Chinese insurers likely to ignore investment advice from regulator CBIRC: Fitch

Chinese insurers are unlikely to dramatically alter their investment strategies or modify their asset allocations despite recent encouragement from the China Banking and Insurance Regulatory Commission (CBIRC) to invest their long-term funds in high-quality listed stocks and bonds, long-term equity investments, and securities brokerage firms' asset management plans and trust products, according to Fitch Ratings.

Fitch believes that insurers will continue to allocate their assets based on their risk management policies and insurance liability profiles. Fitch believes that capital requirements, length of investment horizon and liquidity are the key considerations that insures will continue to focus on, aside from investment return, when they make their investment decisions.

Insurers need to evaluate the impact of asset allocation on their solvency adequacy because assets risks are part of the solvency calculation under the China Risk Oriented Solvency System (C-ROSS). Currently, Chinese insurers' exposure to stocks is not low. Statistics from CBIRC show that investments in stocks and funds amounted to about 12.4% of insurance companies' total invested assets, equivalent to about 1x of their capital in 2018.

Insurers, especially those with thin solvency buffer, are unlikely to significantly raise their exposure to listed stocks or increase their long-term equity investments as these asset categories tend to carry higher capital risk charge than conventional bonds in the computation of solvency ratio. Increased allocation to risky assets, such as stocks, could undermine insurers' solvency and earnings stability, given the potential volatility in equity markets.

Life insurers are likely to have more incentive to invest in securities brokerage firms' asset management plans and trust products as the duration of their insurance liabilities tend to be longer. Some life insurers already have relatively high exposure to non-standard or alternative assets that may have risks similar to those of asset management plans or trust products from the brokerage sector.

The major Chinese life insurers' allocation to alternative investments, such as insurers' asset management plans, infrastructure debt schemes and real-estate related trust products, ranged from about 15 percent to 30 percent of their total invested assets. The insurers may diversify their investment assets by including brokerages' asset management plans or trust products, but Fitch does not expect their allocation to these assets to be material because they already have substantial exposure to non-standard assets and such assets are generally less liquid.

Insurers are unlikely to substantially increase their holdings of long-term equity investments, brokerage firms' asset management plans or trust products if the tails of their insurance liabilities are shorter. In addition, increases in long-term equity investments may increase the concentration of the asset risk profiles of insurers, especially smaller ones.

CBIRC spokesperson Xiao Yuanqi said on 28 January 2019 that the regulator encouraged the insurance sector to invest in stocks and bonds of high-quality listed companies to support the stable and healthy development of listed companies and capital markets. The regulator said it will expedite the filing and approval processes for insurers that take up large equity stakes in listed companies. The regulator also encouraged insurers to invest in securities brokerage firms' asset management plans and trust products.

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