Fitch Ratings delivers verdict on Asian insurance markets

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According to Fitch, it expects these markets’ key credit metrics to remain resilient over the next 12 to 24 months, due to revised assumptions regarding the ongoing economic fallout from the coronavirus pandemic and its impact on the credit quality of the insurers.

Meanwhile, the number of ratings with negative outlooks assigned to insurers in these markets has fallen to less than 20% to date.

The economic environments of China, South Korea and Japan are expected to improve across 2021, due to government fiscal stimulus programs and vaccination rollouts. Insurers’ solvency buffers are likely to remain resilient, thanks to sustained earnings.

The Chinese life insurance industry is expected to refocus its product mix, with more protection-type and long-term products. Consistent product strategies will enable Chinese life insurers to enhance and sustain new business value, Fitch said.

For Korean insurers, the gradual rise of long-term bond yields will help them alleviate their negative spread and reserving burden. These firms’ efforts to increase their allocation to longer-dated domestic bonds will also mitigate the mismatch issue associated with their asset-liability duration.

Amid prolonged low interest rates, Fitch expects Japanese life insurers to manage the situation more comfortably, compared with those outside Japan. For more than five years, Japanese life insurers have adapted to a low-yield environment by focusing on profitable protection-type products, which are not significantly affected by low interest rates.

“However, these insurers continue to face credit and asset risks,” Fitch said. “Chinese life insurers’ credit risks are rising amid the increase in defaults in China’s credit markets. In addition, we expect their earnings to remain sensitive to heightened capital-market volatility, resulting in higher asset impairment. We also expect the asset risks of Korean insurers to rise as they explore a shift in their asset allocation to alternative investments, which may undermine their capital strength.

“Some Japanese insurers are actively reducing their exposure to equities, but others are maintaining their sizeable exposure to seek high dividend yields and/or diversification in their portfolios, which may result in deteriorating capitalisation if equity markets slump due to a global downturn.”

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