The performance of China’s insurance sector was better than expected in the first three months, the new regulatory body tasked with supervising the country’s financial sector announced in its first work meeting in the middle of May.
One of its first duties since its inauguration on May 18, the National Administration of Financial Regulation reviewed the solvency and risk profile of key insurers and the sector as a whole. Solvency supervision is an important way of monitoring risk in the sector and detecting early warning signs.
The National Administration of Financial Regulation was established in March to replace the China Banking and Insurance Regulatory Commission. This body will take on supervisory duties, such as the protection of financial consumers and investors, from China’s central bank.
Li Yunze, the Former Vice Governor of southwestern Sichuan province, was appointed as the Head of the regulatory body on May 10.
Supervision over the insurance industry, especially over insurers’ solvency, should be further strengthened to firmly safeguard the bottom line of preventing systemic financial risks, said the newly unveiled National Administration of Financial Regulation.
The NAFR was formed on the basis of the former China Banking and Insurance Regulatory Commission and evaluated the Chinese insurance market while making observations at its first work conference.
Revenue from insurance premiums jumped 9.2% in the first three months from a year ago to CNY1.9 trillion ($277.4 billion), the regulator said. The annualized rate of return on the investment of insurance funds was 5.2%, showing a good upward trend.
The regulatory body commented that the solvency ratios, which are a gauge of the risks faced by insurers, narrowed significantly and remained within a reasonable range. The average comprehensive solvency ratio of the 185 insurance firms was 190.3%, and the average core solvency ratio was 125.7%.
Newly added insurance policies surged 34.6% to CNY15.8 billion ($2.2 billion) in Q1 2023, while the amount in compensation paid jumped 9.3% to CNY493.2 billion ($70.1 billion).
Insurance firms had CNY28.4 trillion ($4 trillion) in assets as of March 31, an increase of 4.5 % from the beginning of this year. The balance of capital utilization in the insurance sector climbed 10.7% to CNY26.3 trillion. Actual capital reached CNY4.7 trillion ($668.7 billion) and the minimum capital requirement was CNY2.4 trillion.
The minimum solvency adequacy ratio for insurance companies is set at 100% in China. The regulator will require the insurer to suspend all businesses once the ratio drops below the 100% level.
At the end of 2022, the average comprehensive solvency adequacy ratio of Chinese insurance companies was 196%.
The decline in insurers’ solvency adequacy ratio has narrowed significantly and remains within a reasonable range, the NAFR said at its meeting.
According to Fitch Ratings, smaller and weaker life and non-life insurers in China are likely to seek additional capital this year to support their solvency positions after organic growth in capital weakened in 2022 due to global market volatility.
Although China’s optimized COVID-19 control measures since December, the gradual recovery of its economy and better consumer sentiment will boost insurers’ growth momentum this year, Fitch predicted.
Market insiders said that Chinese life insurance companies’ assumed interest rate will be lowered in June, although the rate was once set at 3.5 %. The former CBIRC’s industry research in March to find out the cost of debt of insurance companies is considered a signal to lower the rate.
Zheng Xinru, a researcher at Zhixin Investment, said, “The expected lowering will push the assumed interest rate to adapt to market changes, as the five-year bond yield now is 3.12% and the five-year deposit rate is set below 3%, both of which are quite low compared to historical data.”
Fang Guobing, another researcher at the Shanghai National Accounting Institute, said, “The declining assumed interest rate helps enhance insurance companies’ solvency in light of the current macroeconomic situation and the market interest rates. The new policies will further regulate insurance companies’ product design and marketing, preventing insurers from passing on high-risk investments to policyholders, he said.”
