Insurance companies are required to cap their outstanding overseas financing that is backed by domestic guarantees at 20% of net assets as of the end of the previous quarter, according to a joint notice issued yesterday by the CIRC and the State Administration of Foreign Exchange (SAFE).
The notice was issued to strengthen supervision over overseas investment of insurance funds, improve laws and regulations over the use of insurance funds in overseas investments, guide insurance funds to serve the Belt-Road national strategy and prevent overseas investment funding risks.
The notice stipulates that only an insurance group holding company can undertake overseas financing activities backed by domestic guarantees. It stipulates that the company is either to apply to a domestic bank to open a letter of guarantee or standby letter of credit for special-purpose vehicles (SPVs) or it is to directly provide the guarantee to the SPVs for the latter to obtain loans from foreign banks.
The CIRC/SAFE directive also seeks to standardise the form of the counter-guarantee and collateral. The insurance group holding company can provide such backing by way of a guarantee or a pledge of assets that are to be from the company's own funds. Liabilities or liability reserves should not be used in any form to provide the security or counter-guarantee.
Third, the notice sets out a clear financing ratio and requires that the financing purpose is clear. The funds borrowed overseas that are backed by domestic guarantees are capped at 20% of net assets as of the end of the previous quarter. They should be included in the insurer's financial leverage ratio for risk management purposes. The borrowed funds are to be used for the investment projects of the SPVs that are to be in line with the government's policy guidance and relevant requirements on overseas investment and the CIRC's policies on the overseas application of insurance funds.
Insurance companies also have to carry out a valuation of their overseas investment projects and have audits conducted.