January 01, 2011

Tentative Measures for Administration of the Use of Insurance Capital

Issuing Body: China Insurance Regulatory Commission
Issuing Date: July 30, 2010
Effective Date: August 31, 2010

As of October 2010, insurance companies control nearly RMB5 trillion of assets in China, according to the China Insurance Regulatory Commission (CIRC), and with the insurance industry growing the CIRC has moved to increase its regulatory oversight. In July 2010, the agency issued the Tentative Measures for Administration of the Use of Insurance Capital (Insurance Capital Rules), which govern how insurance groups (holding companies) and insurance companies can invest insurance capital. The Insurance Capital Rules come more than three years after the CIRC first issued a version in draft form. They are especially important in the wake of amendments to the PRC Insurance Law, which took effect on October 1, 2009.

Key provisions of the Insurance Capital Rules are summarized below.

Definition of Insurance Capital

"Insurance Capital" refers to the registered capital, reserve funds, undistributed profits, reserves, and other capital of insurance groups (holding companies) and insurance companies, held either in Renminbi or foreign currencies.

Permitted Use of Insurance Capital

Under the Insurance Capital Rules, investments of insurance capital shall be restricted to the following forms:

  • Bank deposits;
  • Trading in negotiable securities such as bonds, stocks, and shares of securities investment funds;
  • Investment in immovable assets; and
  • Other forms as specified by the State Council.

Prohibited Activities

Under the Insurance Capital Rules, an insurance group (holding company) or insurance company shall not do the following activities when using insurance capital:

  • Place deposits in non-bank financial institutions;
  • Purchase shares that a stock exchange subjects to "special treatment" or "special treatment with a warning that there is a risk of termination of listing";
  • Invest in the equity of enterprises or immovable assets that do not have stable cash flow return prospects or asset appreciation value, or that involve projects which conflict with state industrial policy (for example, projects that generate excess pollution);
  • Directly engage in real estate development or construction;
  • Engage in venture capital investment;
  • Use investment assets derived from the application of insurance capital to provide security for, or extend loans to, third parties, with the exception of loans made against a pledge of a personal insurance policy; or
  • Perform other investment acts as prohibited by the CIRC.

Ratio Requirements for the Use of Insurance Capital

The Insurance Capital Rules contain ratio requirements for the application of Insurance Capital. The following are the requirements that are of key interest to insurance groups (holding companies) and insurance companies as they invest insurance capital:

  • The total book value of investments in stocks and stock funds should not exceed 20 percent of the insurance group or company's total assets as of the end of the preceding quarter.
  • The book value of investments in the equity of unlisted enterprises should not exceed 5 percent of the insurance group or company's total assets as of the end of the preceding quarter; the book value of investments in unlisted enterprise equity-related financial products should not exceed 4 percent of the insurance group or company's total assets as of the end of the preceding quarter; and the total value of the foregoing two items should not together exceed 5 percent of the insurance group or company's total assets as of the end of the preceding quarter.
  • The book value of investments in immovable assets should not exceed 10 percent of the insurance group or insurance company's total assets as of the end of the preceding quarter; the book value of investments in immovable asset-related financial products should not exceed 3 percent; and the total of the foregoing two items should not exceed 10 percent of the insurance group (holding company) or insurance company's total assets as of the end of the preceding quarter.

Conclusion

With China's insurance industry growing and maturing, the Chinese government has taken several steps in the past few years to increase regulation and—it's hoped—improve oversight. In addition to amendments to the Insurance Law and these Insurance Capital Rules, the CIRC has, for example, issued the Tentative Measures for Investment in Immovable Property with Insurance Funds and the Tentative Measures for Equity Investment with Insurance Funds, both of which became effective when released in September 2010 and complement the Insurance Capital Rules.

Clearly one overarching purpose of the Insurance Capital Rules is to assure that insurance groups and companies invest wisely—with the effect of preserving their ability to pay policy holders if and when they incur coverable losses. Although these rules and regulations are quite new, they are likely to play an important role in shaping the legal framework of China's insurance industry, particularly as it relates to insurance groups' and companies' use of insurance capital.

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