Investment Regulation, Portfolio Allocation, and Investment Yield in the U.S. and China Insurance Industry

Abstract

This article presents the comparisons of three aspects of insurer investments in the United States and China. For investment regulation, we summarize the allocation limits specified in the U.S. Investments of Insurers Model Act and update China’s regulation to the 2014 version. For investment allocation, we show the year-by-year allocations to various investable assets from 2005 to 2013 of U.S. and Chinese insurance industries. Finally, for investment performance, we calculate yearly investment returns and discuss the rationale that contributed to the return fluctuation.

Keywords:

• China insurance industry
• investment regulation
• asset allocation
• investment yield

Notes

The China insurance industry might even have greater potential growth because the population in China is more than fourfold that of the U.S.

Life insurers match their investments with their liabilities and are investors with a wide horizon. Therefore, they are allowed to hold more long-term, illiquid assets, such as mortgage loans and real estate, than are nonlife insurers. Insurance regulators, however, ask a higher level of diversification on life insurer investments and place stricter individual limits for some types of investable assets. Please see Table 1 for further detail.

For example, a life (nonlife) insurer shall not acquire an investment if the insurer would hold more than 3% (5%) of its admitted assets in investments of all kinds issued, assumed, accepted, insured, or guaranteed by a single person (DLV Section 10 A (1) & Section 23 A (1)).

CIRC placed more detailed and strict quantitative limits on corporate bond investments before the new notice.

NAIC1 corresponds to AAA (or Aaa) ∼A; NAIC 2 corresponds to BBB (or Baa) (Cantor & Packer, 1996).

Life insurers had large exposure on RMBS and CMBS and suffered the most from the financial crisis.

Only recently (since June 2012), have Chinese banks been allowed to adjust upward to 10% of the deposit rates set by the People’s Bank of China.

The Shanghai Composite Index increased 96.66% in 2007 and decreased 65.39% in 2008.

Only five-year government bond future contracts are now available in China, and each insurer has an open-interest limit of 100 (100 million Chinese yuans contract value) from ten days prior to the beginning of contract due month, which is too small for major insurers.

The market for rating services is underdeveloped in China. Therefore, we think an official rating designation is fairer for insurers. Building an evaluation office also strengthens CIRC’s monitoring capability.