Chinese life insurers cut projections amidst low-interest concerns

Insurers reduced pricing interest rates on traditional products, aiming to lower guaranteed liability costs.

Fitch Ratings indicates that major listed Chinese insurance groups' adjustment of economic assumptions for embedded value (EV) and new business value (NBV) in 2023 will enable them to manage long-term investment risks effectively. 

Lowering assumptions of investment return and risk discount rates in response to sustained low-interest rates is a proactive move by larger insurers, likely influencing smaller peers and enhancing industry-wide practices.

Despite these adjustments, there's no anticipated fundamental change in life insurers' operations. 

Sustainable new business expansion, coupled with optimised product structures and resilient investment returns, will remain pivotal for operating performance and EV growth.

The revised economic assumptions reinforce the sustainability of life insurers by preventing the underestimation of liabilities and overvaluation of assets. 

Strong financial fundamentals and realistic valuations will continue to position major life insurers favourably in China's competitive market. 

Aligning policyholders' expectations with actual investment performance promotes healthier, sustainable products and market discipline, discouraging high-risk practices without commensurate returns and boosting investor confidence.

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Reasonable long-term investment yield assumptions enhance life insurers' capacity to manage investment risks amid low-interest rates. 

To address challenges, major life insurers have reduced pricing interest rates on traditional life products, aiming to lower guaranteed liability costs over time and mitigate negative spread risk.

In 2023, major life insurers lowered assumed investment return rates from 5.0% to 4.5%, reflecting China's interest rate trends. This may result in lower expected future profits from new businesses and, consequently, lower NBV. 

However, product repricing could mitigate the impact. Although EV and NBV decreased due to assumption changes, the EV contraction was less pronounced. 

Notably, the NBV movement is influenced by business mix and interest rate fluctuations, with companies relying more on protection-type new business premiums and facing less pressure in a low-interest rate environment.