HONG KONG (S&P Global Ratings) Sept. 13, 2023--China's recent easing of regulatory solvency standards for insurers will likely boost the sector's appetite for more investment risk-taking, particularly in equities. Concurrently, a lowering of minimum capital requirement for small and midsized insurers might weaken their financial strength. These changes could dilute credit strength for the sector.
"Lower risk-weights on equities, including tech stocks, will likely lead insurers to raise their allocations in China's stock markets," said S&P Global Ratings analyst WenWen Chen.
This is not the first time that regulators eased standards amid market volatility, in an apparent bid to boost markets through insurance funds, which tend to be stickier. Regulators did so in 2015, amid a market rout. That easing did not lead insurers to aggressively increase exposures; however, this time could be different.
"Current market conditions are very tough for insurers," said Ms. Chen. "This is why we think they are willing to take on more market risk, in a hunt for higher yield."
Amid lower policy rates, life insurers are facing challenges to meet up to 3.5% guaranteed rates offered on policies sold prior to July 31, 2023. For the property and casualty (P/C) insurers, subdued underwriting margins in China's competitive insurance market have led to a reliance on investment income to support overall profitability.
Besides lowering risk weights for equities, the notice published on Sept. 10, 2023 announced other changes aimed at reducing regulatory solvency capital stress on insurers:
- Differentiating minimum capital requirements based on the asset size of insurers.
- Raising the cap on future-profits contribution within core solvency calculations.
LARGER VULNERABILITIES FOR SMALLER INSURERS
The new rules effectively lower the minimal capital requirements by 5% for midsized insurers and 10% for smaller ones. This in turn boosts the solvency ratio, given minimal capital is the denominator in that ratio.
The discounts are determined by asset size. Specifically, life insurers with total of between Chinese renminbi (RMB) 50 billion and RMB500 billion; and P/C and reinsurers with total assets in the range of RMB10 billion and RMB200 billion will effectively see their minimum capital requirement reduced by 5%. A 10% discount is in store for life insurers with total assets of less than RMB50 billion and P/C insurers with total assets of less than RMB10 billion.
"This easing will give small and midsized players the leeway to embark on accelerated growth or higher investment leverage; i.e., more investment options," said Ms. Chen. "It will also increase their vulnerabilities."
In our view, limited scale economies compared with the major players strain small and midsized players' competitive advantage. In the face of a higher asset-to-capital ratio, these smaller insurers may become more susceptible to sharp market volatility.
EASING STRAINS FROM C-ROSS PHASE II ADOPTION.
We believe some large life insurers could also get some relief on core solvency ratios, due to relaxation of "future profit" caps. Insurers can now recognize a 40% contribution of future profits in core solvency capital. This compares with the 35% cap set since early 2022 with the implementation of China's risk-oriented solvency system (C-ROSS) Phase II. Core solvency ratios declined substantially for some large life insurers after phase II (see "China Insurance: Change Is Painful," published on RatingsDirect on June 20, 2023).
A number of these life insurers are in the middle of a three-year transition period (2022-2024) for C-ROSS Phase II, even as they face limited options to fund their core solvency capital to uphold adequate buffers. The minimum core regulatory solvency ratio is 50%. Insurers may also take the opportunity to increase dividends to boost stock prices, which in due course, could entail lesser capital than prior to the change.
Related Research
- China Insurance: Change Is Painful, June 20, 2023
- Loosened Regulations Are Unlikely To Trigger Major Equity Investments Among Chinese Insurers,
, July 10, 2015
This report does not constitute a rating action.
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| Primary Credit Analyst: | WenWen Chen, Hong Kong + 852 2533 3559; wenwen.chen@spglobal.com |
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