Forex funds of insurance companies and its operations

An exclusive interview of Xu Mangang, Deputy Director, Current Account Management Department, the SAFE

 

 

overview of forex funds of insurance companies

Up till the first quarter of 2003, insurance companies all over China recorded US$ 3.45 billion worth of forex holdings, of which 99.5%, or US$ 3.44 billion, is in the form of forex deposits within domestic commercial banks.  Forex funds of insurance companies are composed of US$ 430 million worth of demand deposits (accounting for 12.5% of the forex funds), US$ 2.94 billion worth of timed deposits (85%), US$ 65.49 million worth of capital margin in deposit (2%), and US$16.73 million (current market value) of forex bonds (equaling 0.5%) bought by three foreign-funded insurance companies via their parent companies.

In terms of the nature of the forex funds, over 80% of the total forex funds of insurance companies falls into the "equity" category, such as capital and profits.  Premiums account for only a small percentage of the total proportion and are mostly short-term.

Characteristics and risks in forex funds of insurance companies

Forex funds of insurance companies is characterized by small scale, dominance of short-term premiums, comparatively high liquidity, and a broader scope for further business development. However, risks still exist in the forex fund held by domestic insurance companies. The current amount of forex funds held by insurance companies is far from adequate as compared with the present overall indemnity risks. The forex funds structure, of which 85% is in timed deposits, indicates a lack of fund liquidity instruments. Utilizing forex funds solely as deposits within domestic commercial banks causes concentrated risks as well as comparatively low yields. In addition, operational expenses of insurance companies are mainly presented in RMB costs rather than on the forex balance sheet.  However, forex reserves for insurance businesses are usually replaced with RMB funds; thus, liabilities shrink, with a misleading increase in forex profits.

Suggestions on insurance forex funds operations at home and abroad

Clarify policies and broaden scope of services. The Insurance Law, though stipulating channels for insurance fund utilization, fails to offer a definition on whether insurance company investment is limited to RMB instruments and the domestic market with exclusion from forex tools and overseas market. In view of this situation, the administrative department should further define operational policies and clarify the fund operational channels set by the Insurance Law, so as to enlarge the scope for insurance companies to operate their funds.

Operate using marketization, with prudent administration of funds. With regard to domestic insurance companies' overseas fund operation and forex funds operations, the China Insurance Regulatory Commission (CIRC) and the State Administration of Foreign Exchange (SAFE) should stick to the principle of prudent administration, and leave insurance companies to decide on their investment activities according to the market situation.

Separate the utilization of RMB insurance funds from that of forex insurance funds. With RMB and forex having completely different methods for utilization, RMB insurance fund and forex insurance funds differ greatly in operational schemes and corresponding administrative measures. For RMB fund, examination and approval can be piloted to control fund scales and fund flows. As for forex funds of insurance companies, the administration should enlarge insurance companies' business scope and give more freedom for investment and operation.

Progress steadily. For either the CIRC or the SAFE, the action will raise new administration issues to broaden the application channel for forex funds of insurance companies or to increase the investment object (overseas) for RMB insurance funds. The operation of forex funds  should be carried out in a prudent manner with both security and liquidity taken into consideration.  For it is forex funds, mostly falling into the category of equity, that constitutes the ultimate guarantee for insurance companies' solvency. The overseas operation of RMB fund should take into account both security and yields, since most RMB fund comes from premiums and the major pressure for RMB investment fund origins from yields.

Policies of the SAFE on insurance  companies’ forex funds management and operation

Policies published by the SAFE include administrative policy on the purchase and payment of forex for overseas reinsurance services. In June 2003, the SAFE and the CIRC jointly released a circular, stipulating that domestic legal entity insurance companies, approved by the SAFE to undertake overseas reinsurance for domestic RMB insurance, can buy forex for payments of the overseas reinsurance. Policies also allow insurance companies into the domestic interbank foreign exchange lending system. On September 1, 2003, the SAFE released a circular, allowing approved domestic legal entity insurance companies to access domestic interbank forex market.

Additionally, SAFE is expected to introduce policies on insurance companies' forex transactions via domestic commercial banks, insurance companies' forex bond business, insurance companies' overseas fund operations, and detailed operational procedures for Interim Provisions on Insurance Foreign Exchange Administration.