The shift by Chinese life insurers towards riskier asset allocations to support their business growth and investment returns amid the persistent low interest rate environment is a credit negative, according to a recent report by Moody’s.

“The shifting asset allocation is pressuring four of the key ratings factors – asset quality, capital adequacy, profitability and liquidity – that are central to our rating assessment for life insurers,” says Kelvin Kwok, a Moody’s Associate Analyst.

“In particular, the industry’s rising exposure to single-name equity investments is increasing concentration risk, and leaves the insurers’ profitability and capital profiles sensitive to capital market movements,” says Kwok.

According to the Moody's report, riskier investments – which include "other investments" and equities – accounted for 49% of the industry's invested assets at end-November 2016, up sharply from 27% at end-2013.

Common instruments include project debt schemes and long-term equity investments, in particular in banks and property companies.

The higher yields these investments offer contrast the broad drop in investment returns on many traditional investment vehicles, such as bonds and deposits. Moreover, the industry's increased allocation to these non-traditional investments has supported several business and operating trends, including bancassurance opportunities and vertical integration via investments in related industries like retirement homes and healthcare projects.

But the shift in asset allocation is pressuring the industry's capital buffer relative to the intrinsic volatility of its risky assets. As a headline measure of insurers' exposure to risky assets, the weighted average high risk assets as a percentage of shareholders' equity increased to 181% at end-2015 from 154% at end-2013 among Moody's rated life insurers.

Moody's expects the current policy and financial market environment will continue to encourage risky investments by life insurers over the next 12-18 months. This is notwithstanding that recent announcements by the China Insurance Regulatory Commission indicate a more restrictive regulatory approach to curb some insurers' aggressive equity allocation.

Although life insurers' exposure to such assets still remains at manageable levels, Moody's notes a further build-up in the absence of a corresponding strengthening in their capital and liquidity profiles could translate into negative rating actions.