The Chinese government’s recent move to reduce capital charges aims to encourage insurers to invest more in equities, with potential effects on their capital and earnings stability.
Regulatory Shift to Spur Equity Investments
On May 7, China’s State Council Information Office announced a 10% reduction in the capital charge for equity investments used in insurers’ solvency calculations. This change is designed to encourage long-term equity investments and support the domestic capital markets.
Impact on Solvency Ratios and Investment Strategy
Fitch Ratings expects Chinese insurers to increase their equity investments as a result of this regulatory change. By lowering capital requirements, the move is expected to make it easier for insurers to meet their solvency ratios and expand operations. However, the shift may introduce more volatility into their earnings and capital positions.
Revisions to China’s Risk-Oriented Solvency System
This reduction marks the second adjustment to investment risk charges under the China Risk-Oriented Solvency System (C-ROSS) since its phase 2 implementation in 2021. The change also aims to address challenges faced by insurers in maintaining sufficient capital buffers.
Shift in Investment Proportions Expected
Currently, equity investments make up 15.3% of life insurers’ assets and 13.5% for non-life insurers. Fitch predicts these percentages will rise due to the capital charge reduction and ongoing low interest rates in China.
Risk Considerations for Insurers
While the capital charge cut provides an incentive for increased equity investment, insurers will likely assess their risk appetite and earnings volatility before making portfolio adjustments. Non-life insurers, in particular, are expected to limit equity exposure due to shorter liability durations and liquidity needs.
Implications for Life Insurers’ Solvency
For life insurers, who already hold a significant amount of equity, the room for further increases may be limited. However, the reduced capital charge is expected to improve solvency ratios, allowing life insurers to expand operations or pursue capital-intensive ventures.
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