AFCA Working Paper
No. 2019-18 Liu Chuankui, Chinese Insurance Asset Management base on Specialized Development
Topic｜Chinese Insurance Asset Management base on Specialized Development
Expert｜Liu Chuankui, Deputy Director Fellow of Asian Financial Think Tank
Chinese Insurance Asset Management Industry is an important part of Chinese asset management industry. The insurance funds with the long-term, large-scale, asset-liability attributes endow Chinese insurance asset management industry some of its own characteristics and enable it to own its unique advantages in serving the national strategy and supporting the real economy. Chinese insurance asset management industry has actively explored the management mode of insurance funds, especially taking the insurance asset management company as the core manager as its important management mode. Meanwhile, Chinese insurance asset management industry also manifests its openness, conducting the practice of management of capital flow. The management of Chinese insurance funds in investment has also been gradually broadened and steadily promoted, while paying attention to the allocation of large categories of assets and prevention of risks as well as sound investment returns. The whole practice of asset management fully reflects and pursues professionality. The article puts forward that we should continue to grasp the international trend and learn from mature experience, and actively probe into the way of further market-oriented, refined and product-oriented development on the basis of specialization.
In recent years, the global asset management industry as a whole has maintained a relatively faster trend of development. According to the BCG data, the total amount involved in the global asset management has registered a growth of 12% to nearly USD 80 trillion Dollars in 2017, recording a new high since the financial crisis in 2008. Benefiting from the fast economic growth brought along by the reform and opening up policy, the asset management demand in China has been increasing, and its development has becoming an important component of global asset management market; meanwhile, Chinese insurance asset management also pinpointed its own position and role in the asset management market of the country. We believe that, professionalization is the foothold and the only way of developing Chinese insurance asset management industry.
1. The Road to Professionalization for Chinese Insurance Asset Management Industry
As of the end of February in 2019, the total size of Chinese insurance asset is RMB 18.85 trillion Yuan, the fund application balance is RMB 16.77 trillion Yuan, registering a year-on-year increase of 12%. Most of the insurance fund came from the liability reserve funds of insurance products, it is the debt of insurance companies and is characteristic of source stability, a relatively longer term, compulsory cost constraint and lower risks, thus determining the specific operational law of its investment management. The approach to insurance funds management was initially subjected to the management and operation by the financial departments, the departments of investment management and the business divisions of investment management of insurance companies, and then gradually to the system and mechanism of being entrusted by insurance companies, deposited in banks, and managed by entrusted insurance asset management companies or other eligible financial institutions.
Like other countries in the world, large-scale insurance companies all established affiliate professional insurance asset management companies. Currently, a total of 27 insurance asset management companies (of which 3 companies are waiting for approval) were established, managing an accumulative of 80% of the total entrusted funds. In addition, there are more than 10 professional insurance funds management institutions, who are dedicating to the investment in equity, creditors’ rights , real estate and so on; 11 subsidiary insurance asset management companies were established in Hong Kong, China.
In China, insurance asset management companies are the core manager of insurance asset; the original intention lies in: on the one hand, the professional level of insurance asset management may be elevated, and specialized institutions and teams may be employed to carry out professional causes independent of the assessment, stimulation and sales culture of insurance companies; on the other hand, the information data may be better shared and integrated with insurance companies, the specific law of insurance funds may be deeply recognized, the strategic allocation and investment guideline may be understood and executed to better serve the main line of insurance business. Over more than 10 years of specialized investment management practice, the main category asset allocation of insurance funds has seen an notably optimized change in its structure, the investment returns have tended to be stable, and the investment notion has becoming increasingly prudent and steady. In terms of asset allocation, the asset object has transformed gradually from the single “deposit + bond” pattern to the diversified asset allocation structure with bank deposit, bond and other fixed-income assets as the priority and the open, unusual and outbound market asset as the supplementation. Currently, bank deposit accounts for 15.03％, bond accounts for 33.87％, stocks and securities investment account for 12.52％, other investment accounts for 38.58%, including long-term equity investment, plan of creditors’ rights for insurance companies, portfolio insurance asset management products and other financial products. In terms of proceeds, from 2004 to 2018, the average annual return on investment of insurance funds hovered at about 5.3%, no fierce volatility appeared in each year; for huge and long-term funds, to realize the absolute benefit covering the cost of debt is extremely difficult.
