Declining interest rates in China are said to have led to narrowing spreads and increased reinvestment risk for domestic insurance firms, which ultimately places a greater onus on insurers’ asset-liability management.
Global ratings agency AM Best, has stated that with yields of 10-year government bonds remaining below 3% across the past couple of years, they are no longer meeting the assumed rate-of-return requirements for some long-term protection products.
Looking back, the investable portfolio of China’s insurance industry increased by 9.9% year over year, to CNY 27.1 trillion (approximately USD 3.7 trillion) as of the end of June 2023, according to statistics from The National Administration of Financial Regulation (NAFR).
Best noted that the asset mix has been largely stable so far since 2022 and through H123. The proportion of bonds has gradually increased and also remains the largest asset class, accounting for 43%.
The share of bank deposits and other assets also declined modestly from Q122 to the end of June 2023, while the proportions of equities, investment funds, and long-term equity investments are said to have remained stable.
Additionally, Best stated that the proportion of participating policies by gross premium revenue has seen a decline in recent years, shrinking insurers’ buffer to absorb investment risk in the current in-force portfolios.
“To address the risk of negative spread, insurers have extended the duration of their assets, but high-quality, long-duration domestic investment instruments remain relatively scarce, leading to reinvestment risk,” said James Chan, director, analytics, AM Best.
“On the liability front, insurers aim to enhance their resilience by lowering assumed rates, and since August, most products with a 3.5% rate have been taken off the shelves and replaced by newer products yielding 3.0% or less.”
Best also highlights how insurers have been making alternative investments, seeking stable returns that are often higher than returns on traditional fixed-income securities, which includes government bonds.
But, despite recent regulatory initiatives, Best stated that it expects insurers to maintain a “cautious approach” toward increasing their equity exposures.
The agency notes that participating products should begin to see stronger growth momentum as policyholders find potential upside in profit-sharing more appealing and competitive than traditional products with lower rates.
Lastly, Best also expects the segment to enhance its value proposition by strengthening product coverage and service quality customized to changing customer needs, instead of competing over return rates as benefits.
