China insurance regulator allows re/insurers to operate as investment managers

There’s been an interesting development in the Chinese insurance and reinsurance market which could open the doors to third-party capital management, issuance of securities including insurance-linked securities (ILS) or catastrophe bonds, hedge fund type business models and re/insurers operating as investment managers. The China Insurance Regulatory Commission (CIRC) has announced that from February 2013 insurers and reinsurers can operate asset management businesses.

The announcement stipulates that only insurers, reinsurers, insurance holding companies and insurance asset management firms with strong risk-bearing capabilities will be allowed to operate as investment managers. The regulations state that companies can offer investment products with total initial amounts of over CNY 30m ($4.77m) to a single investor, or consolidated investment products to groups of up to 200 with total initial amounts of over CNY 1m (approx $160,400).

The investment products stipulated are wide-ranging and include, bank deposits, stocks, bonds, equity investment funds, Central Bank bills, non-financial corporate debt financing instruments, asset-backed securities, infrastructure investment projects, real-estate investment projects and other asset types that the regulator formally approves after consideration.

Given the sums of capital within the Chinese capital market this new regulation could encourage that capital to come into the insurance and reinsurance market much more readily than it does today.

The CIRC said; “The move is favourable to enrich the investment tools of insurance capital, motivating the connection and interaction between the insurance market and the capital market.”

Similarly to U.S. regulations investment offerings can be marketed by the offering firm or a third-party company, but cannot be publicly advertised, steps must be taken to advertise them to likely investors only.

A number of insurance asset management firms are already working towards initial offerings of shares, bonds and funds, including, Beijing-based PICC Asset Management Co, Taikang Asset Management Co and Shanghai-based Taiping Asset Management Co.

This new stance on insurance related investment offerings could result in nothing more than better investment income for insurers and reinsurers in China. Or it could encourage capital into the Chinese insurance and reinsurance market which seeks to operate in a collateralized or fund structure while underwriting insurance and reinsurance business. The fact that insurers and reinsurers can now issue various types of securities would likely include issuance of catastrophe bonds and ILS notes to investors. The new rules may even allow hedge funds to operate insurers or reinsurers in the region.

It’s a change to the regulations, and potentially an opening up of the Chinese re/insurance market, which could have wide-ranging ramifications for the sector. However it will likely take time before we see anything as groundbreaking as a third-party investor backed Chinese domiciled collateralized reinsurance fund established.