Chinese insurers shift to floating-return products amidst risks

Its P&C sector is under strain due to market volatility.

China’s insurance sector is facing increasing pressure due to asset-liability mismatches, as life insurers are struggling to meet guaranteed payouts that exceed current market returns, S&P Global Ratings said.

The problem is expected to worsen with falling interest rates and market volatility. S&P Global Ratings anticipates that tough measures will be implemented to address these issues.

Life insurers are especially vulnerable, with small and midsize companies feeling the strain from slower macroeconomic growth, rising unemployment, and policy lapses. 

Interest rate mismatches, a problem since 2015, have intensified as bond yields continue to decline. 

The Chinese regulator has already imposed caps on pricing interest rates, but further tightening may be necessary. 

Insurers are expected to shift toward floating-return products like participating, universal life, and unit-linked policies to manage liabilities, although these products come with higher compliance risks and may not be as popular with customers. 

As a result, life premium growth is expected to slow to 5%-8% over the next two years, down from 10.2% in 2023.

China’s property and casualty (P&C) insurers are also under pressure due to volatile capital markets and a sharp decline in interest rates. 

Underwriting losses are likely in 2024 due to extreme weather events, with catastrophe insurance expected to face increasing demand. 

Recent events, such as Typhoon Yagi and Typhoon Bebinca, caused significant economic and insurance losses. The P&C sector’s combined ratio is forecast to hover between 100%-102% in the coming years.

The government’s push for affordable insurance, including inclusive health coverage and catastrophe insurance, poses additional challenges. 

Whilst these programs offer growth potential, they are likely to have thinner margins. Slowing growth in areas like auto insurance and construction-related projects will further hinder the P/C sector.

Despite these challenges, China's insurance market remains underpenetrated, and long-term growth prospects are promising. 

However, insurers must navigate the current tough conditions, including possible asset write-downs and increased regulatory compliance, before seeing improved profitability.