China insurers’ worst habits go almost unchecked, while the CIRC struggles to rein them in
China’s insurance watchdog is raising warning flags over the industry’s riskiest investments from corporate raiding to large- scale deal- making. But it could do more to rein in high- yielding products which insurers offer that underpin the hunt for outsized returns.
The China Insurance Regulatory Commission ( CIRC) has fired a series of salvos at wayward insurers this month. It has cautioned that companies are not “automatic teller machines” for major shareholders looking to finance acquisition sprees. Earlier this month, the CIRC asked the industry to tighten risk controls, scale back on related party transactions and improve disclosure.
Insurers have been up to plenty of shenanigans. Financial conglomerate Baoneng was little known for its insurance business eight months ago before it started building up a large stake in top property developer Vanke. Meanwhile, Waldorf Astoria- owner Anbang Insurance dropped a $ 14 billion non- binding bid for Starwood Hotels & Resorts amid speculation that the CIRC wanted it to cap its overseas acquisitions.
The regulator did tighten the noose in March limiting the proportion of oneyear policies insurers can sell to less than 60 percent of the total, and requiring insurers to hold additional capital for policies which can be cashed out in full in under five years. But insurers are still able to offer short- term investment linked products and returns well in excess of bank deposits.
Aggressive insurers are leading a race to the bottom by offering higher yielding short- term products. Anbang’s main subsidiary, Anbang Life Insurance, sold 174 billion yuan ($ 26 billion) of new life insurance policies between January and June this year, according to CIRC data, more than any other Chinese insurer.
As bond yields have fallen and stocks are in the doldrums, insurers are hunting for riskier investment to make these policies pay. Ultimately, China’s insurers are potentially creating a dangerous mis- match between the short- term products that have driven growth in premium income, and the longer dated assets policyholders’ funds are invested in. Regulators have focused their fire on insurers’ assets. It would be wise to take a more thorough look at their underlying policies.