China insurers’ worst habits go almost unchecked

July 26, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

China’s insurance watchdog is looking for trouble in the wrong places. The regulator 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 insurers offer that underpin the hunt for outsize 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, riling the company’s chairman. 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 one-year 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 such as Anbang can lead a race to the bottom by offering higher yielding short-term products and forcing other companies to compete. 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 mismatch 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.

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