The risk exposure of Chinese insurers will increase over the next few years as their businesses grow, said Standard & Poor's Ratings Services in its report, "China credit spotlight: can insurers capitalize on their growth opportunities?"
"In many cases, capitalization is already stretched and could be further strained as asset bases expand and investment appetites become more aggressive," said Standard & Poor's credit analyst Terry Sham. "Earnings may become more volatile for those insurers chasing investment yields."
Market conditions appear to be stabilizing in the life insurance sector. In its study of the top 25 insurers in China by premiums, Standard & Poor's said the earnings of life insurers have improved in the past two years and their reliance on low-margin bancassurance products is reducing.
"Despite a strain on capitalization, financial leverage appears satisfactory for most major insurance groups as indebtedness is generally limited. But the creditworthiness of the largest and smallest insurers could continue to polarize in both the life and non-life sectors," said Sham.
The study also shows that the bigger players tend to have the strongest stand-alone credit profiles, partly due to their well-established franchises, extensive distribution networks, and diversified business mixes. Other benefits include better economies of scale, technical know-how, and compliance functions. A handful of insurance groups have the strongest financial and business risk profiles, which offers some protection against industry downturns.
Standard & Poor's has revised its credit outlook on the life insurance sector to stable from negative because we are increasingly confident about its growth prospects and strategies, particularly compared with two to three years ago.
"We maintain our stable outlook on the non-life sector, partly because underwriting performances are still satisfactory. We expect the biggest players and those with underwriting discipline and good niche positions to outperform most of their peers in the coming few years," it noted.