Regulatory measures implemented in China, so far this year, are mostly credit positive for Chinese insurance companies as they mitigate the build-up of risk, however, Moody’s Investors Service also highlights a number of potential hindrances to market growth and profitability for certain companies.
The regulatory landscape in China continues to evolve, and measures implemented in 2017 have, for the most part, been credit positive for Chinese insurance companies and the broader industry as they are helping to reduce the accumulation of risk.
This is according to international financial services ratings agency, Moody’s, which has discussed the reform and stability of the Chinese insurance sector, in light of regulatory changes witnessed in 2017, so far.
Qian Zhu, a Moody’s Vice President (VP) and Senior Credit Officer, said; “The intention of regulators is to shift product focus back to protection, lower asset risks, and ensure tighter screening of the shareholders of insurers. Specifically, such measures mean an increased focus on regular-premium products with higher protection elements, and discouraging aggressive pricing; a reduction in the concentration risk on single-equity investment exposures; and shareholders will be less likely to leverage policyholders’ funds for their own investment objectives.”
But despite the positives, Moody’s also highlights some potential challenges as a result of recent regulatory measures, including a warning that the ban on short-term savings products exposes certain players to liquidity stress and also lowers the potential for new business growth.
Moody’s also warns that regulatory sanctions on certain industry players could also result in reputational risk and increased surrender rates, which could also strain liquidity when combined with reduced business volumes.
Banking partners of certain insurance players could also become more selective when choosing shelf products, warns Moody’s, which would impact companies that are more reliant on bancassurance.
Insurance sales have also been hit by the regulatory clampdown in China, although Moody’s notes that this remains solid, but with interest rates staying low, reinvestment risks are evident across the industry.
Investments in riskier assets has also been evident across the sector, which Moody’s says lowers asset transparency and also liquidity.
“The performance of insurers will also diverge under the current tighter regulations. The most diversified and established will further leverage their strengths, because of their strong franchises, agency-focused distribution and product focus on protection and long-term savings products. But companies that have adopted aggressive sales strategies – usually smaller firms – will face larger challenges because of their heavy reliance on bancassurance and aggressive investment strategies,” warns Moody’s.
Adding that larger insurers in the region will most likely benefit from improved earnings in the future, as both the growth and value of new business outpaces the expansion of its first-year premium income.
