Chinese insurers unlikely to shift to low-rated bonds despite easing rules

Written by Adam Cadle

30/11/2021

Chinese insurance companies are unlikely to shift their investment portfolios significantly towards lower-rated bonds, despite a recent relaxation in credit rating requirements for their bond investments, Fitch Ratings has said.

The ratings agency said it believes insurers are now making investment decisions more cautiously ahead of tightening solvency computation under the China Risk-Oriented Solvency System phase 2, which could be implemented in 2022.

On 19 November 2021, the China Banking and Insurance Regulatory Commission (CBIRC) announced that there are no credit rating requirements for insurers to invest in bonds issued by financial institutions. Insurers with comprehensive solvency ratios of 200% or above also do not face any credit rating requirement when they invest in bonds issued by non-financial companies. Insurers with comprehensive solvency ratios of 120%-199% are now able to invest in bonds issued by non-financial companies locally rated 'BBB' or above. Prior to this, insurers were only allowed to invest in bonds with local credit ratings of 'A' and above.

“The easing of the rules provides more investment opportunities for insurers, but we expect them to continue to make investment decisions based on their risk-management policies and liquidity profiles,” Fitch Ratings stated.

“In July 2020, the CBIRC allowed insurers to invest up to 45% of their prior-quarter total assets in equities, subject to their solvency and asset-liability management. However, the change did not result in a significant rise in the industry's exposure to equities. At end-2020, stocks and funds represented 13.8% of insurers' total cash, deposits and investments, compared with 13.2% at end-2019.”

Insurers mainly invest in central- and local-government bonds and bonds issued by financial institutions. Many of them increased investments in long-dated government bonds, particularly life insurers, to lengthen their asset duration in 2021. Bonds represented 39.1% of the industry's total investments at end-September 2021, up from 36.6% at end-2020.

“Exposure to defaults remains a key credit risk, with an increase in the number of defaults in China,” Fitch added.

“Insurers with consistent investment strategies and strong risk-management capabilities are unlikely to raise their exposure to lower-rated bonds at the expense of having higher credit risks. We believe capital requirements, investment asset duration and liquidity are key considerations that insures will continue to focus on, rather than pursuing higher yields offered by lower-rated bonds.”

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