In practice, insurance asset management companies gradually obtained the core ability and investment features conforming to the traits of insurance funds. The first is the long-term fund management ability. Since 2003 when the first Chinese insurance asset management company was established, the industry continuously raised its asset allocation ability，built its decision-making system and improve its team combining strategies and tactics, and formed a complete system in investment theory and operational practice; moreover, it withstood the long-term test of market. The second is the observation of the investment guideline of pursuing absolute profits. In terms of long-term, large category asset allocation and skipping cycle investment, insurance asset management companies observe the investment goal of pursuing absolute profits; with the long-term allocation as the origin of their investment behavior and logic, their investment style is more prudent and steady; and their requirement of risk management is higher by refusing to pursue short-term, high-frequency transactions for relative performance and strengthening their ability to withstand short-term market volatility. The third is to become adept at unusual asset investment and products creation. As the duration of insurance funds liability is long, the search of matching long-term asset becomes the mission of insurance asset management companies; through the creation of creditors’ rights plan, equity plan, asset support plan, etc., insurance asset management companies participated in investment in a large number of highways, aviation, city infrastructure, energy and other fields, and have gained investment experience and professional edge in equity, real estate and infrastructure investment.
The above mentioned investment ability of insurance asset management companies originates from the long-term practice of insurance asset management; while providing a strong assistance to the development of insurance business, it has also attracted the preference from the funding parties dealing in old-age pension, enterprise annuity, banks’ financial management funds. In recent years, Chinese insurance asset management companies have also actively expanded the third party asset management businesses, which have gradually become an important approach of improving investment ability. With the “two-way” marketization reform advanced by China’s insurance regulators in 2012, the insurance funds were allowed to be managed by institutions outside the insurance industry such as committed bond traders, fund traders for insurance companies; meanwhile, insurance asset management companies were allowed to be entrusted to manage old-age pension, enterprise annuity, provident housing fund, etc.. On the one hand, the marketization of insurance funds and the lifting of restrictions on commission and trusteeship forced insurance asset management companies to speed up the improvement of their investment ability in return, resulting in the noticeable growth of awareness of industry competition; On the other hand, through the management of non-insurance funds on commission, the capital source was expanded, management costs were increased, and the influence of insurance asset management market was improved. Taking the management of old-age pension on commission as an example, as of the end of September 2018, on the market of enterprise annuity, the investment management scale of Chinese insurance asset management companies exceeded over a half of the total size, accounting for 55.07%; the biggest investment management institution of enterprise annuity is also one of insurance asset management companies, whose ability of investment has been highly recognized by holders of long-term funds.
2. Seizing the international tendency and learning mature experience to develop Chinese insurance asset management industry
From the development characteristics of international asset management industry, first,the head effect is obvious. In 2017, the size of asset management of the world top 20 institutions accounted for 40% of the total, of which, 10 asset institutions were from banking system and insurance industry. Second, clients are from diversified fields. Retail and institutional clients on international asset management market were equally matched, for instance, the old-age pension and individual clients on American market accounted for 40% and 46% respectively. Third, businesses and products are diversified. The investment scope and fields of world-leading asset management institutions have covered the global mainstream markets and varieties.
From the development trend of internationally large insurance asset management institutions, they generally started from the management of internal insurance funds in terms of their development history, and gradually turned to the management of multi-faceted and various types of funds entrusted by markets outside the said institutions; in terms of professional ability, most of the internationally large and highly professional insurance asset management institutions have organized specialized team or have established professional subsidiary companies engaging in the investment of specific varieties; in terms of characteristics and advantages, the fixed-income asset research and investment is the biggest advantage of insurance asset management institutions, and occupies a leading position.
