he expects market discipline among insurers to improve and risk measures to tighten, with the rapid expansion of some insurance companies in 2014-2016 unlikely to be repeated.

“In our view, insurance companies will resume their focus on underwriting and cut back on speculative investments, while more prudently managing their regulatory solvency position.

“The need to strengthen risk management and compliance will hike up operational costs, especially for small- and mid-size insurance companies,” said Tan’s report.

“The hunt for risk management talent will also intensify...while more intensive supervision and rigorous policy implementation may become increasingly challenging for CIRC, given China’s rapidly changing insurance landscape.”

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