Kathmandu. China’s big insurance companies are financially strong. Still, the government is providing 70 billion yuan of new capital to five state-owned insurance companies. Its primary purpose is to increase its ability to handle significant future demand and financial risks.
At the end of June, the total solvency ratio of China’s insurance sector was 180.6 percent and the core solvency ratio was 133.5 percent. The minimum thresholds are 100 percent and 50 percent, respectively. These ratios indicate the financial capacity of the insurance company to handle claims and risks.
There are many reasons behind the increase in capital. The yield on long-term bonds has fallen sharply, the stock market has fluctuated, and insurance companies have to retain more capital than ever before. Many life insurance policies have to pay the customer over many years. To meet these obligations, companies rely on returns from long-term investments. When the yield of bonds decreases, this pressure increases.
This new capital will come from a special treasury bond of 300 billion yuan from China’s Ministry of Finance. This fund is being used to raise the capital of five insurance companies and three state-owned banks. This is the first time that China has used special treasury bonds to increase the capital of insurance companies.
China Life received the highest at 35 billion yuan. That represents half of the total allocation. PICC will receive a maximum of 15 billion yuan, Sinnosure 10 billion, China Taiping 7 billion and the Republic of China 3 billion.
China Life is China’s largest life insurance group. Its net worth exceeded 900 billion yuan at the end of June. However, the government has not specified the company’s size, business volume or future capital requirements. Nor has it provided specific reasons for setting aside 35 billion yuan.
The reasons for choosing these five entities have not been disclosed. Four of them are large commercial insurance groups controlled by the central government. Sinnosur mainly provides export credit insurance.
According to Chinese media reports, the capital requirements of the companies have been considered. Not all companies will receive the same payment. The funds will be directly added to the capital of China Life, Sinosur and China Taiping. PICC will raise a maximum of 15 billion yuan by selling new shares to the Ministry of Finance. In the case of China Rico, the Ministry of Finance will also buy new shares. Its 3 billion yuan plan has been approved by the board of directors, but regulatory approval is still pending.
As of September 24, there is no confirmed information on whether any of the five companies have received full allocation. However, the financial situation of all Chinese insurers is not the same. According to analysts, state-owned companies are very strong. Whereas small insurance companies face large capital and solvency pressures.
Another purpose of the new capital is to increase investment capacity. According to GMF research, the 60 billion yuan in new capital for the four commercial insurance groups, except Sinnosur, could provide an opportunity to invest an additional 100 billion yuan in the stock market. However, due to market risk, it is unlikely that all the money will be invested in the stock market immediately.
The government has said that this fund will strengthen the financial foundation of insurance companies and increase long-term financing opportunities in the country’s economy. It also aims to increase the capacity of export credit insurance in the context of Sinosur.
According to international credit rating agency Fitch Ratings, if large state-owned insurance companies become stronger, their role in supporting smaller companies that are facing difficulties in the future could also increase. However, the Chinese government has not described this as the beginning of any major merger or restructuring program in the insurance sector. – Agency
