Higher equity investments could nick Chinese insurers' capital

The sector must manage their investments, analysts said.

The China Banking and Insurance Regulation Commission’s (CBIRC) decision to raise the equity investment cap for insurers to 45% will mark a rise in appetite but further allocation will dent insurers’ capital buffers, according to an S&P Global Ratings report.

The higher allotment will increase sector strain which S&P had assessed as having a negative credit trend in early 2020, said analysts Eunice Tan, WenWen Chen and Terry Sham. Battling reinvestment risks amidst lower-for-longer interest rates, the added sensitivity toward equity market volatility will erode insurers' ability to withstand losses.

“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,” they said.

Reinvestment risks are piling up for life insurers particularly at a time when asset-liability duration discrepancy is enlarging due to the influx of protection policies with longer durations. The low interest rate trend will also entail for elevated reserve provisions, therefore impacting profitability.

Moreover, China's sluggish economic growth and heightened counterparty risks inhibit insurers' ability to seek good quality and liquid investments. With higher allocation toward equity investments, the correlation between insurers' earnings and capital market performance will increase, the report concluded.