The China Insurance Regulatory Commission (CIRC) released Sunday a long-awaited provisional regulation on the supervision of insurance asset management companies, aiming to further enhance insurers' ability to manage their bulging coffers well.

Issuance of the landmark regulation, which will take effect on June 1, was an imperative step as huge piles of premium income have been built up, putting heavy pressure on insurance companies for better yields, according to officials with the CIRC, the industry regulator.

"The underwriting operations and asset management operations are seen as two important wings for insurance companies," said Yang Huabai, director of the CIRC's legal department.

"Managing assets well has become a pressing challenge for insurance companies."

The newly released regulation sets a high threshold for establishing an insurance asset management company. "That's mainly out of the consideration that asset management companies should have enough capability to dodge investment risks," said Yang.

The regulation stipulates that the establishment of an insurance asset management company should be initiated by an insurance company or one of its shareholders should be an insurance company.

The insurance company should have a history of more than eight years with more than three years of clean records. The net asset of the insurance company should be no less than 1 billion yuan (US$120 million) and the registered capital for the insurance asset management company should be no less than 30 million yuan (US$3.6 million).

The regulation stipulates an insurance asset management company should only dispose of insurance assets, which means no assets from other industries should be involved even if the assets are from the company's non-insurance shareholders.

Yang said small insurance companies are allowed to team up with qualified large insurers to establish asset management companies. Foreign and joint venture insurance companies are also allowed to set up asset management companies if requirements are met.

The issuance of the new regulation, according to Yang, did not hint at the broadening of investment channels for insurers.

But insurance companies would be better positioned to place their money in capital markets once the rules are relaxed, he said.

Increasing by one-third annually, on average, the industry's premium income has been approaching 1 trillion yuan (US$120 billion) as Chinese people grow richer and as the government dismantled a cradle-to-grave welfare system.

However, due to policy restrictions, insurers are only limited to investing in bank deposits, bonds and mutual funds.

Insurance companies have long been hankering for more investment freedom to enhance returns, a key factor in ensuring their ability to pay claims, but the process is expected to be gradual.

Insurance companies are urged to come up with a professional approach to operate their massive fund reserve.

According to Yang, the original method of setting up an internal asset management department under an insurance company cannot respond well to the current needs of some insurers with large reserves, which demand high efficiency in operating huge funds.

Forming a separate asset management company is also in line with common practice in Western mature markets.

By the end of 2002, among the 34 world's largest insurers on the Fortune 500 list, 20 have established asset management companies.

The country's top property insurer PICC Property & Casualty and top life insurer China Life were also given the green light last year by the government to establish their own asset management companies and the one with PICC has already been set up.

Yang said there are many insurance companies expressing interest in establishing asset management companies, but he declined to name them.

(China Daily April 26, 2004)