As part of the effort to liberalize insurance investment and to improve return of insurers' investment, the China Insurance Regulatory Commission (CIRC) promulgated the Implementation Rule of the Provisional Administration Measures on Overseas Insurance Investment with Insurance Fund on 12 October 2012 (the 'Implementation Rule').
The Implementation Rule is one of the eight new investment regulations that the CIRC has promulgated this year. The Implementation Rule provides a clear framework that enables qualified insurers to invest in permitted scopes of financial products and real estate projects in designated jurisdictions. Moreover, authorized insurers are no longer required to obtain prior approval for overseas investment and only need to file reports for such investment quarterly and annually (or on an ad hoc basis for urgent and important matters).
Scope of portfolio assets
Under the previous regulatory regime, Chinese insurers were allowed to invest in a variety of overseas portfolio assets. However, in the wake of the global financial crisis, the CIRC adjusted the scope in 2010 to include only publicly traded bonds, stocks and security funds.
According to the Implementation Rule, insurers are now authorized to invest in the following categories of assets:
- Money market instruments, including commercial notes, bank notes, large-denomination negotiable certificates of deposit (NCDS), reserve repurchase agreement, short-term government bonds, and overnight lending
- Fixed income instruments, including bank deposits, government bonds, government-backed bonds, international financial institution bonds, corporate bonds, convertible bonds
- Equity investment, including ordinary stock, preferred stock, global depository receipts (GDR), shares of non-listed enterprises
- Real estate, and
- Funds which include security funds, private equity and real estate investment trusts (REITs).
The Implementation Rule also provides prudential requirements for each category of the above portfolio assets. For example, the money market tools will have to be issued by an entity with a rating of A or above. The investment in equities of non-listed enterprises is limited to designated sectors including finance, senior care, medical care, energy, resources, auto service and modern agriculture. The direct real estate investment is restricted to "mature commercial and office properties in core cities of developed markets (25 developed countries are classified as developed markets in the Regulation)".
Qualifications & limits
In order for an insurer to be eligible for such a licence of overseas investment, the insurer shall maintain its solvency margin at 120% or above, which is lower than the minimum requirement of 150% in a draft released in July this year.
In addition to the conditions required for a general overseas investment licence, an insurer must also satisfy qualification requirements for a particular investment (if any). For example, according to relevant equity and real estate investment regulations, the net assets of the insurer to make related equity or real estate investments (in China or abroad) shall be no less than RMB 100 million.
The insurance investment in overseas markets is limited to 15% of the insurers' total assets. Separately, investments in 20 permitted developing countries are capped at 10% of the total assets. It is worth noting that every portfolio asset has a limit cap which applies to both domestic and overseas investment and is calculated on a combined basis. For example, currently insurers are able to invest up to 15% of their total assets in non-self-used real estate. If an insurer has spent an amount equal to 5% of its total assets in the domestic market, the funds available for its overseas real estate investment will be capped at 10% of its total assets.
Foreign assets management companies
Foreign assets management companies that are designated to manage the insurance investment should meet the following conditions:
- Over 5 years of international assets management experience and over 3 years of pension or insurance assets management experience
- No less than USD 30 million paid-in capital or net assets
- No less than USD 30 billion managed assets, of which non-related parties' assets account for over 50 percent or are worth at least USD 30 billion (with limited exceptions)
According to relevant regulations, the financial supervisory body of the country or region where such foreign assets management company comes from should have signed a supervision cooperation document with China's financial supervisory authorities. As currently only Hong Kong and Taiwan have similar arrangements with the CIRC, we believe that the cooperation document between non-insurance supervision bodies should be counted for the purpose of this requirement. By the end of 2011, the China Banking Regulatory Commission has entered into supervision memorandums or agreements with its equivalents of over 40 foreign countries (regions).
According to public information, top insurers such as China Life, Ping An and China Pacific all reported a reduction of investment yields for 2011 (down by 1.6%, 0.9%, and 1.6% on a yearly basis to 4.0%, 3.7% and 3.8% respectively). In the context of a weak domestic capital market and immature investment environment, these giant insurers are motivated to look elsewhere for investable assets. The Chinese insurance fund in hundreds of billions of RMB can bring a great potential of opportunities for the industries and countries listed in the Implementation Rule.
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