Caixin
Dec 30, 2016 07:27 PM
FINANCE

Regulators Trying to Steer Insurance Sector Back to Basics

(Beijing) — Encouraging the nation’s insurance companies to focus on the business they know best — and not high-stakes investing — is a key objective behind proposed new government rules aimed at better controlling the industry.

The rules, drafted by the China Insurance Regulatory Commission (CIRC) and announced Thursday, would lower the ceiling on a majority shareholder’s stake in an insurance company to one-third of the insurer’s total equity shares. The current limit is 51%.

The rules would also raise the bar for insurance company investors and seek to address major problems recently identified by CIRC investigators during an ongoing crackdown on insurers selling high-yield, short-term policies designed for moneymaking only. The regulator said these policies do not match the insurance industry mandate and pose significant risks that even big insurers cannot afford to take.

The probe recently prompted CIRC to publicly censure Foresea Life Insurance, Evergrande Life Insurance and several other insurers that rattled the investment community in 2016 by using revenues from customer policy premiums to finance aggressive acquisitions of listed company shares.

A recent Caixin investigation found that existing regulatory limits on insurer shareholding did not stop some companies, such as Baoneng Group, which owns Foresea, from exercising complete control over their insurance arm because they are closely related to and have great influence over all other major shareholders of the insurer.

The draft regulations are intended to resolve problems surrounding so-called concentrated shareholding, said Li Xiaolin, chief analyst at the Beijing Insurance Research Institute, a CIRC-affiliated think tank.

“Reducing the equity-holding limit to one-third clearly shows the regulator’s intention to bring checks and balances into the shareholding structure,” Li said.

“This arrangement will demonstrate its usefulness when shareholders have different opinions,” he said. “It will help prevent any investor from seeking (personal) benefits and not what benefits the company and the industry.”

All new investing in insurance firms would be covered by the proposed regulations, for which public comments will be solicited through January. It's unclear, however, whether the rules would affect existing insurance-company shareholding structures.

A source close to authors of the draft said policymakers have not ruled out the possibility of offering existing insurance company shareholders government “window guidance,” with the goal of compelling them privately to comply with the new rules.

Under the proposed rules, only companies with at least 3 billion yuan ($431,000) in net assets could hold more than 20% of an insurer’s total shares, and have the power to exercise decision-making influence over the firm.

Rule makers call 20%-plus investors “controlling stakeholders.” They would be allowed to control only one insurance firm in one area of the market.

A so-called “strategic investor” — meaning a company that holds 10% to 20% of total equity — could own stakes two insurance firms. Such investors could invest in other insurers, too, as long as each stake does not exceed 10%.

Current regulations do not ban a company from holding a controlling stake in more than one insurance firm.

The proposed requirements reflect the regulator’s intention to guide insurance company investors toward focusing on insurance, rather than using an insurance company as a tool to raise funds, Li said. For insurance company investors dedicated to insurance itself, he said, “controlling one firm should be enough.”

The proposed regulations also specify which funds cannot be used by companies to buy equity in insurance firms. The goal is to close loopholes that now allow financing for such investing through bank loans disguised as investments from other financial institutions, such as trust firms.

Regulators have also proposed introducing a negative list of companies that would be barred from investing in insurance firms. Excluded as viable investors would be firms that entrusted others to hold insurance company shares on their behalf.

The draft also calls for giving the CIRC the authority to delay reviews of materials submitted by companies applying for the right to invest in an insurance firm. Such delays would help regulators tremendously by giving them more time to make informed decisions, said the source close to the CIRC. Regulators currently are given only 20 workdays to reply to a proposed investor’s application.

Contact reporter Wang Yuqian (yuqianwang@caixin.com)

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