Regulator Weighs Tightening Rules on Insurers’ Investments in Riskier Assets

China’s insurance regulator plans to tighten controls on insurance companies’ investments in riskier assets as part of an ongoing effort to step up oversight of the risk-plagued industry.

The China Insurance Regulatory Commission (CIRC) is soliciting opinions on a new draft guideline covering internal controls over the use of insurance funds. The new guideline mainly targets investments in equities, real estate and some financial products.

The new rules, expected to take effect by the end of this year, would establish an anti-corruption system aimed at curbing the transfer of illegitimate interests. The CIRC would also set standards and procedures for the affiliated transactions of insurance companies.

The new requirements could pose compliance challenges to insurers. Most insurance companies should be able to meet the guidelines after minor adjustments in their risk management. Insurers whose internal controls were already considered poor by the CIRC would need to make big improvements to meet the requirements, according to people close to the CIRC.

In December 2015, the CIRC issued a document covering insurance funds’ investments in bank loans, fixed-income products, stocks and mutual funds.

Caixin learned that the CIRC is also considering further guidelines covering risk controls for insurance funds’ investments in debt and stakes in infrastructure projects.

Alternative investments, which include private equities, debt, stakes in infrastructure projects, real estate and trusts, as well as wealth management products issued by commercial banks, are increasingly popular among Chinese insurers, which are allocating more assets to riskier investments in pursuit of better returns.

As of the end of August, the Chinese insurance industry allocated nearly 40% of funds to alternative investments, up from 9.41% at the end of 2012, according to CIRC data.

While safe-haven assets such as bank deposits and fixed-income instruments remain the biggest asset class in insurers’ portfolios, they accounted for just 48.4% of investments at the end of August, down from almost 80% in 2012, CIRC data show.

The new guidelines don’t specify in which assets or how much insurers are allowed to invest in riskier assets. The rules emphasize internal-control management of insurance companies while making such investments.

The CIRC requires an annual third-party audit of insurance companies’ internal controls over the use of insurance funds. The audit report should be submitted to the CIRC by April 30 each year, according to the draft guidelines.