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China Insurers Have To Balance Capital And Investments

HONG KONG (S&P Global Ratings) July 22, 2020--The Chinese regulator's updated guidelines on tiered equity investment limits for insurers based on their comprehensive regulatory solvency will likely prompt insurance companies to review their equity investment appetite. S&P Global Ratings expects the potential increase in allocation toward equity investments for some insurers to further dent their capital buffers. The higher allocation will increase the strain on the sector, which we had assessed as having a negative credit trend in early 2020. Faced with reinvestment risks amid lower for longer interest rates, the added sensitivity toward equity market volatility will erode insurers' ability to withstand losses.

On July 17, 2020, China Banking and Insurance Regulatory Commission (CBIRC) released updated guidelines for supervision of insurance companies' equity asset allocation. The regulator incorporated differentiation through seven categories of equity investment caps (ranging from 10% to 45% of total assets from the previous quarter) based on the insurance companies' comprehensive regulatory solvency ratio. A higher comprehensive regulatory solvency ratio will indicate that a greater level of cap applies. Before this revision, the equity investment limit was 30% for all insurers. The CBIRC also said it was taking control of four insurers to protect policyholder interests. These insurers are: Huaxia Life Insurance Co. Ltd.; Tianan Life Insurance Co. Ltd.; Tianan Property Insurance Co. Ltd.; and Yi'an Property Insurance Co. Ltd. During the year-long takeover period, these companies will remain operational, while being entrusted to leading insurance players within the market.

Reinvestment risks are mounting for Chinese insurers, particularly life insurance companies, as interest rates are likely to stay lower for longer. This comes at a time when the asset-liability duration mismatch is widening as insurers focus on offering more longer-duration protection policies. In our view, the low interest rate trend will call for hiking reserve provisions, denting profitability. In addition, China's slower economic growth and increasing counterparty risks constrain insurers' ability to seek good quality and liquid investments. With rising allocation toward equity investments, the correlation between insurers' earnings and capital market performance will increase. The disclosed sensitivity tests of some listed insurance groups indicate that a 10% drop in equity prices could have resulted in an about 10% reduction in the profit for 2019.

In our view, the tiered approach within the equity investment regulations reflects the regulator's renewed efforts to curb risks within the insurance sector. Through the introduction of differentiated equity investment caps, the onus is on the insurers to manage their investments. We believe the alignment of regulatory solvency to equity investment limits will prompt enhanced cooperation and dialogue between capital and investment management teams, limiting silo-risk management.

This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

Primary Credit Analysts:Eunice Tan, Hong Kong (852) 2533-3553;
WenWen Chen, Hong Kong (852) 2533-3559;
Secondary Contact:Terry Sham, CFA, FRM, Hong Kong (852) 2533-3590;

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