CONSERVATIVE APPROACH BY CHINESE INSURERS ON INVESTMENT TRENDS - AM BEST

KUALA LUMPUR, Oct 11 (Bernama) -- Declining interest rates in China have led to narrowing spreads and increased reinvestment risk for domestic insurance companies, according to a new AM Best report, placing a greater onus on insurers’ asset-liability management.

The Best’s Special Report, “Chinese Insurers’ Investment Trends Remain Conservative”, states that with yields of 10-year government bonds remaining below three per cent over the past two years, they no longer meet the assumed rate-of-return requirements for some long-term protection products.

Furthermore, the proportion of participating policies by gross premium revenue declined in recent years, shrinking insurers’ buffer to absorb investment risk in the current in-force portfolios.

“To address the risk of negative spread, insurers have extended the duration of their assets, but high-quality, long-duration domestic investment instruments remain relatively scarce, leading to reinvestment risk,” said AM Best director, analytics, James Chan in a statement.

Overall, the investable portfolio of China’s insurance industry grew by 10 per cent year over year, with a stable asset mix according to China’s financial regulator.

The proportion of bonds has increased gradually since the start of 2022 and remains the largest asset class, accounting for 43 per cent, while life insurance companies account for approximately 90 per cent of the Chinese insurance industry’s overall investments.

Insurers also made alternative investments, seeking stable returns that are often higher than returns on traditional fixed-income securities such as government bonds, though many have more complex and opaque structures.

Despite recent regulatory initiatives, the global rating agency AM Best expects insurers to maintain a cautious approach toward increasing their equity exposures.

The report states that participating products should see stronger growth momentum as policyholders find potential upside in profit-sharing more appealing and competitive than traditional products with lower rates.

AM Best expects the segment to enhance its value proposition by strengthening product coverage and service quality tailored to changing customer needs, rather than competing over return rates as benefits.

-- BERNAMA