Zhang li
Senior vice president, tokuhei
Guo jie quan
Member of the board of directors, middle earnings investment management ltd. Long
This paper explores the practical path of involvement of insurance institutions in asset securitization, analyses the main problems and makes recommendations。
Over the past 10 years, our insurance industry has grown rapidly, with significant increases in the size of insurance assets and the use of insurance funds. Statistics show that the total assets of the industry exceeded $11,272. 3 billion in the first eight months of 2015, an increase of 10. 96 per cent over the beginning of the year; the balance of insurance funds available was $10,190. 7 billion, an increase of 9. 21 per cent over the beginning of the year. In accordance with the objectives set out in the opinions on accelerating the development of modern insurance services, insurance funds are expected to be available over a seven-year period of over 20 trillion yuan between 2014 and 2020。
However, as our economic development enters a “new normal”, the sustained growth in the scale of the use of insurance funds and the gradual slowdown in economic growth become contradictory. With the country entering a new cycle of interest-rate reductions and a monetary policy environment that is relaxed, there is growing pressure on the use of insurance funds. The characteristics of insurance funds, however, determine the high level of safety required for the use of insurance funds, as well as the degree of liquidity, rate of return and matching of investment periods. In the view of the author, the current state of use of insurance funds in the country does not justify the allocation of assets。
Status of securitization products for investments in insurance funds
According to the american insurance industry organization (naic), insurance funds are one of the major investors in the area of asset securitization. At the end of 2012 alone, the united states insurance industry held 11. 8 per cent of the stock of abs. The federal reserve data (table 1) show that in the united states life insurance agencies, federal agencies (i. E., the united states, the united states, the united states, the united states, the united states, the united states and the united states) issue portfolio support products that account for about 10 per cent of the total size of the financial products in the credit markets they invest. When added to private sector-issued asset-supporting securities, the proportion of united states life insurance agencies investing in asset securitization products reached 22 per cent in 2014. In our country, the main investors in securitization of interbank credit assets in 2014 were commercial banks, according to china's bond information network and chinese debt credit, with insurance institutions investing only 3,635 million yuan, or 1. 35 per cent of total market investment. Thus, in terms of size, there is considerable room for development of the size of the asset securitization products invested by our insurance institutions. Based on 10 per cent of the total investment in current insurance institutions ' bonds, there are between $300 billion and $400 billion in investmentable amounts。
Inadequate participation in asset securitization has attracted attention from regulators. On 27 august 2013, the board issued its guidance on insurance sector support for economic restructuring and transformational upgrading, which states that it encourages innovative insurance financing and supports the participation of insurance funds in securitization of credit assets. In july 2014, the board issued the " qualifications for the pilot operation of the project asset support plan " , which sets out the regulatory profile of the insurance asset management company as issuer of the securitization of the assets, gives to some extent the attributes of the special purpose vehicle of the project asset support plan (spv) and opens the model for securitization of the assets of the direct investment of insurance funds。
With the introduction of the new deal for insurance investment in the second half of 2012, the investment channel for insurance funds has expanded considerably, and financial products such as infrastructure claims investment schemes, real estate claims investment schemes, etc., have been favoured at risk and are increasingly allocated. The project asset support plan is attractive to insurance institutions as it is more customized to meet investment requirements for insurance funds. As at the end of 2014, the project assets support plan had been issued on a scale of approximately $60 billion。
However, owing to the scarcity of high-quality assets, the scale of insurance-related products registered in the first half of 2015 decreased on an equal basis. Finding new and suitable financial investment products is urgent. In august 2015, the board issued a further interim approach to the operations management of the asset support plan, which regulates operations, promotes the transition from pilot to routine operations and provides policy space for insurance agencies to issue and invest in asset securitization products。
Practical path for participation of insurance institutions in asset securitization
In fixed-income assets, asset-supporting securities are highly competitive products. As shown in table 2, safeguarding investment security through structured stratification designs, financial flows, etc., is an important way to expand the range of insurance finance counterparties and investments and achieve a new balance between returns and risks, in line with the principles of asset securitization。
The role of insurance institutions involved in securitization of credit assets should not be limited to the role of investors, but could well serve as a spv in the process of securitization of assets and as a trustee for the issuance of asset securitization products. The return on investment is relatively stable because of the long duration of the investment and the high level of funding that the investment preference for insurance funds has. Since credit and enterprise asset securitization products available on the market do not necessarily meet the investment needs of insurance funds in terms of duration, rate of return and safety, autonomous issuance and direct investment by insurance agencies, as trustees, are important future directions。
Table 3 shows that the involvement of insurance institutions in asset securitization can focus on infrastructure, commercial property, and asset securitization in the area of indirect investment by insurance agencies, based on market resources accumulated in prior periods. Specifically:
Secured infrastructure assets
Infrastructure development projects are generally characterized by advancedness, high input volumes, long construction cycles, high sedimentation costs and low demand elasticity, which coincides with the characteristics of insurance finance。
Infrastructure claims investment plans have higher requirements for guarantees and credit. Large insurance institutions generally require projects to be rated at the aaa level and are guaranteed by large financial institutions, cids or government agencies, thus limiting the availability of projects. In addition, with national development with the issuance of document no. 43 and its follow-up, local governments may not borrow through enterprises, divest themselves of the financing function of the financing platform company, and limit the traditional means of financing from the government platform, including fiscal budget repayments, and the financing of the gap; on the other hand, as a result of macro-policy easing, institutions are more willing to pay directly than to invest in infrastructure claims. As a result, insurance institutions have initiated asset securitization in the area of infrastructure, which can expand to a greater extent the area of investment, in the traditional areas of transport, energy, communications, environmental protection, municipalities, and so on, by obtaining quality inventory assets, such as concessionary fees or rights of return, and by broadening the scope of investment by lowering the qualification requirements for the original equity holders themselves。
