Quick Take: China Bans Some Credit-Risk Insurance Products

China is banning some credit insurance products to rein in risks within the financial sector.

Insurers are no longer allowed to sell policies that protect holders against default risks of some financial products, such as asset securitization, creditor rights transfers, private placement bonds, as well as publicly offered bonds with a credit rating lower than AA+, the China Insurance Regulatory Commission (CIRC) said Thursday.

The CIRC is also tightening its oversight on insurance policies for financial products sold online. The regulator said online lending platforms must publicize relevant credit insurance products to minimize misleading advertising. To protect creditors, these platforms often require issuers to obtain insurance policies before they can sell products.

Insurers are also required to improve internal risk-management measures and submit a report to the regulator before April every year, detailing its operations and potential risks, the CIRC added.

Last year, two subsidiaries of Guangdong-based electronics manufacturer Cosun Group defaulted on bonds sold through an online wealth management platform backed by Alibaba Group Holding Ltd. Zheshang Property and Casualty Insurance Co. had provided credit risk insurance for the bond issuance, but initially refused to compensate investors because of suspected fraud from the issuer. Following further investigation, the insurer began to compensate bond holders from Dec. 28, and is expected to pay out nearly 1.15 billion yuan ($170 million).

Contact reporter Liu Xiao (liuxiao@caixin.com)