The debt of banks and local governments often makes headlines when discussing risks in China Assurance. But the insurance industry, which has traditionally been associated with caution and caution, It has become a slowly spreading crisis. For regulators
A crackdown on high-risk activities by several private insurance companies associated with distressed financial conglomerates. It has failed to put an end to the sector’s deeper problems. A series of problems erupted in 2017 after a series of scandals and the fall of the head of the insurance regulator.
The introduction of a revised regulatory framework for capital and risk management last year has only aggravated the problem. This is because regulatory compliance has weakened the balance sheets of many insurance companies. forcing them to raise capital to replenish reserves at a time when profit growth is slowing and Shareholders are strapped for cash.
China’s insurance industry which has the second largest premium income in the world are facing challenges The situation is struggling to overcome the impact of COVID-19 disease control. strict for 3 years, which has a negative effect on sales and profits Weak stock and bond markets and low interest rates affect investment returns. This makes it difficult for some insurance companies to pay out high-yield policies when interest rates rise.
China’s Zero-covid policy, which includes strict lockdowns in parts of the country. This negatively affects sales because agents cannot go out and sell policies. Weak economic growth after the pandemic also weighed on sales. A problem that is being aggravated by a shrinking number of agents due to an overhaul of the agent system to improve quality and reduce bad buys.
All of these factors affect insurance companies’ profits and balance sheets. This has raised concerns that some companies will be unable to pay their maturing policies.
In 2022, the combined profits of China’s 86 life insurance companies fell 57.3% to 57.2 billion yuan ($7.9 billion), according to data compiled by the China Insurance Association. Only 38 companies were profitable, compared with 59. Last year, 71 companies performed worse than the year before. The 10 biggest money-losing life insurance companies lost a combined 109.7 billion yuan.
Last year, the insurance industry as a whole which includes life insurance companies and general insurance companies Reportedly, premium income rose 4.6% to 4.7 trillion yuan, compared with a 0.8% decline in 2021 and growth of 6.1% in 2020 and 12.2% in 2019, according to data from the Banking and Regulatory Commission. Chinese insurance that has closed down The average investment return excluding unrealized gains and losses is 3.76% in 2022.
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In the first half of this year Life insurance companies have been ordered to reduce expected returns from new products to reduce pressure on balance sheets. The regulator has proposed a maximum limit of 3.5% for traditional life insurance products, 2.5% for participating life insurance policies and 2% for universal life insurance products. Companies with better investment opportunities may be allowed to offer higher rates.
The restrictions were partly put in place to protect weak insurance companies. Many of whom are desperate for cash and struggling to keep their businesses afloat. From offering products with high returns to increase sales and income. This strategy not only has the potential to transform the market; But it also creates more financial risk. This is because in a low interest rate environment Insurance companies will have to make higher-return, higher-risk investments to earn enough money to pay for their products.
A new regulatory system launched in 2016, called China’s Risk-Oriented Resolution System (C-ROSS), has worsened the balance sheet problem. Insurance companies are assessed on their financial strength every quarter. and are classified on four levels, from A, which indicates low risk, to D, which indicates serious risk. Insurance companies must have two solvency ratios: a total solvency ratio of more than 100% and a core solvency ratio of rui.