The China Insurance Regulatory Commission said on Dec 29 that it would tighten regulations for insurers to reduce the risks from equity investments.
Several insurance firms have been making aggressive equity investments recently with leveraged trading and this could endanger their ability to meet financial obligations.
Xiang Junbo, chairman of the China Insurance Regulatory Commission, warned of the “emerging risks along with the rising number of market players and the expansion of their investment channels”.
“Some insurance firms will face risks like weakened solvency capability under the new regulatory regime that will be implemented next year,” Xiang said after a meeting with major insurance firms.
“The credit risk, misallocation of assets and capital market volatility will mean greater uncertainties about investment returns of insurance firms,” he said.
The regulator’s warning came after a slew of insurance firms aggressively purchased equities in the public market through leveraged trading, raising concerns about their liquidity and investment risks.
Baoneng Group, a private insurance and property conglomerate’s high-profile acquisition of listed developer China Vanke Co Ltd has stirred intense public attention as the financing of the investment is believed to be made through leveraged products such as stock collateralization and structured funds.
Analysts said that the rapid growth of insurance premiums and the low-interest rate environment are the main factors that prompted insurance companies to increase their exposure to higher-yield but more risky equities market.
Total insurance premiums between January and November reached 2.2 trillion yuan ($340 billion) with the total asset value of the insurance sector exceeding 12 trillion yuan, according to the regulator.
Business newspaper 21st Century Business Herald cited Chen Wenhui, vice-chairman of the CIRC as saying that some insurance firms are facing liquidity risks and many of them lacked effective internal risk management and sound corporate governance.
Cao Hengqian, an insurance analyst at GF Securities Co Ltd, warned about the risk of the aggressive business model by many insurance firms of gaining capital at high cost and seeking to pay their clients with even higher returns by investing in risky assets.
“Many insurance firms have been massively purchasing blue-chip stocks to gain investment returns and share dividend as they are pressured to offer even higher returns to their clients. Such operations may be unsustainable and risky without strong liquidity support,” he said.