China’s Insurers Fine-Tune Investment Portfolios

July 2, 2021 — Singapore

Regulatory developments and the sector’s size provide opportunities for outsourcing

The implementation of liberalization measures over the last two years is likely to spur further growth in China’s insurance industry, which bounced back from the COVID-19 pandemic with higher asset growth and sound investment returns, according to the latest Cerulli Edge—China Edition.

China’s insurance industry’s total assets increased 13.3% in 2020 to RMB23.3 trillion (US$3.5 trillion) despite slower premium growth during the pandemic. The growth in insurance assets improved from 12.2% in 2019, largely driven by sound investment returns. According to local media reports, the industry garnered annual investment income of RMB957.1 billion last year, up by 40.8% year on year.

The outlook for the insurance industry is positive, following the implementation of liberalization measures in the last two years, such as the full removal of the foreign ownership cap and raising of limits on foreign shareholdings in insurance asset management companies. In July 2020, the China Banking and Insurance Regulatory Commission (CBIRC) relaxed the upper thresholds on insurers’ equity investments. Under the new rules, insurers’ maximum equity allocations can range from 10% to 45% of the total assets recorded at the end of the previous quarter, depending on their solvency, asset-liability management capabilities, and other risk measures.

The new rules are likely to boost equity holdings for qualified large insurers, although Cerulli believes that the short-term impact could be limited by insurers’ prudent investment styles and trade-off considerations of the high-risk charge on equities under the China Risk-Oriented Solvency System (C-ROSS).

While equities do generate alpha, insurers also use multi-assets and alternatives for portfolio diversification. Multi-asset is a growth area for managers, with demand coming from smaller and mid-sized insurers, and cross-border demand from large players. As for alternatives, Chinese insurers favor non-standard debt assets, treasury bond futures, private equity, and real estate to enhance yields and match against long-term liabilities. Recently, insurers subscribed heavily to the first batch of infrastructure real estate investment trusts (REITs) to source for liquid alternatives, purchasing a total of RMB3.3 billion. This made insurers the largest group of beneficiaries, with a marketshare of 34.6%.

Similar to other markets, affiliated managers dominate insurance outsourcing in China. According to a survey of insurers by the Insurance Asset Management Association of China (IAMAC), 73% of portfolio assets was managed by affiliated asset arms, followed by insourcing at 23% and outsourcing to managers with no insurance background at 3%. Although small, Cerulli notes that the last category of outsourced assets can still present lucrative revenue opportunities for fund houses to tap on, as it translates into RMB519.8 billion in mandates and other sources of investments as at the end of last year.

In fact, China’s insurance market continues to pose the most growth potential for outsourcing across the region. According to Cerulli’s survey last year, 92.3% of managers surveyed believe that non-affiliated opportunities will increase in China over the next three years.

“With supportive measures in place, Cerulli expects sound long-term growth prospects for China’s insurance industry,” said Ye Kangting, senior analyst at Cerulli. “Managers who understand the short- and long-term demands of insurers, have built strong relationships with them, understand the implications of the various insurance rules, and possess resources or capabilities to complement insurers’ existing strategies will be able to stand out from the competition.”

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Note to editors

These findings and more are from The Cerulli Edge—China Edition, 2Q 2021 Issue.

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