AM Best addresses concerns on China's economic slowdown, highlights insurer financial security

China will diversify its sources of economic growth to counteract the impact of an ageing and declining population.

In response to concerns about China's economic slowdown and sovereign risk, AM Best emphasised that a company's financial security can surpass that of its home country, and placing a sovereign ceiling on an Insurance Credit Rating (ICR) would overlook a company's ability to manage country risk through various strategies.

China is classified as a CRT-3 country by AM Best, characterised by low economic risk and moderate levels of political and financial system risk. 

Despite challenges, no immediate changes to its tier are anticipated. Under C-ROSS Phase 2, with most rated Chinese insurers being established or financially strong, their balance sheet strength assessments are generally in the "very strong" category. 

The overall balance sheet strength of Chinese insurers closely aligns with those in CRT-1 and CRT-2 countries.

Despite China's positioning in CRT-3, the country faces challenges, including off-balance sheet debt from local government financing vehicles (LGFVs) and a sluggish property sector impacting economic growth. 

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AM Best anticipates China utilising fiscal and monetary tools for short to medium-term growth targets amid structural changes.

The LGFVs in China hold significant debt relative to GDP, raising concerns about servicing debt obligations. While the central bank has pledged emergency support, the sheer scale of debt may lead to cautious and selective government support based on factors such as strategic importance and ownership structure.

The real estate and infrastructure sectors, constituting over 30% of China's GDP, have faced declines, prompting government interventions. 

Despite recent IMF growth forecasts for China, concerns about financial stability persist. AM Best expects that, over the longer term, China will diversify its sources of economic growth to counteract the impact of an ageing and declining population.