Chinese insurers have been exploring alternative avenues to raise funds in order to meet their capital requirements. According to a recent report by AM Best, capital supplementary bonds (CSBs) issued by insurers have seen a significant uptick in recent years. However, these CSBs are not recognized as core capital under the C-ROSS Phase II solvency regime, resulting in a material downward pressure on the core solvency ratio, particularly for life insurers.
The report, titled “Rising Capital Challenges for China Insurers Amidst Declining Investment Yields,” highlights that many insurers have applied for a three-year transition period, set to end in 2024. In response to the challenges faced, regulatory authorities have relaxed certain requirements under the C-ROSS framework, and insurers have turned to issuing perpetual bonds to bolster their core solvency ratios. These measures have provided some stability to the insurance industry’s solvency levels in 2023.
With low debt financing costs in China, insurers have benefited in the past. However, the prolonged negative spreads along with declining investment yields pose significant challenges, especially for life insurers. As the negative spread widens further, insurers may struggle to find suitable investment opportunities for asset-liability matching. This could potentially decrease insurers’ inclination to issue CSBs to raise capital.
While insurance perpetual bonds are still relatively new to onshore investors in China, the market is expected to mature in the long term with improving investor confidence and market depth. This development is seen as credit-positive, as it enhances insurers’ capital structures and improves financial flexibility.
Although there has been an increase in debt issuance in recent years, AM Best-rated companies have maintained low financial leverage. However, excessive financial leverage is considered credit-negative as it weakens liquidity, especially during unfavorable capital market conditions.
For more information, you can access the full report on AM Best’s website.
AM Best is a prominent global credit rating agency, news publisher, and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company operates in over 100 countries with regional offices worldwide.
Original source: [Business Wire](https://www.businesswire.com/news/home/20240429172030/en/)
The article “Rising Capital Challenges for China Insurers Amidst Declining Investment Yields” discusses the difficulties Chinese insurers are facing in raising capital due to declining investment yields. Here are some additional facts and discussions related to the topic:
Current Market Trends:
1. Chinese insurers have been increasingly issuing capital supplementary bonds (CSBs) to raise funds in recent years. However, these CSBs are not recognized as core capital under the C-ROSS Phase II solvency regime, leading to a decrease in the core solvency ratio for life insurers.
2. Regulatory authorities have relaxed certain requirements under the C-ROSS framework and insurers have turned to issuing perpetual bonds to strengthen their core solvency ratios.
3. The insurance industry’s solvency levels in 2023 have been stabilized by these measures.
Forecasts:
1. The negative investment spreads and declining investment yields pose significant challenges for insurers, especially life insurers. As the negative spread widens further, insurers may face difficulties in finding suitable investment opportunities for asset-liability matching.
2. The market for insurance perpetual bonds in China is expected to mature in the long term, with improving investor confidence and market depth. This development is seen as credit-positive, enhancing insurers’ capital structures and financial flexibility.
Key Challenges or Controversies:
1. Prolonged negative spreads and declining investment yields pose challenges for insurers, particularly in finding profitable investment opportunities.
2. The use of capital supplementary bonds (CSBs) to raise funds may decrease if insurers struggle to find suitable investments due to widening negative spreads.
Advantages and Disadvantages:
One advantage of issuing perpetual bonds is that it improves the capital structure of insurers and provides them with increased financial flexibility. This allows insurers to meet their capital requirements more effectively. However, excessive financial leverage can be considered credit-negative as it weakens liquidity, especially during unfavorable capital market conditions.
For the full report on these capital challenges faced by China insurers, you can access the article on AM Best’s website: link name.
AM Best is a reputable global credit rating agency, news publisher, and data analytics provider in the insurance industry. Operating in over 100 countries with headquarters in the United States, the company offers valuable insights into the industry.
Original source: [Business Wire](https://www.businesswire.com/news/home/20240429172030/en/)