CIRC to Probe Shandong Approval of New Foresea Offices

(Beijing) – China’s insurance regulator will probe whether its Shandong branch granted new business approval to an unqualified insurer, underlining the agency’s efforts to crack down risky investments by some insurers.

“Any violation of regulations will be resolutely corrected and punished accordingly,” the China Insurance Regulatory Commission said in a statement published on its website late Tuesday.

The statement came shortly after Caixin reported that the Shandong bureau of the CIRC gave a green light to Foresea Life Insurance, controlled by investment conglomerate Baoneng Group, to set up two new branches in the province in early January, according to a statement published by the Shandong CIRC.

But the Shandong bureau’s decision may violate a CIRC regulation issued Dec. 30. That ruling barred any insurance company from setting up new branches if its premiums from traditional indemnity policies accounted for less than 30% of total quarterly premiums.

The regulation is designed to curb insurers from selling short-term, high-yield policies to fund speculative stock investments. Known as universal life insurance, these policies, with maturities of one or two years or even less, are mainly sold to investors seeking higher returns rather than long-term protection. But such policies could also expose retail investors to losses if insurers use the premiums to purchase long-term, illiquid assets or make other risky investments.

Foresea Life has been among the main targets of the CIRC’s crackdown on universal life insurance as the company used premium revenue to finance a hostile takeover by its parent company of China Vanke, the country’s biggest property developer, market documents showed.

In December, the CIRC suspended Foresea Life from selling these universal insurance policies. Last week, the commission banned Yao Zhenhua, chairman of Foresea Life, from the insurance industry for 10 years because of alleged violations of insurance laws.

Data from the CIRC showed that for the first 11 months of 2016, Foresea Life received 77.6 billion yuan ($11.3 billion) from premiums on universal life insurance policies, accounting for almost 80% of gross premium income. The company’s conventional indemnity policies accounted for about 22% of total premiums in the final quarter of 2016, missing the regulatory requirement of 30% for new business approval.

A source from the CIRC told Caixin that the regulation would be strictly implemented based on assessments of insurers’ quarterly performance starting in the fourth quarter of 2016, and “no exception would be made.”

Several other insurers that may have failed to meet the CIRC’s requirements have also received new business approvals from local CIRC branches, including Hua Insurance’s new branches in Anhui, Sichuan and Henan, as well as Evergrande Life Insurance’s branch in Hubei.

But the CIRC source said these companies won approval to incorporate new branches before the December regulation was issued, and the latest approvals are follow-up steps for operational permits.

Chinese insurance companies have experienced an investment frenzy as regulators eased restrictions on the investment of insurance funds over the past few years. The CIRC since last year has tightened scrutiny of the industry in hopes of forcing insurance companies return to their role as long-term value investors amid concerns over mounting financial risks and leverage.

Last week, Xiang Junbo, the CIRC’s chairman, vowed to impose “stringent” rules and “severely” punish short-term speculation by insurers.

Contact reporter Han Wei (weihan@caixin.com)