Changes to China’s capital rules could benefit investors come 2024

The revision to China’s capital rules will benefit regional insurers; investment teams also stand to gain.

China Sept 2023 @Pixabay.
Stabilisation in China's insurance sphere will likely have a positive trickledown effect to other markets.

China’s revised capital rules will reduce the burden on insurers in the region, says a new report from Fitch Ratings. Institutional investment teams also stand to gain from the change – given enhanced stability in the sector.

NAFR revisions

The revisions were announced by the National Administration of Financial Regulation (NAFR), China’s financial regulator, on 10 September, with the mid-September report from Fitch Ratings, Hong Kong, saying that it believed the changes were “partly in response to the difficulty some insurers face in maintaining their solvency stability amidst a less favourable investment environment and lower surplus growth”.

With all eyes on the ongoing market volatility caused by high inflation and subsequent rate hikes by central banks, these amendments to the China Risk-Oriented Solvency System (C-ROSS) will be effective immediately, aiming to stabilise the country’s turbulent insurance sector. Phase II was implemented in Q1 2022.

“Most small- and medium-sized insurers will be subject to lower
capital requirements under the revised framework.”

The China Banking and Insurance Regulatory Commission (formerly the CIRC) launched C-ROSS in March 2012 and implemented the system in January 2016, using the "Three-Pillar" regulatory framework that was utilised internationally – with the basic principle of "risk orientation".

The newest changes “take a more differentiated approach and bases minimum capital requirement on insurers’ operating scales,” said Fitch.

“Most small- and medium-sized insurers, with assets under the CNY500 billion (£55.25 billion) and CNY200 billion (£22.1 billion) thresholds for life and non-life insurers, respectively, will be subject to lower capital requirements under the revised framework,” it added.

Investment changes

These new rules could also impact insurers’ credit profiles in the region – however, Fitch maintained that it “[did] not expected issuers to significantly increase investments in the affected categories”.

It said that, since the assessment of insurers’ capital strength uses proprietary models, there would likely be a “minimal impact” from the potential improvement in insurers’ regulatory capital adequacy ratios.

“We do not expect issuers to significantly increase
investments in the affected categories.”

The Chinese revisions come on the heels of other recent east Asian solvency changes – such as those in South KoreaIndonesia, and Japan – and could have a wider impact on the investment capital insurers deploy, as well as the allocations they make.

Recently, South Korea’s three biggest life insurers – Samsung Life Insurance, Hanwha Life Insurance Co., and Kyobo Life – were reported to have altered strategies to enhance asset management profitability. In contrast, international insurers allocated more than half of their investments to safer assets.

China’s economy in trouble?

Recent changes to China’s economy have already caused some concern to the market so the changes could highlight a more robust industry for outside investors.

MAPFRE AM said the country’s PMI fell to 51.7 points in August from 51.9 in July, making it the eighth consecutive month of economic expansion (above 50 points), but with a visible deterioration compared to the previous months, in early September.

“In the last decade, we’ve seen occasions when
China was going in the wrong direction.”

Alberto Matellán, Chief Economist at MAPFRE Inversión, the insurer’s asset management arm, explained that the latest data looked negative, with “multiple things are coming together” in the country to drive investor concern.

“In the last decade, we’ve seen occasions when China was going in the wrong direction. But it’s more widespread now and this is spooking investors. However, the data still have room to get worse. The Government has resources available and is showing a willingness to act,” he said.

Others have also noted that China’s demographics point to a weakened economy in the long run and that investors might look elsewhere for emerging markets that show promise.

The “fine-tuning” of C-ROSS began in September 2017 – with aims of “enhancing the scientific, effective, and comprehensive development” of the solvency supervision system. Benefitting the real economy, mitigating industry risks, and protecting consumer interests are said to be its goals.

Fitch’s global outlook

With recent global macroeconomic turbulence comes revisionary moves – though some have cautioned against any ‘doom-and-gloom’ prophesising. In a recent breakfast briefing before the Rendez-Vous de Septembre, Fitch representatives said they felt that markets would remain cyclical in the long run.

“There will come a point where markets start to soften again, and
capacity will be maintained by the industry.”

“There will come a point where markets start to soften again, and capacity will be maintained by the industry,” said Robert Mazzuoli, Director of EMEA Insurance, regarding his global re/insurance outlook for 2024. “It will take more time, though,” he added. “It won’t happen next year, but there is renewed interest and more capital deployed on a very moderate level.”

For insurers seeking to cope with inflation, pricing changes and investment income are the two main routes forward – and for those looking at Chinese markets, stabilisation in the insurance sphere will likely have a positive trickledown effect on other markets.