09 August 2012

Risk.net: Regulatory change will enable China insurers to reduce their asset-liability mismatch

On July 16, the CIRC announced reforms to allow Chinese insurers to invest in hybrid and convertible bonds, private equity, infrastructure-related debt and real estate. The CIRC also raised the ceiling on insurers' investment in unsecured bonds (bonds backed only by the creditworthiness of the issuer and not by any pledged assets) to 50 per cent of total assets from the 20 per cent previously allowed.

The average duration of Chinese life insurers' liabilities is difficult to determine but analysts say tenors of life policies can range from five up to 20 years. In contrast, the asset portfolio held by insurers is typically short dated, with investments in new assets often held for tenors of less than five years.

According to Joyce Huang, director of financial institutions at Fitch Ratings in Hong Kong, the increased flexibility will give insurers the ability to invest in bonds with a wider range of tenors, reducing the risk of asset-liability mismatches.

"It is a positive step; however it will not solve the problem of the mismatch between assets and liabilities as there is not enough long-term debt in the Chinese market, or a deep derivative market for insurers to use. Chinese regulators including the People's Bank of China, China Securities Regulatory Commission and China Banking Regulatory Commission will need to encourage more issuance of longer-dated assets and the development of derivative markets to address this, in addition to allowing the use of more derivative instruments to hedge this risk", says Leslie Mao, director of investment services at Towers Watson in Shanghai.

"In general, regulators would prefer products that are simple and understandable. We have not seen derivatives being widely used in the insurance market in China. The market will dictate the development of these products and whether someone is willing to take the risk to buy such a product and someone is able to supply the product", Shu-Yen Liu, PwC actuarial practice leader for Asia in Beijing says.

In addition, the regulator has also permitted the outsourcing of insurers' investments to other asset and fund management companies. Previously, Chinese insurance companies were only allowed to invest through nine asset management companies, set up by insurance companies to manage their own and other insurers' funds.

To qualify to take over management of insurers' assets, asset managers must have at least 10 billion yuan (US$1.57 billion) in outstanding assets under management, under the new rules.

This move should also provide insurers with an incentive to improve their risk management practices in light of the greater complexity of the assets they are now allowed to own, says Huang.

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