China Regulator Asks Insurers to Tighten Risk Control on Invested Assets

BEIJING, Aug 26, 2008 (A. M. Best via COMTEX) -- LFC | Quote | Chart | News | PowerRating -- The China Insurance Regulatory Commission has asked insurance companies to get a better grip on their invested assets amid volatile local and international equity markets. Investment setbacks have already dragged down net profits for major Chinese insurers in the first half this year.

China Life Insurance Company Ltd. reported a net fair value loss of 6.5 billion yuan on invested assets in this year's first half, compared to a profit of 10.8 billion last year. Ping An Insurance Company of China Ltd. also suffered a drop of 2.5% in first-half net profit due to investment declines.

"The domestic A-share equity market fluctuates a lot this year, and this dragged down insurers' overall investment returns," said Hong Kong-based KGI Securities analyst Pandora Leung.

Although China's insurance regulator already put asset limits on insurers' equity investments, Leung said insurance companies have to be cautious in their investment portfolios, and indeed, most companies already slashed assets invested in equity markets.

The CIRC is requesting that China's insurers submit reports on asset investment on a regular basis, which would then examine the companies' investment portfolios in terms of invested assets' product nature, location, currency, distribution, return and proportion.

China's insurance companies also need to report their property investments as part of the CIRC's measures to assess insurers' efforts on risk control and management on their invested assets.

Property investment is not usually a major invested asset by China's insurers, said Leung. In fact, Chinese insurers are looking for opportunities to invest in fixed-income markets such as government and corporate bonds, but Leung said the domestic bond market is still at its "initial stage" of development on the mainland.

In China, total premium income collected from life insurance products rose 66.7% during the past seven months, the fastest growth in a decade. Despite of the rapid growth, the CIRC asked insurers not to overlook certain fundamental issues faced by the industry, such as lack of business sustainability, short insured periods and weak policy coverage of insurance products, and over-reliance on banks and post offices as distribution channels.

Risk control on asset management is crucial for insurance companies who should be responsible and accountable for their business liability, credibility and healthy operation in the long run, the CIRC said in its announcement.

The regulator said insurance companies should also consider risk factors caused by market fluctuations such as cash flow, settlement capability and potential withdraw of existing policies.

In order to maintain long-term credit reserves and business development, the CIRC said it would take a closer look at insurers' invested assets, insurance policies and actuarial accuracy, risk control and settlement capability.

(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)

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