China could become friendlier for overseas insurers if they are allowed to take full control of local asset management units.
On December 10, the CBIRC (China Banking and Insurance Regulatory Commission) released a public consultation document, "Regulations on the Management of Insurance Asset Management Companies (Draft for Comment)" setting out draft rules that would remove the existing 25% cap on ownership by foreign entities, enabling foreign investors to raise their stakes in insurance asset managers to 100%. The public consultation period on the rule changes will run until January 10.
Angelina Ng, executive director for securities services at Capco, a management consultancy for the financial services sector, told AsianInvestor that “for foreign asset managers, this is the natural next step to the relaxation of foreign ownership limits on securities companies that previously took place and further opens up China's financial markets.”
She believes domestic investors can expect to be able to diversify their portfolios through expanded investment options, while domestic asset managers are likely to use competitive pricing, product and distribution innovation to increase the "stickiness" of their products.
"Foreign asset managers should take stock of their existing regulatory compliance capabilities to ensure they are prepared to navigate a regulatory regime where aspects such as data protection and consumer education are evolving and being strengthened,” she said.
Foreign insurers will also need to improve their investment and risk management abilities to compete with local players, said Fred Wen, wealth business leader at Mercer China, told AsianInvestor.
"The core competitive advantage for an insurance AMC [asset management company] is its investment and risk management capabilities. It’s worth noting that an insurance AMC without a strong local insurance parent will likely struggle to accumulate sufficient AUM in the early going, even with the fusion of global best practices with local reality," he said.
Bernhard Kotanko, senior partner at McKinsey, believes the latest move will provide foreign players with more opportunities to expand their businesses in China.
“Adding an insurance asset management company to a life insurance company is a logical next step for a company beyond a minimum scale. Hence we would expect foreign JVs beyond a minimum scale to be more proactive in pursuing such licences and building as well as increasing ownership where this is suitable and feasible,” Kotanko told AsianInvestor.
But growing an insurance asset management business in China organically may take overseas firms longer than they may think.
“The increased ownership right may add a positive aspect of entering China, yet there are many other considerations international players have to consider. Overall, the share of international life insurers and JVs in China is very minor at less than 10%. And we would expect this share to remain very low in the near to medium-term,” he added.
Three main challenges confront international players in China, Kotanko believes.
"Firstly, a lack of initial market reach and distribution scale. Secondly, a different set of aspirations and KPIs relative to domestic players. And lastly, some challenges in truly appreciating and tailoring the operating, talent and governance model for China," he said.
"The biggest gap between local and foreign players is the level of resources and support insurance asset managers receive from their insurance parent. Currently, the size of an insurance asset manager is highly dependent on the size of its insurance parent, and big insurance companies will naturally nourish their captive insurance asset management units. With bigger AUM, local insurance asset managers are able to recruit more talent and have greater access to premier assets," Wen added.
According to CBIRC data, as of the end of September, 31 insurance asset management companies were operating in China, of which 27 are mainly local players, leaving only four (Bocommlife Asset Management, CITIC-CP Asset Management, Cigna & CMB, ICBC-AXA Life Asset Management) as joint ventures with a foreign shareholder.
Insurance asset management has been through a tough ride since most insurers tend to focus their internal teams on investment management. As the market has expanded, some of them have hired more third-party managers in the past few years as they seek to diversify more and look for better returns.
In mid-December the Insurance Asset Management Association of China (IAMAC) assessed 88 external managers of insurers, including fund houses and asset management arms of securities firms, which collectively manage 99% of the country’s Rmb500 billion ($78.69 billion) of outsourced insurance assets.
The association gave its highest rating of five stars to 54 firms, or 61.4% of the total, based on overall performance of their segregated accounts and investment management capabilities, according to an IAMAC announcement on December 3.
China had Rmb20.12 trillion of insurance investable assets as of December 2020, according to data from IAMAC.