The central government will initiate a pilot insurance exchange in Shanghai, said Wu Dingfu, the head of the China Insurance Regulatory Commission (CIRC).

"Setting up an insurance exchange is part of Shanghai's plan to become an international financial center, which is something the CIRC, as a financial regulator, strongly supports," Wu said on Sunday at the annual session of the National People's Congress.

"The Shanghai government and the CIRC have fully discussed the issue and the initial decision has been made to pilot an insurance exchange in Shanghai."

Wu's announcement confirmed earlier media speculation that Shanghai was close to building such an exchange.

Xu Wenhu, director of the insurance research center at Fudan University and head of the research group for the proposed exchange, told China Daily on Feb 17 that the municipal government had completed preliminary work on the plan and submitted it to the State Council.

Wu did not give away any details about the specific functions and potential players that might be involved in the exchange. Xu, though, said the participants would "probably" include foreign insurers.

A report in the Security Times on Feb 17 speculated that the exchange would initially trade in liability insurance, reinsurance, and property and group life insurance products.

The article suggested the exchange will offer risk securitization products, catastrophe bonds and insurance derivatives at a later date.

Companies dealing in life insurance, property insurance and reinsurance as well as insurance brokers will be among the main participants in the proposed exchange, according to the report.

Also on Sunday, Wu said the CIRC is working on specific entry rules for insurance funds wanting to invest in government-subsidized affordable housing projects. He said the CIRC plans to also pilot those ideas in Shanghai.

"There is no legal barrier to stop investment funds investing in affordable housing projects. We have decided to pilot it in Shanghai and relative works are on-going."

But he cautioned that risk management was still the top priority for insurance funds because they need to provide returns for insurance policyholders.