Author: Jason Xia
Since the second half of 2015, insurance funds have become one of the few "hot spots" in the capital market. Insurance companies frequently buy the shares of listed companies, which not only lead to the resistance by the management of some of such listed companies, but also give rise to the criticism of investors. The regulatory authorities take this problem seriously and make public comment about this issue. This paper summarizes and sorts out the regulatory rules and trends of use of insurance funds this year (especially the universal insurance funds).
On 28 December 2016, China Insurance Regulatory Commission(CIRC) issued on its official website the Notice on Further Strengthening the Supervision of the Universal Insurance and Promoting the Development of Universal Insurance in an Orderly Way,in which CIRC decided to “suspend the internet insurance business of Huaxia Life Insurance and Soochow Life Insurance and prohibit them from product application within three months due to their failure to make proper rectification of its universal insurance”. The Notice also emphasizes that "CIRC will study and improve the regulatory system, fully implement the current policies to strengthen the monitoring and guidance on major companies, impose tough supervisory measures on the offending companies to regulate the market order. The Notice "reiterates" the policy philosophy and regulatory cornerstone that “insurance industry should focus on the insurance business”.
The Notice not only responds and implements the principle that “the insurance companies should focus on the insurance business, and CIRC should focus on the supervision”, and it also confirms the application of the supervision means and trends about the insurance funds(especially the universal insurance funds) since 2016.
As early as March of this year, the CIRC issued the Circular on Matters Concerning the Standardization of Medium- and Short-term Life Insurance Products, and redefined the "scope of medium- and short-term products"( the actual duration of the product was increased from less than three year to less than five years) and annual premium income targets (within twice of the invested capital or the net assets of the companies, whichever is larger) etc., and requested insurance companies which do not meet the comprehensive solvency adequacy ratios to stop selling the medium- and short-term life insurance products of which the scale exceeds the limit and the duration is less than one year. The CIRC introduced above measures for the purpose of enhancing the stability of the insurance fund, and preventing the short-term funds from damagingthe protection function of the insurance.
Soon afterwards, from May to August 2016, the CIRC carried out special inspection on universal insurance of insurance companies who have large volume of universal insurance business and especially a large proportion of medium- and short-term products.Regulatory letterswere issued to the companies who failed to comply with the applicable rules. And the Notice issued on 28 December reinforces the continuous follow-up monitoring on this special inspection.
In September 2016, the CIRC issued the Notice on Relevant Issues Concerning Strengthening the Actuarial Management of Personal Insurance Products, and the Notice on Relevant Issues Concerning Further Strengthening the Supervision on the Personal Insurance Products.These two notices further improve the regulatory measures on the medium- and short-term insurance products, and adjust the standard of the calculation method of insurance coverage, insurance amount and management of universal insurance etc., thus preventing the financial risk that may be caused by the insurance companies or arise from "turning the short-term insurance to the long-term one".
According to the media report, the CIRC issued the Circular on Matters Relevant to Strengthening the Oversight of the Investment in Shares by Insurance Institutions and Persons Acting in Concert Therewith (Draft for Comment)in August 2016, and requiresto disclose relevant information, regulates the source of funds and increases the approval and filing procedures etc., thus mitigating and dissolving the financial risks that may arise from the hostile takeover utilizing the insurance as leveraged finance platform.
However, the regulatory rules did not prevent or reduce the enthusiasm of insurance companies to invest in capital market and listed companies. In the second half of 2016, insurance companies frequently bought the shares of listed companies, which eventually cause China Securities Regulatory Commission(CSRC), CIRC and other regulators to make public comment and introduce the above-mentioned specific regulatory measures.
At present, the CIRC and other regulatory authorities mainly supervise the insurance funds especially the universal insurance from the following two aspects: (1) in terms of the insurance products, on one hand, the product form, pricing of the insurance products has been standardized to prevent the insurance companies from launching short-term products to increase premiums, thus triggering the impulse of high-risk investment; on the other hand, the internet insurance business has been verified and rectified to control the scale of insurance products from the sales channel. (2) In terms of the investment direction, the information disclosure has been strengthened and the source of funds has been strictly restricted, in order to regulate and limit the malicious acquisition that may exist in the previous frequent operation of placards, thus guiding insurance funds to make long-term financial investment, and eventually ensuring that “insurance industry should focus on the insurance business”.
Of course, we also believe that the aforesaid regulatory trend doesn't intend to restrict the insurance funds from entering into the capital market or restrict the insurance companies from buying listed companies. On the contrary, the construction and perfection of the use of the insurance funds by regulatory rules can better regulate the use of insurance funds and curb the intention and impulse of short-term speculation, which not only reflect the essence of “insurance”, but also guide the insurance funds to play its role as the stabilizer in the capital market.
At the time of this paper, the CIRC announced the revised Administrative Measures for Equities of Insurance Companies (Draft for Comment), which regulates and supervises the investment and shareholding of insurance companies from the aspects of shareholders access standards, shareholding ratio, source of funds etc., for the purpose of preventing the insurance companies from changing into mere investment tools at the root. The key principle and philosophy of such regulation is still that “insurance industry should focus on the insurance business”.