China's insurance companies have been encouraged to strengthen cooperation with banks and securities companies under a new guideline issued by State Council yesterday.

Such relationships could pave the way for cross-sector management in the financial sector in the near future, analysts said.

According to Wu Dingfu, chairman of the China Insurance Regulatory Commission (CIRC), the proportion of insurance companies' actual stock investment to their total assets will be boosted from the previous 1 percent to 4 percent. For the moment, Chinese insurers can invest up to 5 percent of their assets in the domestic stock market.

More insurance companies would be allowed to have direct investment in the capital market and the investment proportion would be further increased according to the guideline, which is seen as a significant step to boost the development of the insurance sector.

"China Life will be the largest beneficiary of the guideline, given our wide outlets and big market shares," Yang Chao, chairman of the country's largest life insurer, said. China Life occupies 44 percent of market share in the life insurance sector.

The firm plans to take advantage of the new guideline to achieve another cornerstone in the 11th Five-Year Plan (2006-10), Yang added. "But this time, we hope to make some breakthroughs in our business structure, profitability and investment returns."

China Life is soon expected to get a 16.2 percent stake in CITIC Securities, becoming the second-largest shareholder of the firm.

"Although the expanded investment channel is a piece of good news for us, we should take a more cautious approach since risks rise accordingly," said Yang.

Meanwhile, the CIRC is backing further cooperation between insurers and banks.

"We support insurance companies buying into, or even taking controlling stakes, in well-managed, profitable banks that have a strong customer base," Wu said.

Insiders disclosed that the insurance regulator was working to map out details on investment into banks.

An insurer investing in unlisted banks, for instance, will have to choose one with a capital adequacy ratio exceeding 8 percent, whose total assets stand above 50 billion yuan (US$6.25 billion) and whose non-performing loan ratio is below 5 percent.

"But the investment ratio that insurers can put into banks will not be high," Hao Yansu, an insurance professor with the Central University of Finance and Economics, said.

Ping An Insurance, China's second-largest life insurer, is currently bidding for a 60 percent stake in Shenzhen Commercial Bank through its investment arm Ping An Trust & Investment Co Ltd.

According to Liu Mingkang, chairman of the China Banking Regulatory Commission, commercial banks will be allowed to set up insurance businesses.

The banking regulator is drawing up rules with the central bank and the insurance regulator to give broader scope to lenders on insurance and brokerage businesses, Liu added.

Banks are currently allowed to sell policies for insurance companies and securities funds for brokerages.

To further broaden the investment channel for insurers, the guideline also encourages insurers to increase their investments in asset-backed securities and property and take part in venture capital projects.

The CIRC will also expand the overseas investment scope for insurers to include other products such as equities and funds.

(China Daily June 27, 2006)