The China Insurance Regulatory Commission (CIRC) will strive to deepen the reform of insurance asset management mechanisms so as to resolve problems in the management of insurance funds, a top official said yesterday.

A key step in that direction is to complete organizational structure for investment management, which would require insurance companies to set up investment management commissions under their boards of directors, Wu Dingfu, chairman of CIRC, told a conference on insurance funds management yesterday.

Insurance companies also need to handle the relationship with their asset management subsidiaries well, by both overseeing the work of asset managers and leaving room for independence in their investment strategies, he said.

"In asset management, we need to maintain the precondition of risk control, and stick to a balance between safety, liquidity and profitability," Wu said.

Chinese insurers have long been frustrated by low investment yields largely because of tightly regulated investment channels.

They are allowed to invest in bank deposits and bonds, but have to trade stocks only through securities investment funds.

Largely due to the policy restrictions, insurers held 52 per cent of their investments, totalling a combined 873.9 billion yuan (US$105 billion) at the end of last year, in bank deposits, although interest rates are at a decade's low in China.

Chinese insurers' average return on investment dipped to 3.14 per cent in 2002 from 4.3 per cent in the previous year, approaching the 3 per cent minimum required by solvency margin regulations. The figure for 2003 was not available.

The situation has improved gradually in recent months. The Chinese Government had reportedly approved, in principle, a reform measure that permits insurance funds to be invested in infrastructure projects.

The State has also agreed to allow all insurance companies to, once certain requirements are met, set up asset management firms to manage their rapidly-growing indemnity funds. Only the PICC Holding Company and China Life - the two State-owned market dominators - have so far established their own asset management firms.

In the latest development, the CIRC announced regulations last month allowing qualified insurance companies to invest in overseas financial markets.

Yet officials and insurers have warned about the need to contain risks in investing in overseas markets, which few domestic insurers are familiar with, although the regulations contain measures to prevent risks.

Insurers are required to have a minimum of 5 billion yuan (US$600 million) in total assets to apply for an overseas investment license. And the regulation circumscribes strict restrictions on types of products insurers can trade - mostly bonds with high credit ratings and relatively safe money market instruments. Stocks are forbidden.

"The loosening is welcome, but it poses higher requirements on the risk management of insurance companies," said Xie Xiqun, chairman of Taiping Life Insurance Co Ltd.

CIRC's Wu stressed the need to establish long-term mechanisms for risk prevention in insurance funds management yesterday, requiring insurers to separate investment decision making from final transactions, and investment management from risk management.

Insurance companies need to find custodian institutions for their funds, especially "in a couple of investment areas with high risk concentration," he said, without elaborating.

Wu also urged insurance companies to improve their fund management expertise, stressing the importance of the ability to analyze macro and financial conditions.

The persistently bearish stock market this year has resulted in heavy investment losses at Chinese insurers.

China Life Insurance Co Ltd, the nation's largest life insurer, reported 63 million yuan (US$7.6 million) in net realized losses on investments for the first half of this year, a sharp reversal from net gains of 420 million yuan (US$50.6 million) one year earlier.

(China Daily September 10, 2004)