Moody's Investors Service said recently 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.
However, 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, the rating agency estimated.
"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," he noted.
In addition, C-ROSS Phase II will encourage insurers to improve asset and liability duration matching by investing in long-dated fixed income investments, the rating agency said.
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, Yuen noted.
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, according to Moody’s.
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, the firm added.
“Similarly, reinsurers' solvency ratios could weaken in 2020 on both a weaker profit outlook and higher capital consumption,” Yuen predicted. “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.”
