China's insurers are likely to strengthen investment risk controls after the rollout of a new stock directive. Regulators are encouraging insurers to invest a portion of their incremental premiums into the stock market. Promotion of participating life policies means policyholders will share in the risks and rewards. But as equity allocations gradually rise, so too could market risk. Capital buffers could also narrow, and earnings volatility increase.
What's Happening
From 2025, authorities expect major state-owned insurers to invest 30% of newly added insurance premium into yuan-denominated A shares. In the interim, regulators will establish a performance measure for state-owned insurance companies over a cycle of more than three years. The directive aims to stoke capital markets and we expect it could introduce Chinese renminbi (RMB) 300 billion-RMB500 billion in insurance funds to the equity market.
Why It Matters
This directive complements the prospective investment strategies of life insurers. To manage interest rate risk, insurers are promoting participating life products, which allow them to share investment risks with policyholders. The returns on these policies tend to come with low guarantees and vary according to market performance. Because of this, life insurers typically invest more in stocks for the funds that manage these types of policies.
Chart 1
Life insurers and other market participants are hunting for yield and willing to take on more risk. The credit profiles of the insurers we rate remain stable. But as institutional investors, insurers--particularly small and midsize insurers--are finding the conditions tough. Low interest rates and volatility have weakened the balance sheets of some insurers in recent years.
What Comes Next
Insurers will place more emphasis on investment risk controls. We anticipate more active stress testing to oversee financial positions and more emphasis on managing concentration risk. Regulatory solvency will remain paramount, in our view. Some small and midsize insurers may be reluctant to increase equity holdings because of their constrained regulatory solvency position. The 12-month extension of the C-ROSS II transition period (to end of 2025) means some insurers are still struggling to meet the regulatory requirements after the three-year transition period for C-ROSS Phase II (effective from January 2022).
Related Research
- China Insurance: Time For Tough Medicine, Sept. 25, 2024
- Revised Regulatory Standards Could Be Credit Negative For Insurers in China, Sept. 13, 2023
- Loosened Regulations Are Unlikely To Trigger Major Equity Investments Among Chinese Insurers, July 10, 2015
This report does not constitute a rating action.
| Primary Credit Analyst: | WenWen Chen, Hong Kong + 852 2533 3559; wenwen.chen@spglobal.com |
| Secondary Contact: | Judy Chen, Hong Kong + 852 2532 8059; judy.chen@spglobal.com |
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