China’s recent announcement that it will reduce capital charges for insurers’ equity investments is expected to be successful in its aim to increase their holdings in equities, Fitch Ratings said on Monday.
However, while the move aims to support long-term investment and market stability, the rating agency warned it could also heighten earnings volatility and strain capital buffers for some insurers.
The State Council Information Office announced on 7 May that the capital charge applied to equity investments for solvency ratio calculations would be reduced by 10%, lowering capital requirements for insurers.
The change is part of ongoing regulatory efforts to encourage long-term equity investment and follows previous reforms including eased allocation limits and pilot programmes.
“This marks the second adjustment to the investment risk charge since the introduction of China Risk-Oriented Solvency System (C-ROSS) phase 2 in 2021,” Fitch said. “The revision is also aimed at alleviating the difficulty some insurers face in maintaining an adequate capital buffer.”
As of end-2024, life insurers held 15.3% of their invested assets in equities, while non-life insurers held 13.5%. Fitch expects these proportions to increase, particularly for life insurers, given regulatory guidance and persistently low domestic interest rates.
Nonetheless, the agency noted that “insurers will consider their risk appetites, earnings volatility and alignment of their assets with liabilities before changing their investment strategies.” Non-life insurers are unlikely to make significant shifts due to the short-term nature of their liabilities.
Fitch also said the relaxation will likely benefit life insurers more, helping improve solvency ratios and enabling expansion. The comprehensive C-ROSS ratios for life and non-life insurers rose to 191% and 239% respectively at end-4Q24, up 2 and 7 percentage points from the previous quarter.
Fitch concluded, “We expect the solvency ratios to remain stable in the short term, aided by the 10% cut in capital charge on equity investments. However, we think that insurers’ capital buffers will continue to be under pressure.”
