Moody's: Market correction may increase risks for insurers

The sharp correction in China's equities market will bring greater pressure on the capitalization and profitability of Chinese insurance companies which have high equity exposure, global credit ratings agency Moody's Investors Service Inc said on Monday.

The market volatility is likely to have an immediate negative impact on Chinese life insurers as their financials are highly dependent on the stock market performance, said Sally Yim, a senior credit analyst with Moody's at a news conference in Beijing.

The ratings agency forecast that the Chinese stock market will remain highly volatile for the coming 12 to 18 months, coupled with lingering economic uncertainties, low liquidity and reduced margin financing activity.

Equity investment accounted for 12 to 25 percent of total investments for major Chinese life insurers, whereas their US counterparts have only about 3 percent of the assets allocated to equities, according to Moody's.

Due to the prevalent headwinds from the equities market, the industry's solvency ratio, which measures an insurer's liquidity and ability to meet its obligations, will decline below the high average of 275.4 percent for major life insurers in the first half of the year. But it will remain above the 150 percent "Adequate II" level stipulated by the China Insurance Regulatory Commission, Yim said.

Meanwhile, the administrative measures to stabilize the market and encourage insurers to increase their stock purchases will further add to their already high equities leverage and increase their exposure to further stock market volatility.

But the downside risks from a deteriorating investment environment can be mitigated by the rising demand for insurance products by the increasingly risk-averse consumers. The declining interest rate will also make life insurance products an attractive investment option, Yim said.

Moody's also expects that the industry's exposure to the stock market will bring greater uncertainties to the full implementation of the much-anticipated "Solvency II" regime, the risk-oriented regulatory scheme of the Chinese insurance sector soon to be launched by the regulator.

Nonetheless, the ratings agency continued to give a stable outlook for the Chinese life insurance sector and expects the industry's annual premium growth rate to be between 15 percent to 20 percent in the coming 12 to 18 months, similar to the 18.4 percent recorded last year.

For Chinese property and casualty insurers, the challenges will come from weaker domestic consumption, slower car sales and the pricing liberalization of motor insurance products, said Stella Ng, an insurance analyst with Moody's.

They will maintain a low double-digit premium growth rate which will be lower than last year's 16.4 percent. But unlike life insurers, property and casualty insurers have limited exposure to the stock market, and thus are not immediately affected by the sharp correction in China's stock markets over the past three months, Ng said.