China’s capital charge cut to spur insurers’ equity investment

State Council Information Office announced a 10% reduction in the capital charge.

Fitch Ratings expects Chinese insurers to increase their equity investments following a regulatory move to reduce capital charges, though the shift could add volatility to earnings and capital positions.

On 7 May, the State Council Information Office announced a 10% reduction in the capital charge for equity investments used to calculate insurers' solvency ratios. 

This measure lowers capital requirements and is part of broader efforts to stabilise domestic capital markets by encouraging long-term equity investment.

The change is the second revision to investment risk charges since the launch of the China Risk-Oriented Solvency System (C-ROSS) phase 2 in 2021. 

It also addresses difficulties some insurers face in maintaining adequate capital buffers.

As of end-2024, equity investments made up 15.3% of life insurers' invested assets and 13.5% for non-life insurers. 

Fitch anticipates this proportion will rise, supported by regulatory easing and persistently low interest rates in China.

Despite the incentives, Fitch notes that insurers are likely to weigh their risk appetite, earnings volatility, and asset-liability alignment before adjusting their portfolios. 

Non-life insurers, in particular, are expected to limit equity exposure due to shorter liability durations and liquidity needs. 

For life insurers, who already hold significant equity assets, the scope for further increases may be limited.

The reduced capital charge is expected to improve life insurers' solvency ratios, enabling them to expand business operations or pursue other capital-intensive activities.