Relaxation in investment rules puts the spotlight on technology for Chinese insurers

Peter LiuRegional Sales Director, Eagle Investment Systems

In 2012, the China Insurance Regulatory Commission (CIRC) began relaxing the restrictions on permitted investments for insurance firms, opening the door for insurers to look beyond domestic fixed-income products and pursue investments in new asset classes such as equities and alternative assets, as well as offshore investments. While insurers in China have cheered the CIRC’s actions, the Commission’s increasingly progressive stance is exposing some of the shortcomings of Chinese insurers’ technology and systems that underpin their investment strategies.

In 2014, for instance, insurers were able to invest in private equity for the first time, while the proportion of assets that could be invested overseas has been extended from 5% to 15% of total assets. This relaxation offers obvious benefits, as insurers can target investments with potentially greater returns and higher yields, while eliminating some of the risk of being overexposed to Chinese bonds. Still, while many firms have been waiting to see what their peers will do before making any bold moves, the CIRC’s relaxation efforts have already had an effect on allocations. According to industry research, in the 12-months trailing January 31, 2015, alternative investments surged 66.4% to Rmb2.3tn and accounted for 24% of total insurance investments in the period. In contrast, investments in bank deposits and bonds grew by around nine percent in the same period.

There are signs too that the larger players are beginning to test the waters more. For example, in April, China Life Insurance Group and Ping An Insurance Co, two of the largest insurance firms in China, made their first foray into the U.S.commercial real estate market by snapping up a majority stake in a project in Boston Seaport. Furthermore, in December 2014, China Life awarded mandates to eight international investment managers. While they were not the first insurer in the country to award mandates to offshore managers, none have done so across such a broad range of managers. Moreover, as the biggest insurer in the country, industry observers expect others to follow suit in the coming year.

These new opportunities, however, bring with them a new set of challenges, particularly when it comes to technology. As investment portfolios become more diverse and complicated, many firms are starting to find that their existing technology systems aren’t able to keep up with the pace of change.

Typically, the technology systems employed by Chinese insurers have been developed by small- to medium-sized local vendors and have hitherto been well suited to handling relatively simple, domestic-focused fixed income funds and bonds, as well as equity investments traded over the Shanghai Stock Exchange or the Shenzhen Stock Exchange.

However, some legacy vendors in China lack the experience and insight in the international investment marketplace. As a result, their systems are unable to accommodate the complex instruments now available to insurers. Insurers exploring these new investment opportunities are quickly recognizing the limitations of their technology with the result that many are no longer using their legacy systems at all.

The larger insurers in particular are increasingly seeking comprehensive technology solutions that can support their investment strategy wherever it takes them and in whatever form. With the greater range of opportunities and better understanding around the business case for making the requisite investment in their systems, they are becoming less price conscious and are considering systems that can fulfill their current and future needs.

In the last 12 months, we have had conversations with IT executives at several of the top firms in China, who are actively courting global technology vendors. Their goal, almost universally, is to learn from the experience of the Western vendors to find solutions that will deliver a competitive advantage. It is fair to say that not everyone is necessarily looking to replace their systems immediately, but they are certainly weighing their options in the face of legacy systems potentially overwhelmed by the breadth of investment options.

Areas of particular interest include flexible data management capabilities that are designed to handle all types of investment, as well as performance measurement and risk management for regulatory reporting. At the same time, there is concern that more comprehensive systems do not equate to more complex and convoluted administration and that they do not introduce additional layers of risk. Therefore, there is a preference for single vendors that can offer a wholly integrated solution across the middle- and back-office.

The Chinese insurance market is just coming to grips with the increased flexibility it has been afforded when it comes to investment. Many are still sizing up the array of instruments now available and haven’t even so much as thought about their technology. Indeed, for many their investment strategies at this early stage have yet to take full advantage of the CIRC’s relaxed restrictions, at least not to warrant the expenditure on comprehensive technology solution. However, China’s insurance market is rapidly maturing and, as firms make greater use of international investments and more complex instruments, they will need to have technology solutions that can support these investments in order to take full advantage of the opportunity.

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