Chinese insurers will likely report lower investment yield and earnings this year as Beijing battles the Wuhan coronavirus epidemic, but they should weather the volatile markets courtesy of regulators’ earlier efforts to lift industry risk standards, say rating analysts.

The country’s policymakers are expected to try to mitigate the economic damage done by the coronavirus outbreak by offering more fiscal spending and interest rate cuts. Such rate drops would likely cause insurers to see their investment yields drop, Frank Yuen, a senior analyst for the financial institutions group at Moody’s Investors Service, told AsianInvestor.

Moreover, when some non-standard assets mature, insurers may shift part of their investments into safer but lower-yielding assets like government bonds instead of investing in such assets again, he added. 

In addition, Chinese life insurers' earnings are expected to weaken in the short term as a result of higher claims, slower premium growth and lower investment yields due to low interest rates, Fitch Ratings said in a report.

The central bank has lowered its new benchmark lending rate – the loan prime rate (LPR) – by a total of 16 basis points since last August to 4.15%. The one-year benchmark deposit rate now stands at 1.5%. 

Ma Jun, an external adviser to the People's Bank of China’s (PBOC) monetary policy committee, suggested on Monday February 10 that the country’s monetary authorities consider lowering benchmark deposit rates so that banks have more room to reduce lending rates to small businesses in difficult times. 

EQUITY IMPACT LIMITED

While the outcome for fixed income investments isn’t rosy, analysts believe the longer-term effect on insurers’ equity investments will be limited.

This is partly because most insurers have increasingly invested in long-term equity, which is defined as equity stakes in public or private companies that are large enough for the buyer to secure a board seat and take part in the company’s direction.

Long-term equity investment can reduce volatility in earnings due to its accounting treatment. The capital charge for such investments is also lower compared with allocations in listed stocks, Yuen said.

Indeed, Ping An said in 2018 that its investment income had become more volatile after adopting International Financial Reporting Standards 9, and that it would continue to source long-term equity investments to diversity its risk and lower the impact of market volatility.

Most recently, insurers that have relatively higher solvency ratios and asset liability management (ALM) capabilities have been permitted to increase their equity investments beyond the standard cap of 30% of their portfolios, according to Cao Yu, vice chairman of the China Banking and Insurance Regulatory Commission.

Cao made the announcement in a press briefing on how the financial sector can help amid the Wuhan coronavirus outbreak in early February. The regulatory change is apparently an attempt by the regulator to encourage insurers to offer long-term funding for the development of the real economy and help to lower corporates’ leverage ratios.

However, Yuen believes the country’s largely risk-averse insurers will unlikely increase their equity investments even after the investment cap is raised. This was borne out by the chief investment officer of an insurer in China, who told AsianInvestor that his company is now neutral on equities.

SUSTAINING THE BLOW

Despite the current investment challenges, Fitch believes that China’s insurance industry will maintain an adequate capital buffer in view of their comprehensive solvency ratios under the China Risk-Oriented Solvency System (C-Ross).

Most of the country’s life and non-life insurers are well-capitalised, boasting an average solvency ratio of more than 200%, well above the 150% threshold, the agency added.

Insurers have also enhanced their asset-liability management capabilities as a result of an overarching ALM framework introduced in early 2018. This allows insurers to more consistently and precisely measure the duration and liquidity of their assets and liabilities.

“The duration gap (the difference between the duration of the assets and liabilities held by an insurer) is smaller, so even if there is some interest rate shocks, the impact on their earnings and capital are smaller,” Yuen said.

Moreover, short-term and high-yield products are also fading out due to a sustained regulatory clampdown, leading to insurers to possess more stable liability structures which give them more room to sustain volatility in the capital market, he added.