Chinese life insurers to steadily increase equity and alternative investments in 2022

More exposure to risky assets, and better asset liability management and ESG practices are among the focuses of Chinese life insurance companies in 2022.
Chinese life insurers to steadily increase equity and alternative investments in 2022

Chinese life insurance companies are set to steadily increase exposure to equity and alternative investments to reach higher returns, with their focus potentially shifting from non-standard assets to standard, public market strategies that are simple and transparent.

Cao Deyun, executive vice president and secretary general of the Insurance Asset Management Association of China (IAMAC), pointed out key targets for Chinese life insurance companies during a recent closed-door meeting held by IAMAC and attended by senior executives of Chinese life insurance companies and industry experts.

Cao Deyun, IAMAC

The current complex global investment environment highlights the importance for Chinese life insurers to adhere to long-term investments, value investments, stable investments, and responsible investments based on asset-liability matching, Cao stressed.

The imminent focus for Chinese life insurers’ asset management strategy includes steadily expanding equity and alternative investments in the context of low interest rates and asset shortages in China, while continuing to improve asset-liability matching and keeping risks under control, he said.

Also sharing views in the meeting, Liu Xinqi, chief analyst of the non-banking sector at Guotai Junan Securities, noted that the importance of equity investment has increased significantly in recent years among Chinese lifers, with more room for allocation in the future.

Investment portfolio of China Life Insurance Company as of Dec 31, 2021 

However, with the new solvency system called Risk-Oriented Solvency System (C-ROSS) phase 2 having come into effect in January of this year, Liu suggests insurance companies to pay more attention to earnings certainty and moderately reduce growth expectations, especially when it comes to growth targets for high-debt cost policies; increase interest rate-sensitive products; and rationally invest in equity projects in industries such as pension and healthcare.

Under the phase 2 regime, risk factors on risky assets are all increased, especially for private equity and long-term equity, and a concentration risk charge is added to encourage insurers to reduce risks on their balance sheets.  

“Going forward, regulatory standards will no longer be ‘one-size-fits-all’ for equity investment. Capital and accounting volatility will be key constraints for the industry to add equity positions,” said Rick Wei, head of Asia ex-Japan insurance strategy at JP Morgan Asset Management.

Rick Wei, JP Morgan AM

While a number of large life companies with healthy solvency ratios have increased equity allocation in their long-term strategic assets, many are currently under-allocating in the asset class due to market volatility. Meanwhile, the industry is facing a shortage of quality onshore alternative assets that meet investors’ return targets, Wei said.

In the past, the industry heavily relied on non-standard debt plans to maintain return targets. However, the supply of non-standard debt plans has significantly declined, and the median return has lowered to around 4.5% versus 6 to 7% in the past, he said.

“Going forward, insurers may shift allocations from complex non-standard assets to standard, public market strategies with simplicity and transparency, while reducing concentration risk. In 2022, more and more insurers are exploring ways to invest in overseas markets for diversification, enhanced returns, and potentially better matching of liability with long-term assets for life insurers,” Wei told AsianInvestor.

However, Jaijit Kumar, head of Asia insurance solutions at Invesco, told AsianInvestor that he believes non-standard assets may continue to be an area of focus, at least in the near-term, given the continued pressure on rates and significant equity market volatility, subject to capital and other regulatory requirements.

Jaijit Kumar, Invesco


IAMAC’s Cao also noted in the meeting that as China’s population ages, life insurance companies should explore ways to give full play to their advantages and capabilities in pension financial services, especially in the third pillar of the country’s pension system - individual commercial pension plans.

Under China’s net-zero target, life insurers should also improve environmental, social and governance (ESG) practices and carry out sophisticated green investments, he added.

The role to be played by Chinese life insurance companies in the pension space will largely depend on their ability to differentiate products and services from other asset management players, JP Morgan’s Wei said.

In the past two years, Chinese regulators have been implementing pilot schemes to encourage more private financial institutions both at home and abroad to sell personal pension products in designated cities.

“Market-oriented life insurers with strong investment capabilities and long-term track records are well-positioned to grow market share in the pension market, and differentiate themselves from other asset management players that are unable to provide long-term solutions with principal-protection and/or guaranteed returns,” Wei said. “I am very optimistic that Chinese insurers will play an important part in the next round of pension reforms.”

On ESG practices, Wei said that the priority for Chinese life insurers is to establish a firm-wide ESG policy with clear incentives for more holistic approaches to ESG measurements as well as integration in the entire investment process, from security investments to portfolio construction.

Chinese insurers could also collectively respond to the regulator’s consultation paper on ESG disclosure standards and mandatory ESG policies to help improve data availability, accuracy and comparability in China. They can gradually adopt a more active ESG approach via investment stewardships, which can help achieve ESG and carbon-neutrality goals for corporate issuers, he added. 

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