[ET Net News Agency, 12 May 2020] Moody's Investors Service said in a new report that
Chinese insurers' solvency remains strong due to higher earnings from lower tax rates and
an equity market rebound in 2019.
But ratios could dip in 2020 on coronavirus impact and the implementation of Phase II of
the China Risk Oriented Solvency System (C-ROSS Phase II), the country's insurance capital
regime.
"Life insurers' solvency ratios will likely drop in the first quarter of 2020 to reflect
the sharp fall in stock prices in this period, and remain exposed to lower stock prices
and interest rates as a result of the coronavirus pandemic," said Frank Yuen, a Moody's
Vice President and Senior Analyst.
"That said, higher valuation on insurers' fixed income assets, slower business growth
and improving profitability will support solvency, and C-ROSS Phase II will tighten the
discipline on capital management," added Yuen.
Moreover, C-ROSS Phase II will encourage insurers to improve asset and liability
duration matching by investing in long-dated fixed-income investments. This will mitigate
the potential increase in their duration mismatch under the declining interest rate
environment, which could raise interest rate risk charges and reduce solvency.
Property and casualty (P&C) insurers' solvency in 2019 benefited from underwriting
profit, higher investment income and lower tax rates, but it will plateau or even drop in
2020. This will reflect lower investment incomes in a weak economic environment, and to a
lesser extent, weakening profit on some business lines for some insurers such as guarantee
or credit insurance.
Similarly, reinsurers' solvency ratios could weaken in 2020 on both a weaker profit
outlook and higher capital consumption. The upcoming adoption of C-ROSS Phase II could
raise cession by direct insurers, which will support reinsurers' premium scale but also
add to their capital consumption. (KL)