China permits insurers to outsource investment management

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China's insurance regulator said on Monday it will permit insurers to outsource management of their investments to securities brokerages and fund management companies (FMCs) for the first time.

Under the new rules, which take effect immediately, insurance companies can use brokerages and FMCs to manage their bank deposits and invest in equities, bonds and mutual funds on their behalf, according to the new rules published on the China Insurance Regulatory Commission's (CIRC) website, www.circ.gov.cn.

Previously, insurers were required to manage their investments directly or through asset management companies they owned.

Most large insurers do not outsource their investment activities but maintain internal asset management units, occasionally outsourcing a small portion of their assets.

China's insurance market is dominated by large insurers but also has numerous smaller players, said Hong Kong-based Credit Suisse Asian insurance analyst Arjan van Veen.

He said that the new policy may be intended to solve economy-of-scale problems that small insurers face and ameliorate their lack of investment experience.

To qualify to take over management of insurers' assets, FMCs and brokerages must each have at least 10 billion yuan ($1.57 billion) in outstanding assets under management, according to the rules.

Other unconventional types of asset management companies must have at least a paid-in capital of 100 million yuan in addition to meeting the 10 billion yuan minimum.

Chinese insurers have struggled with low investment returns and asset depreciation.

China Life, the world's biggest insurer by market value, in April posted its sixth consecutive decline in quarterly profit. The world's second-biggest insurer, Ping An , saw its 2011 investment yields fall to 4 percent from 4.9 percent.

Regulators are moving to improve returns. On Thursday, CIRC allowed Chinese insurers to invest in hybrid and convertible bonds and raised the ceiling on insurers' investment in unsecured bonds to 50 percent of total assets from 20 percent previously.

In May, the CIRC allowed insurers to buy unsecured corporate bonds via an underwriters' book-building process.

State media have reported that the CIRC is also considering allowing insurers to conduct margin trading, short selling and trading in financial derivatives both abroad and domestically.

The report also indicated regulators are considering a relaxation of rules governing overseas investment, and investment in private equity and real estate. ($1 = 6.3735 Chinese yuan)

This article is copyrighted by Reuters

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