Tourists visit Shanghai’s Bund on Dec. 23. China’s regulators are looking to curb the aggressive behavior of some insurers to protect the country’s financial system. PHOTO: CHINAFOTOPRESS/GETTY IMAGES
 

China’s insurance regulators are raising alarms about risks in the industry, warning that aggressive stock buying by insurers and sales of high-return products could damage the country’s financial system.
The China Insurance Regulatory Commission has issued at least six statements on risk control since late November, including a demand for better disclosure and limits on the size of high-return products. “As the economy enters the new normal, cross-market financial contagion risks cannot be neglected,” the regulators said in a warning to the industry dated Dec. 11.
The Chinese insurance industry is dominated by several huge players, operating alongside dozens of smaller, more aggressive companies.
Analysts say Beijing is most concerned about the smaller companies, which are pitching investment products with promised annual returns as high as 8%, to savers who are frustrated with China’s volatile stock market and with low interest rates offered by bank savings accounts. China has cut interest rates six times since November last year, dropping deposit rates to 1.5% from 3%.
The regulators appear to have two main concerns. They worry that insurers, which need to boost their own returns to meet the promised high payouts, have been scooping up stocks, helping to drive the market to a one-month high and adding volatility. They are also uneasy about the products themselves, and the risk of a mismatch between the insurers’ investments and their promised payouts.
“The massive buying by some insurance firms is upsetting because they violated the principle of sound investment,” said an editorial in Tuesday’s print edition of the official People’s Daily, a mouthpiece of China’s Communist Party. Beijing has frequently raised concerns about financial stability this year, as the stock market soared then crashed.
Analysts say stock buying by insurers has helped boost China’s battered stock market, which surged in the first half of the year only to fall by more than 40% from its highs. The Shanghai Composite Index is up more than 20% from this year’s low in late August, but a recent rally in some stocks has been seen as too much. “The market rally in December was primarily driven by insurers’ buying frenzy,” says Shen Zhengyang, an equity analyst at Northeast Securities Inc. “That’s against the government’s will to cultivate a slow bull.”
Chinese insurers have spent more than 130 billion yuan ($20 billion) to raise stakes to at least 5% in 26 listed companies in the second half of this year, according to calculation by the state-run Securities Daily. In China, firms must disclose their holdings after their stakes hit 5%. When word gets out that insurers are buying stocks, fast-trading individual investors often pile in, driving up the prices of shares.
Under new rules announced this month, the regulator will require insurers to disclose big share-purchase plans and look to limit how many higher-return products insurers can sell.
While pressure to deliver high returns is one reason why insurers have become more aggressive, rules changes by the government have also played a part. As it was trying to stabilize the crashing stock market in the second half of the year, Beijing allowed insurers to boost their investments in stocks to 40% of assets from a previous limit of 30% by investing the additional allocation in blue-chip stocks.
Enhance International, a consultancy focused on insurance, estimates that U.S. life-insurance firms allocated only about 2.5% of their total assets to stocks and about 73% to bonds in 2014. That is much lower than the 14% overall allocation to stocks that Chinese insurers already have, analysts say.
One product that has garnered investor attention is universal life insurance, which promises 6% returns on average. In February, the China Insurance Regulatory Commission lifted the 2.5% cap on minimum guaranteed returns for such products, allowing insurers to set their own interest rates.
The regulator estimates that premium income from this type of insurance reached more than 600 billion yuan in the first 10 months of 2015—29% of the industry’s total income from premiums, and nearly double the premiums of 2014.
‘The market rally in December was primarily driven by insurers’ buying frenzy. That’s against the government’s will to cultivate a slow bull.’
—Shen Zhengyang, an equity analyst at Northeast Securities

A Dec. 9 statement by the regulator said insurers should stop selling “high cash value” products if they are already failing to meet minimum capital requirements. For these products, which include universal life policies, Chinese insurers pay beneficiaries a large cash return for their investment, and only a small token death benefit. The regulator also said insurers shouldn’t be receiving premiums for these products valued at more than twice the amount of a company’s investment capital, effectively putting a brake on how aggressive smaller insurers can be.
Recently insurers have gone beyond just buying stocks and appear to be interested in buying big stakes or even whole companies, which is also worrying regulators.
The most recent deal to raise concerns came Monday, when PICC Property & Casualty Co., a unit of state-owned People’s Insurance Company of China, agreed to buy Deutsche Bank AG’s nearly 20% stake in China’s Hua Xia Bank Co. for up to 25.7 billion yuan. PICC Property & Casualty couldn’t immediately be reached for comment by phone.
The most controversial move by an insurer this year has been the possible takeover attempt on the world’s largest property developer by sales, China Vanke Co., by Baoneng Group, a property-to-insurance conglomerate that owns Foresea Life Insurance Co.
Baoneng has bought roughly a quarter of the shares of Vanke, which has a market value of $40.5 billion, though it hasn’t made a formal offer. Baoneng couldn’t immediately be reached for comment by phone. Vanke has stepped up efforts to rebuff any offer, saying Tuesday it had reached a deal to potentially issue new shares to an unnamed investor.
—Yifan Xie and Chao Deng