The CBIRC's new rules to regulate insurers' investments in trust products will benefit the industry, but are unlikely to dramatically increase insurers' appetite for the products, Fitch Ratings says.
The revised rules, announced earlier this month, highlight the regulator's intention to permit greater interaction between insurers and trust companies, while also imposing tighter measures to control potential risks associated with trust products.
The new rules explicitly stipulate that insurers cannot use their investments in trust products to circumvent regulations for other purposes. Credit enhancements such as guarantees need to be arranged if the underlying assets of trust products are non-standard credit assets. The regulator also imposed limits on insurers' exposure to single trust products to minimise concentration risk. On the other hand, the regulator lowered the requirements for companies engaged in the issue of trust products.
Fitch believes insurers' investments in trust products are unlikely to accelerate materially in the near term, despite being allowed to deal with more trust companies under the revised rules. Trust products normally offer yields that are higher than conventional debt, but the urgency of insurers to seek higher yields to offset the cost of insurance liabilities has been reduced from two to three years ago after a structural shift in their liability profiles.
Insurers' liability burdens have eased because most of them have consistently cut their exposure to short-term single-premium savings-type products, which typically carried high crediting rates, in the last two years. They instead emphasised the distribution of long-term regular premium-type life insurance policies with more protection features through their agency forces. As a result, insurers have greater flexibility to select investment instruments that better match their insurance liabilities.
Key factors in investment decisions include not just investment returns, but also capital requirements, length of investment horizon and liquidity.
The risk profiles of trust products are more complex and opaque. They are highly dependent on the structure of the trust schemes, the quality of the underlying assets, and the credit strength of the guarantors. Life insurers generally have greater incentive to invest in trust products because they are able to match the duration of their insurance liabilities to the duration of trust products, which could potentially range from three to 10 years. Nonetheless, trust products are generally less liquid than conventional corporate bonds.
Many insurers, especially those that offer single-premium-type short-term products, have increased their asset allocation to trust products since 2013 in an attempt to seek higher investment spreads over their liability costs. Chinese insurers' investments in trust products rose to about 7% of total assets by end-2018 from about 3% at end-1H14, according to the regulator. The size of the investments in these products amounted to CNY1,270bn ($185bn) at the end of 2018.