Credit rating agency, Fitch says rapid boost in overseas investment by Chinese insurance firms can lead to rising risks in a number of areas, including asset-liability duration, currency mismatches, asset concentration risks and execution risks from mergers and acquisitions.
Chinese insurance carriers are said to get ramped up their overseas investments after the offshore investment regulations were liberalised in October 2012 by China’s insurance regulatory commission, with all the objective boosting returns on insurers’ portfolios plus it allowed for any greater diversity of overseas investments, including in many products and destination markets.
“Chinese insurers’ investments are predominantly in long-tenured, illiquid asset classes including property, infrastructure projects and private equity. Rapid growth in these investments may lead to greater asset-liability duration mismatches if insurers rely mainly on premiums from short-tenured insurance products, including universal life policies, to fund the offshore investments,” the business said.
With the growth in Chinese insurers’ overseas assets, Fitch also expects the liabilities of Chinese insurers, which might be mostly Yuan- denominated, to pose currency risks; and even more Chinese insurers, including China Life, Ping An, and China Taiping, have issued offshore debt to mitigate a number of this currency risk.
Fitch also said concentration of assets using some sectors or regions can make Chinese insurers’ capitalisation more vulnerable to potential impairments, and insurers with limited experience of investing overseas may also face execution risks since they significantly expand their portfolios or do mergers and acquisitions.
“Insurers are permitted to spend money on 45 stipulated national or regional markets plus asset classes, including fixed income, equities, properties and money. Offshore and offshore emerging market investments mustn’t exceed 15 per cent and 10 per cent of insurers’ total assets in the last year, respectively”, the agency said.
By Emmanuel Odonkor