China's Insurers Don't Know Their Own Risks

Such an environment is bound to lead to excesses. Take Anbang Insurance Group Co. At the end of last year, its Chinese stock holdings had risen to a staggering 203 billion yuan, up from 27 billion yuan at the end of 2014. Anbang’s domestic holdings grew so fast that it soon counted itself as a top-10 shareholder in each of the four major state banks. It also became one of China’s largest outbound investors, buying up everything from the Waldorf Astoria to Japanese real estate. It started to look more like a too-big-to-fail wealth manager than an insurance company.

One product Anbang offered was a type of high-yielding investment known universal insurance, which offers buyers a guaranteed redemption value upon maturity and included a death benefit to qualify as “insurance.” Regulators have started to get wise to this kind of thing: Last month, they said one product Anbang wanted to offer “deviates from the fundamental origin of insurance” and imposed a temporary sales ban on the company for causing what they called “market havoc.”

Yet cracking down on insurers more broadly won’t be easy. When Foresea Life Insurance Co. was barred from selling new products last month, the company threatened to block customer redemptions unless it was allowed to gear up again. It issued something close to a threat, urging regulators to avoid “inciting mass incidents by clients and localized and systemic risks.”

The message was pretty clear. As with tightening money markets, authorities can’t clamp down too hard on insurers or they risk triggering collapses — and the resulting “mass incidents.”

Even so, the China Insurance Regulatory Commission could continue to tighten standards on what products qualify as insurance. It should also start demanding improved risk analytics from insurers. The world-class credit analytics developed by WeChat — China’s ubiquitous social media and payment app — offers a useful model. Then there are the basics: Hiring more actuaries, prudently pricing risk, and matching assets with liabilities may not be the most exciting way to make a living, but it’s all fundamental to any insurance company.

Aspiring Chinese Buffetts also ought to pay closer attention to the Oracle of Omaha’s investment philosophy. Buffett is famously detail-oriented — and happy to walk away from deals he doesn’t understand. One wonders if even he could comprehend what China’s insurance companies are up to.

— Read Long-Awaited ‘Asian Century’ Might Not Ever Come on ThinkAdvisor.