On the whole, Chinese insurance asset management industry is also experiencing the development process from the management of insurance funds alone to comprehensive asset management activities; there are much foresighted experience from international asset management industry who deserves our consideration and learning. Combining with the concrete development of Chinese insurance asset management industry, to better play the positive role of insurance funds in serving the national strategy and supporting real economy, we could make a further exploration and improvement in the following aspects:
The first is to continue to follow the road of professionalization. Following the principle of “being entrusted to manage money by proxy”, the asset management industry shall always seize the key of improving insurance asset management industry’s competition and influence, that is, the professional investment ability, especially the established asset allocation ability, long-term funds management ability, credit risks rating and management ability as well as unusual asset creation ability, etc., all the ability needs to be consolidated and improved continuously. Meanwhile, in the short slab of quantitative investment ability, creating net value of products and other ability, we should make more efforts.
The second is to continue to follow the development road of marketization. On one hand, the asset management market is also the one with the high mobility of talent, ability and technology, the insurance asset management without market-oriented management mechanism, talent motivation mechanism, investment decision-making mechanism and risks management mechanism will place itself in a disadvantaged position in competition with other asset management industries. On the other hand, more market-oriented choices for insurance asset application shall be in place; though dependent on insurance funds, if the insurance asset management industry still sticks strongly to “the position of a buyer”, it will face greater pressure of competition in terms of insurance asset management, and also will be unable to meet the investment management needs of the funding party with non-insurance funds, which is not to the benefit of the industry’s long-term development.
The third is to continue to follow the road of elaborate development. For instance, for insurance institutions with a large size, high professional level and better development conditions, the exploration of establishing subsidiary companies dedicating to the management of creditors’ rights, equity, real estate and other unusual assets may improve the delicate insurance asset management level and promote the more market-oriented development of insurance asset management companies.
The fourth is to actively explore the development road of productization. The development of productization is one of the underlying development trend of asset management industry, and is of the characteristics of high flexibility and strong individualization; it is suitable to private-equity firms, and also well appeals individual high net value clients. Through the introduction of insurance asset management products, especially portfolio insurance asset management products, the insurance asset management industry’s technical features of long-term asset management, absolute benefits, and lower risks could be given a better role to play, and explorations could be made to provide high-quality investment services for long-term wealth management, commercial pension insurance, etc..
(The English translation has not been verified by the author. If you have any questions, please refer to the original Chinese version.)
Expert Biography:
Liu Chuankui, Deputy Director Fellow of Asian Financial Think Tank, Deputy Secretary General of the Insurance Asset Management Association of China（IAMAC）. The Co-chair of the Joint Committee of IAMAC Investment and Research Manager; the Executive Editor of ‘Insurance Asset Management of China’ (trade publications). Mr. Liu has been jointed IAMAC since preparatory period. He has been working in financial area over 20 years, and held the certification of executive qualification in fund companies and securities companies. He has been served as the executive position over 10 years, who used to work in the people's Bank of China and other professional financial institutions. Mr Liu is widely-experienced and highly-skilled in research, investment, compliance and risk management areas. He is one of the most experienced professional fund practitioners in China who has involved in the drafting and legislation work of the Fund ACT(2003), published (associate editor and independent work) over 10 professional works in the aspect of securities, funds and finance. Besides, Mr. Liu is the extracurricular tutor in Tsinghua University, Fudan University and Nankai University. He is the member of the Revolutionary Committee of the Chinese Kuomintang who specializing in economy and works as core member of the Economic Committee. Also, Mr Liu holds PhD in Economics from Nankai University and EMBA degree from CUHK.
About Asian Financial Think Tank:
Asian Financial Think Tank (hereinafter referred to as “AFTT”) is a branch of Asian Financial Cooperation Association (hereinafter referred to as“AFCA”). AFTT is comprised of 80 Chief Economists or Research Department Directors recommended by 80 AFCA member institutions in 27 countries and regions in Asia, Europe, America, Oceania and Africa, including 47 domestic experts and 33 foreign experts. With the philosophy of "market location, global perspective, problem orientation, in-depth observation, and smart solution", AFTT have developed Weekly CE (Chief Economist) View, Monthly expert Q&A, AFTT Annual Report Asian Financial Observation and other bilingual products, conducted Quarterly Seminars, AFTT Annual Forums and other high-level financial activities, sending a strong Asian message constantly on the international stage.