Chinese Insurers - Challenges - Investment Earnings

Chinese insurance companies is facing challenges in maintaining their investment earnings amidst falling interest rates and significant volatility within the country's stock markets. Despite these hurdles, insurance firms under its purview have not significantly increased their allocations to higher-risk assets. This conservative shift in investment strategy is attributed to a more stringent capital regulatory environment established in 2022, which has led insurers to adopt a more cautious approach to risk.

Chinese insurers' investment yields in 2023 - During the first three quarters of 2023, several of China's major insurers listed on stock exchanges witnessed their investment yields fall short of their average performances over the past three years, despite a marginal improvement from the previous year. 

The aggregate annual investment return rate for Chinese insurance companies, excluding unrealized gains, dropped by 1.53 percentage points, settling at 2.23% from the previous year.

Chinese insurers' investment yields in 2024 - the investment returns are not expected to substantially recover in 2024 due to the persistently low interest rates and difficult investment conditions. The investment strategies of insurers in the real estate sector have come under scrutiny amidst ongoing concerns about the stability of Chinese property developers. Despite these challenges, insurers will face significant losses from their property investments, highlighting their diversified and moderate exposure to this area.

Certain life insurance providers have directed a portion of their assets into the real estate market, including investments in equity, fixed-income securities, and various non-traditional assets like trust plans and asset management products.

The firm estimates that the exposure of these rated life insurers to the commercial property sector is relatively low, generally a mid-single-digit percentage of their total investment assets. In contrast, non-life insurance companies show even less investment in commercial property, reflective of their shorter insurance liability durations and smaller operational scale.

Impact of China Risk-Oriented Solvency System - The introduction of the second phase of the China Risk-Oriented Solvency System (C-ROSS) in early 2022 has prompted insurers to tread more carefully in their investment activities, particularly in long-term equity stakes related to property.

The regulatory update has increased the capital requirements for such investments and included the acquisition costs of investment properties in the calculation of available capital, which has led to a more cautious investment posture among insurers.

While there has been a slight uptick in investments in policy-driven initiatives like social housing projects, aimed at mitigating distress within the property sector, these investments represent only a small portion of the insurers' overall portfolios. While these investments may align with government efforts to stabilize the property market, their immediate return potential may be limited, potentially placing further pressure on the insurers' return on assets.