Chinese Insurers to Benefit From More Investment Options

by CFO Innovation Asia Staff, 31 July 2012

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Finance and Banking Insurance

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assets insurers potential liabilities

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Chinese insurers should be able to match the duration of their assets and liabilities more accurately, and may benefit from improved earnings stability, following a decision to relax restrictions on the investments they can hold, Fitch Ratings says.

However, insurers will need to improve their risk-management practices in light of the greater complexity of the assets they are now allowed to own.

The new rules, among other changes, allow insurers to invest in hybrid and convertible bonds, and raise the ceiling for investment in unsecured bonds, private equity, infrastructure-related debt and real estate.

This increased flexibility will give insurers the ability to invest in bonds with a wider range of tenors, reducing the risk of asset/liability mismatches.

Chinese insurers’ earnings have been volatile over the last few years because of sharp fluctuations in the stock market. The rule changes could reduce this volatility if they drive a further reallocation of assets from equities to bonds or even real estate – asset classes which can generate relatively stable interest or rental income.

The changes are timely, as strong premium growth has increased insurers’ needs for suitable investment vehicles. The lift in the ceiling on unsecured bond investments, in particular, will allow insurers to enhance yields. However, this greater freedom must be matched by improved risk-assessment practices and tighter investment discipline.

Internal controls to prevent insurers taking undue risks are particularly important because China’s solvency rules do not take account of the specific investment risks of insurers’ invested assets, although there will be a required minimum solvency ratio of 120% to invest in unsecured bonds, private equity and real estate.

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