It is worth mentioning that such securitization operations by insurance agencies require attention to the corresponding legal risk and asset assessment of the transfer of the underlying asset, clear attribution of the right to charge, the absence of restrictions such as non-transferability, and the absence of a security or other security interest. In addition, an insurance institution may extend the counterparty to enterprises that provide product packages and services to institutions with higher creditworthiness by way of a concession to receivables; and by examining the debtor's ability to perform, it may properly lower the subject-matter qualification criteria for creditors. Such operations need to focus on, inter alia, cash-flow control。
Securement of commercial property assets
Since 2015, insurance institutions have increased their investment in real estate claims schemes as infrastructure claims investment plans have been significantly reduced in scale by policies affecting local financing platforms. The overall supply in our commercial property sector is greater than demand, risk accumulation, safety of investment in insurance funds, and limited creditworthiness of counterparties investing in real estate. For their part, well-functioning and mature rental commercial properties can generate sustained and stable cash flows. Innovative models, represented by the principles of asset securitization, can effectively mitigate the tension between returns and security by enhancing the pooling and regulation of funds while further reducing the qualifications of commercial property finance. Insurance institutions should focus on the location, value and future cash flow of the commercial property itself, rather than merely on internal and external guarantee, credit or disposal capacity。
Commercial property asset securitization may take the form of commercial property fees or rights of return securitization, or may take into account real estate trust investment funds (reits). The country has previously not been able to move well towards the securitization of commercial property assets, mainly because of long investment cycles and low rental returns, and because of legal flaws in the “commercial property billing rights” as the underlying asset for asset securitization. In recent years, there have been some breakthroughs in the market, such as the special asset management scheme for benefits from the sea and indies trust and the special asset support scheme for xinhua sunning in china, respectively, innovations in the area of the right to lease property and reits, which have provided some inspiration for investment in insurance funds or insurance institutions as trustees。
Such asset securitization operations by an insurance institution should take place on the basis of the principle that the material risk is more than the form, that, on the one hand, the regulation of the transfer of funds is to be implemented, and, on the other hand, that since the underlying asset is dependent on the real estate itself, the trustee needs to take full account of the impact of the disposal of the immovable property itself on future cash flows, and that the property should be able to provide collateral or property transfer segregation。
Secured assets of insurance institutions in the area of indirect investment
The securitization of assets facilitates access to investment opportunities exclusively owned by some financial institutions. Compared to other financial institutions, banking institutions are better able to address information asymmetries in financing because of their network size and private information, and thus have greater advantages in terms of investment in such areas as real estate loans, credit card loans, car loans, consumer loans and non-performing loans. When banks securitize these loans as basic assets, the insurance agency is given the opportunity to invest in such assets。
Overseas, asset securitization products are dominated by mortgage securitization (mbs), mortgage securitization (clo) and credit card and automobile loan asset support securitization (abs). Mbs is more consistent with the financial characteristics of insurance in terms of financial security and duration requirements. At present, the country's credit asset securitization trustees are limited to trust companies, and the insurance asset management company is not yet in a position to act as trustees, thus making it difficult to meet the customization needs of insurance companies for securitization products, which to some extent limits the incentive of insurance institutions to subscribe to purchases。
In addition, insurance companies are currently engaged in the practice of securitization of enterprise assets represented by micro-credit and leasing companies, which, because of their homogeneity and dispersion, are better suited as underlying assets and have a higher degree of market recognition, yet their development space is subject to the size of such assets and the original equity personality。
Issues and recommendations
Higher cost of funds
The market has high expectations for insurance funds, which are expected to become one of the main buyers of securitized assets. However, owing to their own size and the cost of liabilities, domestic insurance funds have limited capacity to purchase. An important reason for the higher liability costs of insurance institutions is their high dependence on the banking system, and the trend towards the financialization of insurance products in recent years has led to higher liability costs. Under current conditions, the return on credit asset securitization products is difficult to cover the cost of liabilities for insurance funds and the price advantage of venture asset securitization is lacking. In the long term, insurance institutions should continuously optimize the debt structure, expand direct marketing and internet marketing channels, develop new products, reduce financial costs and improve competitiveness in capital markets。
Market competition is high. Insurance agencies lack pricing. Rights
In the coming period, the interest rate environment will enter a downward route, with more diverse financing instruments available to financiers and more competition in the area of asset securitization. In a competitive situation of “big capitalization”, banks, coupons, trusts, fund subsidiaries, etc. Can conduct asset securitization operations, and the types of project-procedures issued in the interbank market form a competitive relationship with asset securitization products. The late start of insurance institutions and inadequate staffing have led to weaknesses in market pricing rights. In addition to strengthening human capacity-building, the securitization operations of insurance institutions require a clear market location, based on the financing of service insurance, and differentiated competition。
Systems could be progressively improved
In the current macro-environment, the rule of law in the area of asset securitization has yet to be improved, and there is an urgent need for top-level design and market-owned innovation, including, inter alia, the establishment of insolvency isolation mechanisms, cross-regulatory cross-market cooperation and enhanced liquidity. From the point of view of the use of insurance funds, there is a need for regulatory bodies to clarify the management of insurance institutions as credit assets and trustees of enterprise assets, and to grant certain preferential policies on solvency and large-scale investment limits to the securitization of venture capital assets。
