Regulator’s Latest Target: Loans Backed by Life Insurance Policies

China’s financial regulator is planning to tighten oversight of loans made by insurance companies to borrowers who pledge their life insurance policies as collateral, as the government moves to rein in risks in a market that is growing rapidly.

The China Banking and Insurance Regulatory Commission (CBIRC) issued a draft (link in Chinese) of the proposed rules on Thursday, saying they were aimed at “perfecting oversight and internal control norms, controlling financial and business operations risks, and effectively protecting the interests of insurance consumers.”

Policy loans, also known as life insurance loans, are booming, as consumers look for alternative ways to raise cash, sometimes for speculative purposes such as property investment or stock market trading. They are mostly short-term loans issued by life insurance companies to policyholders and use the cash value of the insurance contracts as collateral. The outstanding value of such loans jumped by 26.3% in 2018 to 439.5 billion yuan ($65.6 billion), more than six times the figure at the end of 2011, according to the latest official data compiled by CEIC, a global economic data provider.

The CBIRC is concerned that lending is rising too rapidly and called on insurance companies to strictly control the pace of growth as well as the share of such debt in their total assets. It warned them not to get distracted from their core business of selling life insurance policies, according to the draft regulation, which is open for public feedback until Nov. 29.

The rules extend the maximum term of an insurance policy loan to 12 months from six months and stipulate that it must be repaid before the policy itself expires. The funds borrowed must not exceed 80% of the cash value of the policy at the time when the customer applies for the loan.

The CBIRC also imposes restrictions on how the money raised through such loans is used –– the regulations ban borrowers from investing the funds in property, the stock market, and equity of non-listed companies. The controls are in line with long-standing guidance from policymakers on bank lending which aims to limit funds, especially consumer loans, from being invested in speculative, non-productive activities that could fuel asset bubbles and to channel more money into the real economy, especially manufacturing and services.

In order to guard against money laundering, life insurance companies must also strengthen checks on the identity of borrowers and the legality of their accounts to ensure they are the policyholder, and scrutinize large advances and clients who take out multiple loans, according to the draft.

The proposed rules represent a tightening of oversight after the CBIRC earlier this year encouraged life insurance companies (link in Chinese) to extend the term of insurance policy loans and increase the ceiling on such loans to help ease short-term funding pressure on small and micro enterprises triggered by the Covid-19 pandemic.

As the economy recovers, policymakers are now trying to find a balance between supporting the economy and reining in financial risks. “China’s monetary policy must strike a balance between stabilizing growth and preventing risks,” Governor of People’s Bank of China Yi Gang told a financial forum in Beijing last week.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)

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