Eight of the top 13 life insurers in China have experienced a decline in their solvency level since the fourth quarter of 2015, underscoring the crucial need for regulation/supervision that ensures the industry develops in a viable and sustainable manner, says an A.M. Best report.
The Best’s Special Report, “How Chinese Life Insurers Need to Adjust to the New Regulatory Reality,” explores how regulators in China’s life insurance sector have had a profound effect on the industry with the influence and enforceability of changes they have enacted. These changes will continue to affect life insurers in a wide range of areas, including product development, distribution, investments and risk management.
The companies that exhibited gaps in their solvency level under the China Risk-Oriented Solvency System (C-ROSS), which was fully implemented in 2016, experienced rapid growth in their total required capital that outpaced their actual capital. The top 13 companies represent approximately three-quarters of the total market share. For the eight companies that saw a decline in its capital level, the magnitude ranged from 15% to more than 100%.
These life insurers showed signs of solvency improvement in the first half of 2017 due to slower growth in the capital required to support market risk on a quarter-to-quarter basis, relative to the growth in the actual capital during the last quarter.
To further improve their solvency position, A.M. Best believes the companies should look at their asset allocations, and consider duration-matching and investment risk more prudently during the investment decision-making process. However, it will take time for companies to divest and rebalance their investment portfolios, particularly if they were already heavily invested in private equity or other long-term investments that have less liquidity.
Life insurers also may need to adjust their business mix to achieve a liability mix and duration that can be matched with appropriate investment assets.
China’s growing middle class continues to provide ample business opportunities for life insurers to expand their book of business. However, life companies that are less skilled in asset-liability management will face pressure to sustain their business viability as well as capital adequacy over the medium term, and industry consolidation could occur as a result.