Prospects for gold in China’s insurance industry

Gold Investor, October 2018

18 October, 2018

Prospects for gold in China’s insurance industry

The Insurance Asset Management Association of China (IAMAC) is a national self-regulatory organisation, with more than 540 members. Deyun Cao, Executive Vice President and Secretary General of IAMAC, considers developments across the insurance sector and assesses the role that gold can play, as the sector seeks out long-term, sustainable returns.

Deyun Cao
Deyun Cao
Executive Vice President & Secretary General
Insurance Asset Management Association of China

The global financial crisis of 2008 prompted a comprehensive overhaul of the financial sector. Governance and oversight have been widely revised, with new structures and features introduced across the industry.

China’s role on the global stage has also changed over the past decade. In 2017, according to the International Monetary Fund (IMF), global economic growth strengthened to 3.6%, bolstered by a contribution of more than 30% from the Chinese economy. China has thus become an important participant, builder and contributor to global economic growth.

The Chinese government has gradually opened up the domestic economy in recent years, instituting new legislation across the financial industry and facilitating the participation of overseas players. In his report to the 19th Congress of the Communist Party of China, General Secretary Xi Jinping pointed out that the service industry requires further reform so it can become a truly open market. And in April, Governor Yi Gang of the People’s Bank of China announced 12 concrete measures to boost financial liberalisation, highlighting policymakers’ intention to deliver further reform, development and liberalisation.

As China pursued a path of reform and liberalisation over the past 40 years, the insurance asset management industry also underwent significant transformation, with both domestic and overseas players experiencing rapid growth. Between 2006 and 2017, the average annual increase in insurance assets was 23.85% and assets under management increased at approximately the same rate. In 2017, insurance premiums grew 18% year-on-year to 3.66 trillion (tn) Yuan (US$562 billion (bn)); assets under management rose 11.4% to 14.9tn Yuan (US$2.29tn) and total assets increased 11% to 16.75tn Yuan1 (US$2.57tn) (Chart 1). According to China’s “13th Five-Year Plan,” annual premiums and total assets are expected to stand at 4.5tn and 25tn Yuan1 (US$691bn and US$3.84tn) respectively by the end of 2020.

Importantly too, foreign operators account for nearly 30% of the market. Companies from 16 countries or regions have opened 57 insurance legal entities in China, covering life insurance, property insurance, reinsurance and insurance asset management businesses. There are 13 foreign insurance intermediary agencies and 141 offices representing foreign insurance companies. These businesses have been growing market share and are expected to continue doing so. An element of globalisation is also evident within the domestic industry, as firms diversify their assets and increase overseas allocations. By the end of 2017, the balance of overseas investment of insurance funds was nearly US$70bn, accounting for 2.3% of the total assets of the insurance industry. However, the pace of investment is accelerating.

Chart 1: 2006-2017 China insurance asset size

Chart 1: 2006-2017 China insurance asset size

Note: Insurance assets under management is the sum of capital, paid-in capital, retained earnings, all the insurance reserves and other funds according to local insurance law. Total assets are insurance assets under management plus, but not limited to, fixed assets, intangible assets and pledged assets. *Conversion rate = 6.4884
Source: CBIRC; World Gold CouncilSource: Metals Focus; World Gold Council

Between 2006 and 2017, the average annual increase in insurance assets was 23.85% and assets under management increased at approximately the same rate.

This trend is significant, as the industry matures. Diverse asset allocation has an essential role to play in the professionalisation of China’s asset management industry, driving efficiency and international reach. It also helps to prevent systemic risks and reduce exposure to individual market movements.

Today, just over 47.51% of total insurance assets are in fixed income securities, of which 34.59% are bonds and 12.92% are bank deposits. A further 12.3% of assets are in equities, of which 7.26% are stocks and 5.04% are funds; 26.57% are in alternatives; and 13.62% are allocated to other assets (Chart 2).

Chart 2: 2006-2017 China insurance asset allocation

Chart 2: 2006-2017 China insurance asset allocation

Source: CBIRC; World Gold Council

Meanwhile, confronted with issues such as global warming, the environment and development, the Chinese insurance asset management industry is paying increasing attention to environmental, social and corporate governance (ESG), among others. Green finance and responsible investment are becoming the consensus of the industry.

Looking ahead however, insurers are keen to move into new assets, as they seek out large-scale, long-term sources of funding, long-term stable returns and lower systematic financial risks. Gold could make a useful contribution in this context.

China’s insurance asset management industry is conducting an in-depth study into the feasibility of investing in gold. Historical market data shows that gold, as a highly liquid asset, constitutes an effective tool for diversifying investment portfolios.

With the support of the World Gold Council, therefore, China’s insurance asset management industry is conducting an in-depth study into the feasibility of investing in gold. Historical market data shows that gold, as a highly liquid asset, constitutes an effective tool for diversifying investment portfolios. It has a strong and consistent track record and is not susceptible to default risk. In the case of inflation or currency depreciation, it can also improve portfolio risk-adjusted returns and maintain or even increase asset values for clients. Our study is ongoing but we are confident that gold could be an effective asset for China’s fast-growing insurance industry.

The Insurance Asset Management Association of China (IAMAC) is a national self-regulatory organisation, founded with the approval of the State Council and endorsement of the former China Insurance Regulatory Commission and the Ministry of Civil Affairs of the People’s Republic of China. With more than 540 members, the association drives innovation, encourages discipline and provides a range of services for the insurance industry.

The World Gold Council is not affiliated with the IAMAC and the opinions shared within this article are those of the author and not necessarily those of the World Gold Council.

Footnotes

  1. The projection is estimated based on the 23.85% compound annual growth rate of insurance assets between 2006 and 2017.

Disclaimer [+]Disclaimer [-]