China's insurance reforms aim to support smaller insurers

However, larger insurers continue to dominate the market.

Chinese insurers face mounting operational uncertainties amidst a challenging economic and regulatory environment, according to Fitch Ratings' report from September 2024. 

Key challenges include low interest rates, increased exposure to real estate-related credit risks, and changing distribution channels.

Life insurers are particularly vulnerable to low interest rates, which lead to potential negative spread as investment returns fail to cover long-term liabilities. 

Many have responded by promoting protection-type products and adjusting their portfolios to include more long-term government bonds and high-dividend stocks. 

Meanwhile, property and casualty insurers are less affected by spread losses but face pressure to maintain underwriting profitability due to declining reinvestment yields.

The industry's reliance on real estate investments poses additional risks, particularly for private insurers with higher exposure to speculative investments. 

Whilst the sector remains generally stable, certain pockets of the market could experience significant challenges.

Chinese regulators have introduced reforms under the China Risk-Oriented Solvency System (C-ROSS) Phase II to help smaller insurers by lowering capital requirements and reducing commission rates. 

However, larger insurers continue to dominate the market, creating barriers for smaller players, particularly in the property and casualty sector, where the top three insurers hold over 65% of the market.

The report notes that smaller insurers face challenges related to business homogeneity, solvency pressure, and higher reliance on third-party channels. 

They also struggle with investment management, given their limited access to high-yield, lower-risk assets.

Changes in distribution channels are also affecting insurers. The number of individual agents has declined significantly, and whilst the bancassurance channel remains important, new regulations have reduced commission rates, leading to a drop in sales volume. 

Moving forward, insurers will need to balance product margins and customer service to adapt to the evolving distribution landscape.

Fitch Ratings expects Chinese insurers to focus on optimising product mixes, improving operational efficiency, and enhancing risk management to navigate these challenges.