The China Insurance Regulatory Commission (CIRC) announced on Monday that it has promulgated regulations that allow insurance companies to replenish their capital base by issuing subordinated bonds.

The move follows a precedent set last year by the China Banking Regulatory Commission, which permits Chinese banks to issue such bonds.

Allowing insurers to issue subordinated bonds will help them improve solvency margins, a CIRC spokesman said. Proceeds from such bonds are calculated as second-tier capital when regulators appraise insurers' solvency margins.

Expanding the channels through which insurers can raise capital will also help expedite the development of the Chinese insurance industry, which is now greatly hampered by capital inadequacy.

Only the three largest Chinese insurance companies have made initial public offerings during the past year to raise capital. Others generally tried to shore up strength by increasing existing shareholders' equity or ushering in foreign investors.

"But those channels face problems of lengthy time and high cost," the spokesman said. "Difficulty in raising funds has become a major problem hindering the development of China's insurance industry."

Insurers are allowed to issue subordinated bonds with maturities of not less than five years, and the bonds rank behind all issuer liabilities and only before preferred and common stocks in terms of claims on issuer assets.

Issuers are not allowed to repay the bonds if they cannot meet regulatory solvency requirements after doing so, and creditors are not entitled to file bankruptcy charges in the event the issuer fails to repay.

(China Daily October 12, 2004)