Moody’s Investors Service has upgraded its outlook on the life re/insurance industry in China from negative to stable as the sector improves its product mix and stabilises its asset risks.
A recent report by the rating agency found that risks are subsiding for Chinese life insurers’ product and investment portfolios, and that major insurers are leading a push towards long-term savings and protection-type products.
Moody’s also expects the sector to benefit from the Chinese Government’s economic policies, which are likely to remain focused on containing leverage, and on improving the quality and strength of growth.
Qian Zhu, a Moody’s Vice President and Senior Credit Officer who authored the report, commented: “The change reflects our expectation that the current moderate economywide build up in leverage, a shift to a more sustainable product mix, and a slowdown in investment allocation to high-risk assets will prevent further deterioration in the creditworthiness of Chinese life insurers over the next 12-18 months.”
He added: “For life insurers, premium growth will be lower in 2018, but insurance demand will be supported by steady economic growth, low insurance penetration and initiatives to promote long-term products.”
Cash flows are also likely to be more stable going forward, as renewal premium is increasingly accounting for a larger proportion of total premiums, and as the premium growth for short-term savings products like universal life policies continues to decline.
Additionally, life insurers have responded to tighter regulations and higher interest rates by reducing the use of high-risk assets in their investment allocation, and Moody’s expects them to report stable profitability and solid solvency metrics over the next 12-18 months.
As the industry continues to shift towards more profitable protection-type products, underwriting profit will see likely see improvements, and solvency ratios are also expected to stay solid, supported by lower reserve recognition resulting from rising liability valuation rates.
However, Moody’s cautioned that, despite its stable outlook for the industry, insurers that are late to adopt their business transformation will continue to face heightened challenges to profitability and capitalisation.
