The state is rolling back the ‘liberalisation’ of the insurance industry, seeing the sector as a threat to financial stability.

rewarding risk

The industry’s image went from bland to ‘barbaric’ between 2012 and 2016. Deregulation had been a strong theme under Xiang Junbo 项俊波, the China Insurance Regulatory Commission (CIRC) chair, whose March 2017 detention and dismissal for corruption transmitted a major shock to the financial sector. Under Xiang, restrictions had been relaxed on insurance companies’ investments across all asset classes, traditional and alternative, domestically and overseas. Risk management was left to firms, holding them accountable for investment decisions. A China Risk-Oriented Solvency System (C-ROSS) was first piloted as deregulation began in 2012. CIRC envisaged something like the banking sector’s Basel III, (a standard committing firms to hold enough capital to cover liabilities). But C-ROSS did not become fully operational until 2016.

See here for a full breakdown of these deregulatory policies.

With constraints on capital allocation lifted, firms’ assets ballooned. Total industry assets in 2016 were 2.5 times those of 2011; those gained through investment almost tripled. Firms rushed for greater exposure to equity and alternative investments, in particular real estate.

short-term highs

To fund aggressive investments, insurance companies issued short-term policies, promising high returns. The most popular was universal life insurance, a wealth management insurance product combining a primary life insurance policy with an investment account. Launched in China in 1999, these products lost favour after the 2008 stock market crash, but staged a comeback from 2012. Contributions to investment accounts, indicating the popularity of universal life insurance, grew an astonishing 53 percent from 2012 to 2016 (annual compounded), compared to 19 percent for conventional insurance premiums.

the growth of new contributions to investment accounts averaged 53 percent, almost doubling from 2014 to 2015. Source: CIRC.
the growth of new contributions to investment accounts averaged 53 percent, almost doubling from 2014 to 2015. Source: CIRC

testing regulatory limits

Smaller players seeking to overtake established firms seized on this unconventional ‘asset-driven’ business model, raising funds from insurees to beef up their assets, disregarding the higher risks. Foresea Life and Anbang Group, among others, made headlines for breakneck growth in sales of universal life insurance and high-profile acquisitions of domestic and international firms. Foresea practically became a cash machine for its largest shareholder, Baoneng, a third-tier real estate developer, while Anbang, a lone wolf, plunged money into banking and real estate stocks. This buying spree peaked with Baoneng’s infamous attempted hostile takeover of Vanke, the real estate industry leader. Insurance firms jumped into the fray as the two slugged it out from mid-2015 to 2017. Foresea backed Baoneng and Anbang acted as Vanke’s ‘white squire’, defending the firm’s management.

contribution to investment accounts for different players (in billion RMB)

Anbang and Foresea, industry latecomers, fully embraced the asset-driven model, while Ping An, the long-standing industry leader, was less enthusiastic. Source: CIRC.
Anbang and Foresea, industry latecomers, fully embraced the asset-driven model, while Ping An, the long-standing industry leader, was less enthusiastic. Source: CIRC

caging the barbarians

In December 2016, regulators took aim at insurance firms ‘shopping’ for listed companies using ‘ill-gotten money’. Liu Shiyu 刘士余 China Securities Regulatory Commission chair called such firms ‘barbaric laymen turned industry bandits’. The same day, Chen Wenhui 陈文辉 CIRC vice chair alluded to firms’ using fraudulent capital injections to overcome C-ROSS requirements. A few weeks later, a CIRC slogan ‘Insurance should live up to its name’ took aim at the industry’s excesses. In April 2017, the agency laid out those aspects of the industry that threatened ‘financial stability’

  • maturity mismatch between assets and liabilities, above all from aggressive cross-sector and/or cross-border M&As, increasing firms’ liquidity risk
  • ineffective internal controls and corporate governance enabling fraudulent capital injections and repatriation, watering down firms’ solvency and letting shareholders use firms as cash machines
  • complex conduits for insurance asset management products that intensify systemic risk

In May, CIRC pledged it would correct past regulatory blunders, and placed greater restrictions on aggressively priced short-term policies, capital injections and shareholder structures. Assets, warned the regulator, should not determine liabilities, but be developed against longer-term liabilities with more predictable cash flows.

See here for full breakdown of recent regulatory developments.

In H1 2017, 60 percent fewer companies announced plans to invest in new insurance companies than in 2016. Foresea was penalised in December 2016, and its chair, Yao Zhenghua 姚振华, barred from the industry for 10 years. Anbang was penalised in May 2017 for universal life insurance policies rolled out six months earlier. Clamping down on unconventional products dries up a crucial source of funds, and will likely stymie the buying sprees.

After the takedown of Xiang Junbo and Wu Xiaohui 吴小晖 (see our analysis of the politics behind this), the pressure is on CIRC and the industry to clean up their act and return to more conventional practices. With Xiang and Wu gone, the relentless growth model and slack regulations that fuelled it are expected to wind up.


Xiang Junbo 项俊波 | former CIRC chair

With 282 new policies, CIRC under Xiang aimed to liberalise the heavily regulated insurance industry. Apart from loosening restrictions on insurance companies’ investments and bringing in the new solvency system C-ROSS, he also pushed to marketise life insurance and auto insurance premiums. During the 2015 stock market turmoil, Xiang lifted the equity investment cap to 40 percent of last quarter’s total assets, which some saw as whetting insurance firms’ appetite for risky bids. In January 2017, he coined the slogan ‘CIRC should live up to its name’, placing CIRC’s responsibility as a regulator ahead of its role as a promoter of the industry’s growth.

Chen Wenhui 陈文辉 | CIRC vice chair

Overseeing capital allocation and financial accounting, Chen was central to the asset-side deregulation wave, and the rollout of marketised risk management. Concerns over insurance players’ involvement in the Baoneng–Vanke takeover battle prompted criticism of deregulation, but Chen defended CIRC’s position, trying to downplay the systemic implications of the incident. Although CIRC’s position towards high-profile bids has since toughened, Chen has remained a market reform champion. The solution to aggressive business models, he suggests, is not rolling back deregulation, but enhancing business ethics and corporate governance.

Caixin Media 财新传媒

Founded in 2009 by Hu Shuli 胡舒立 (pictured), one of China’s most formidable journalists, as a platform for high-end investigative reporting. This followed censorship of her earlier outlet, Caijing. With a licence to produce original news, Caixin has acquired a reputation for in-depth analysis and critical commentary. A series of reports since May 2016 tracked Anbang’s footprint in the domestic equity market and global M&A market. This escalated into a personal feud between Hu and Wu Xiaohui, Anbang’s founder, when a frontpage article in Caixin alleged Wu and his family had fraudulently injected capital into the firm. Hu is vigorously refuting allegations of dependence on political favour made by rogue property tycoon Guo Wengui.

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