Chinese insurers' solvency remains strong

Chinese insurers' solvency remained strong in 2019 due to higher earnings from lower tax rates and an equity market rebound, but ratios could dip this year because of the coronavirus pandemic and regulatory changes, Moody's Investors Service said in a report.

Major direct insurers and reinsurers reported average comprehensive solvency ratios of more than 200 percent, well above regulatory minimum of 100 percent, an indication of their capital strength.

Life insurers' solvency ratios reflect higher stock market volatility, but are supported by improving earnings. They reported average core solvency ratios of 204 percent and average comprehensive solvency ratios of 218 percent at the end of 2019.

Both ratios were mainly unchanged from previous quarters and well above their respective regulatory thresholds of 50 percent and 100 percent, respectively, suggesting a capital buffer in the industry to absorb potential shocks, the rating agency said.

Moody’s predicts that insurers' solvency ratios are likely to drop in this year's first quarter to reflect the sharp fall in stock prices and lower interest rates as a result of disruptions caused by the pandemic.

However, underwriters’ key solvency support will come from higher valuation on insurers' fixed income assets, slower business growth, improving profitability and upcoming regulations under Phase II of the China Risk Oriented Solvency System.

Over the past year, property and casualty (P&C) carriers registered improved solvency, driven by their underwriting profit, higher investment income and a lower tax rate.

However, this improvement will plateau or even reverse in 2020, the report said, reflecting lower investment incomes in a weak economy and, to a lesser extent, weakening profit on some business lines, such as guarantee or credit insurance, for some insurers.

Chinese reinsurers' solvency increased in 2019 because of investment gains, lower tax rates and capital injections, but could fall this year on both a weaker profit outlook and higher capital consumption. Reinsurers' investment income is likely to be strained by a more difficult investment environment, according to the study.

The industry's improving value of new business margins will continue as the industry shifts to high-value products with higher portions of long-term regular premium and protection elements.

This product shift will diversify insurers' profit drivers from spread gains to morbidity gains, reduces the risk of negative spreads from the current low interest rates and enhances insurers' internal capital generation capabilities, Moody’s added.