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Fitch: Chinese Insurer Risks Are Rising Under New Framework
March 28, 2017 / 12:56 AM / 9 months ago

Fitch: Chinese Insurer Risks Are Rising Under New Framework

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, March 27 (Fitch) Some Chinese life insurers are facing rising and more concentrated risks as a result of their increasing exposure to long-term equity investments, which carry a relatively low capital risk charge under the country's new risk-based capital framework, says Fitch Ratings. Insurers' profitability is coming under pressure from low interest rates, and they have responded by shifting toward riskier assets with higher yields. This strategy has typically involved higher exposure to alternative investments, such as debt investment plans, trust schemes, and investment properties. Some firms have also boosted their equity investment - in particular, their long-term equity investment. Long-term equity investment is treated favourably under the China Risk Oriented Solvency System (C-ROSS), which was introduced in January 2016. The capital risk charge is around 15%, compared with 31%-48% on listed stocks. Moreover, mark-to-market is not required for long-term equity investments, which means they do not create solvency volatility - at least not until they are sold. Some life insurers have taken the advantage of this favourable treatment by increasing their equity investment in single entities to the point where they have significant influence and can therefore reclassify their holdings as a long-term equity investment. We do not believe the underlying risks involved in long-term equity investment are significantly lower than those inherent in other equity investments. It is more the case that insurers' risk has become more concentrated as exposure to single entities has risen. We estimate that some insurers now have investment in single entities that account for more than 50% of their equity capital. Concentrated exposure creates potential liquidity problems. The supposed long-term horizon of these investments means they might not match the shorter-duration liability structure of some insurers, especially those with a focus on universal life insurance products. Investments might have to be sold off when there is an unanticipated liquidity need, possibly triggering substantial capital losses. The absence of a mark-to-market mechanism magnifies potential losses, as the book value could be very different from the market value, particularly if an investment needs to be liquidated during adverse market conditions. Contact: Terrence Wong Director +852 2263 9920 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road, Central, Hong Kong Dan Martin Senior Analyst Fitch Wire +65 6796 7232 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. 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The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. 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As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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