Low interest rates could pressure Chinese life insurers’ earnings

A low interest rate environment in China continues to place pressure on the profitability of the country’s life insurers, which rely on interest spreads for profits, according to a Fitch Ratings report.

The China Insurance Regulatory Commission (CIRC) fully removed of the 2.5 percent cap on guaranteed returns for policyholders in October 2015, which has contributed to Chinese life insurers pricing insurance policies more aggressively.

Fitch also highlights that these insurers have shifted to investing in riskier assets to sustain investment yields, making their credit profiles more vulnerable to unfavourable capital market fluctuations and potential credit-quality deteriorations amid an economic slowdown.

For example, alternative investments, long-term equities, properties and overseas investments account for larger shares of Chinese life insurers' assets.

Fitch points out that alternative investments are generally less liquid than straight bonds, and are focused on the infrastructure and real estate sectors.

The life sector’s premium growth in 2017 is expected to be constrained by the CIRC’s crackdown on high cash-value products, which will pose challenges to insurers’ liquidity management.

The ratings agency believes this pressure will be more pronounced for insurers exposed to significant asset-liability duration mismatches.

According to Fitch, these insurers mainly source revenues from short-term insurance policies while allocating assets to investments with long horizons.

Furthermore, it suggest liquidity strain can be significant if they are unable to sustain sufficient new premiums for insurance claims or payments.

Fitch is maintain its rating at sector outlooks for the Chinese life insurance sector as stable, as it believes that the insurers' ratings are supported by resilient market positions, adequate capitalisation and external funding capabilities.

However, earnings volatility, asset risks and fierce competition among insurers to sell homogenous, savings-type products are key rating constraints.