Monday's establishment of the China Life Insurance Assets Management Co Ltd, the largest of its kind in the nation, was a signal it is only a matter of time before domestic insurers can invest directly in the capital market.

The State Council declared a nine-point strategy to boost development of the capital market in February. And the China Insurance Regulatory Commission recently also issued a long-awaited provisional regulation on the supervision of insurance asset management companies, which took effect on June 1.

With the introduction of insurance asset management companies, it seems everything is in place for domestic insurers to embrace the supposed high-return capital market.

Thanks to the country's strong economic growth, gross assets owned by China's insurance sector soared to 1.036 trillion yuan (US$126.3 billion) by the end of May.

But limited investment opportunities in China have forced domestic insurers to focus their investment on cash, deposits and government bonds.

Meanwhile, competitive sales of insurance contracts have exposed many to the heavy burden of negative spread.

A bridge between the insurance sector and the country's capital market thus looks like a win-win deal for both sides.

For instance, insurance companies can help promote prudential investment and quench the domestic stock market's thirst for funds. On the other hand, new flexibility in asset management and investment will enhance domestic insurers' profitability.

However, it will not be that easy.

The declining stock markets indicate they may not be an ideal place for domestic insurers to alleviate their negative spread. Nor it is realistic for insurance companies to cure the ills of domestic stock markets all by themselves. And to invest abroad is another problem involving no less risk.

In fact, the most pressing challenge for domestic insurers comes from their international peers. The restrictive entry requirements on foreign rivals will be phased out this December in accordance with China's pledge upon gaining entry into the World Trade Organization in 2001.

To weather growing competition, domestic insurers must raise their risk management to the international level as soon as possible.

The current deregulation that encourages investment diversification is only a means. The end still requires more and immediate efforts to sharpen supervision and speed up domestic insurers' internal reforms.

(China Daily July 2, 2004)