Foreign and Sino-foreign joint venture insurance companies are raising their voices calling for a broader investment scope to improve their returns in the Chinese market.

At the China Insurance Regulatory Commission's (CIRC) first conference with foreign-funded insurance firms last week, many of them said the current scope of investment has constrained their investment yield and is hampering further business growth.

"The investment channels are narrow, and can hardly support the development of the company," said Xu Yifei, chief financial officer with the Sino-French AXA-Minmetals Assurance Co Ltd.

Insurance companies in China now hold the majority of their funds in bank deposits, treasury bonds, financial bonds and corporate bonds, and can only invest a maximum of 15 per cent of their assets in securities funds. They cannot trade stocks directly.

As assets at Chinese insurance companies grew rapidly, their average investment yield kept declining, falling to 3.14 per cent last year from 4.3 per cent in 2001.

And the situation is worse for foreign-funded insurers, as they are still barred from signing large-sum deposit agreements with banks, where Chinese insurers put as much as 70 per cent of their entire bank deposits.

But interest rates on such agreements are also sliding as banks have more sufficient funding sources. The yield on five-year deals has dipped to 4.3 per cent from 5 per cent in 2001.

The situation is unsatisfactory for foreign insurers who are typically expecting returns in China to be a few percentage points higher than their investments in other parts of the world due to risk reasons, said Zhang Li, deputy general manager of Haier New York Life Insurance Co Ltd.

The return on Haier's investment in the joint venture with New York Life is also lower than the home appliance giant's investments in other areas, Zhang said.

Wang Xiaobin, general manager of Royal & Sun Alliance's Shanghai branch, said another factor hampering foreign insurers' investment yield was strict capital requirements. The capital minimum for a branch of a foreign insurance firm was doubled by the CIRC to US$24 million late last year, which she said was unnecessary as the normal functioning of such branches were already guaranteed by their headquarters upon their establishment.

The stricter capital requirements were excessive for a limited market like China's, Wang said, adding that the current size of China's non-life insurance market was only US$9 billion, and that in Shanghai was a meagre US$500 million.

Yet in India, where Wang said such liberalization was at a faster pace, "many companies are increasing their investments."

Foreign-funded insurers are urging the CIRC to speed up co-ordination with the People's Bank of China in promulgating a regulation on renminbi deposit agreements by foreign insurance firms.

Like their Chinese counterparts, they also want to be allowed to make real estate loans and invest in infrastructure construction projects like the ones Shanghai is preparing for a World Expo in 2010.

The CIRC has been cautiously broadening the scope this year, allowing insurance firms to invest more funds in a broader range of bonds, and has repeatedly said it is considering further liberalization.

Despite a narrow investment scope, foreign insurance firms are enjoying rapid growth in the Chinese market. In the first five months of the year, foreign insurance firms operating in China garnered 2.33 billion yuan (US$280 million) in premiums, up 37.5 per cent on a year-on-year basis, according to CIRC statistics.

In Shanghai and Guangzhou, capital of South China's Guangdong Province, which were among the earliest cities to be opened to foreign capital and have the strongest presence of foreign insurance firms, their market shares grew to 10.1 per cent and 4.8 per cent respectively in the first five months, the commission said.

So far, 36 foreign insurance firms have set up 57 operational entities in China, including 20 life insurers, 14 property insurers and two re-insurers.

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