Fitch sees potential for increased market exposure, but warns of heightened earnings volatility
Chinese insurers are poised to ramp up equity investments following a regulatory move to lower capital requirements, a step aimed at bolstering the domestic capital markets.
On May 7, the State Council Information Office announced a 10% cut in the capital charge for equity investments used in calculating insurers’ solvency ratios. The change is expected to ease pressure on insurers’ capital positions and encourage long-term investment in equities.
According to Fitch Ratings, the revised rule is likely to prompt insurers to increase their exposure to equity markets. However, the credit agency cautions that greater equity allocations could introduce more earnings volatility and strain capital buffers, particularly during periods of market turbulence.
This is the second adjustment to investment risk charges since the introduction of the China Risk-Oriented Solvency System (C-ROSS) Phase 2 in 2021. The latest revision reflects efforts by regulators to support insurers struggling to maintain sufficient capital levels and to provide a stabilizing force in financial markets.
As of the end of 2024, equity investments accounted for 15.3% of total invested assets for life insurers and 13.5% for non-life insurers. Fitch expects these proportions to rise, citing regulatory easing and persistently low domestic interest rates as contributing factors.
Despite the regulatory incentive, insurers are likely to proceed cautiously. Fitch notes that firms will continue to balance potential returns against risks to earnings stability and the need to align assets with liabilities.
Non-life insurers, whose liabilities tend to be shorter in duration and more liquidity-sensitive, are expected to remain conservative in expanding equity positions. Life insurers, while already more heavily invested in equities, may have limited room for further increases.
The capital charge reduction is anticipated to strengthen life insurers’ solvency ratios, potentially enabling them to expand operations or undertake more capital-intensive business initiatives.
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