The exposure of rated insurers in mainland China and Hong Kong to ailing Chinese commercial real estate assets is manageable, S&P Global Ratings analyst WenWen Chen said in a webinar.
There have been no rating actions induced by commercial real estate (CRE) on these insurers, Chen noted. The Chinese insurers' exposure comes from bonds, loans, equity and alternative assets, representing less than 5% of invested assets and 20% of shareholder equity as of early 2022. Rated insurers have also been lowering these exposures, Chen said.
"But we won't rule out those small and midsized insurers, those with larger property exposure. ... [T]hey have been susceptible to more capital earnings volatility," Chen added.
Tough medicine
Mainland China's insurance industry has tripled in size over the past decade, but this level of growth is not reflected in profitability, so it is time for "tough medicine," Chen said.
China's State Council released guidelines Sept. 11 to enhance regulation, development and risk prevention in the insurance sector. The operational burden for insurance management will intensify, given regulatory calls to tighten risk-control systems and provide more affordable insurance, Chen said.
A big challenge for life insurers is asset liability mismatches due to a larger-than-expected fall in interest rates and volatile market conditions. Some life insurers already guarantee returns higher than current market investment returns on some policies. Given the low rates and volatility, the scope for boosting returns via investment strategy is actually limited, Chen said.
Life insurers are expected to adopt floating-return policies, such as participating universal life and unit-linked policies, which are likely to contribute positively to value generation through lower liability costs. However, the uncertainty around returns could reduce the attractiveness of these products, which could lead to softer demand that may dampen the growth outlook, Chen added.
High combined ratio
Chen expects Chinese property and casualty insurers to face underwriting pressure that could lead to combined ratios of about 100% to 102% over the next two years as new car sales, construction projects and consumer confidence, combined with lower interest rates and market volatility.
Recent flooding and typhoons may also prompt policyholders to ask property and casualty insurers to provide an affordable safety net against catastrophes. Insurers will likely refine their catastrophe insurance programs and work more closely with reinsurers and policyholders on risk mitigation.
"So, you may have a question in mind: 'Do insurers in China make it through the coming tough patch?'" Chen said. "In short, yes. However, things could get worse before they become better." Some insurance companies may exit the market, and with regulators strengthening barriers to domestic entrants, the giant insurance companies will likely cement their foothold, Chen added.