Chinese insurers' insolvency still strong, but risks persist

Both life and P&C insurers can suffer from insolvency drops this year.

Chinese insurers' solvency remains robust given higher earnings from lower tax rates and an equity market rebound in 2019, but ratios could dip in 2020 due to the coronavirus and the implementation of Phase II of the country's insurance capital regime, according to a Moody’s report.

Life insurers’ solvency ratios are expected to drop in Q1 2020 to reflect the plunge in stock prices in the period, and remain exposed to lower stock prices and interest rates, said Moody’s vice president and senior analyst Frank Yuen.

"That said, higher valuation on insurers' fixed income assets, slower business growth and improving profitability will support solvency, and C-ROSS Phase II will tighten the discipline on capital management," adds Yuen.

The China Risk Oriented Solvency System (C-ROSS Phase) II will encourage insurers to improve asset and liability duration matching by investing in long-dated fixed income investments, the report said, which will allay the potential increase in their duration mismatch under the waning interest rate environment, which could raise interest rate risk charges and reduce solvency.

P&C insurers' solvency in 2019 benefited from underwriting profit, higher investment income and lower tax rates, but could plateau or even drop in 2020, Moody’s said. This will reflect lower investment incomes in a weak economic environment, and to a lesser extent, weakening profit on some business lines for some insurers such as guarantee or credit insurance.

Similarly, reinsurers' solvency ratios could crumble this year on both a weaker profit outlook and higher capital consumption. The adoption of C-ROSS Phase II could raise cession by direct insurers, which will support reinsurers' premium scale but also add to their capital consumption, Moody’s concluded.