Chinese insurers continue quest for alternatives

Moody’s analysis showed a compound annual growth rate of 55% in alternative investments by the country's insurers between 2013 and 2016.

China’s insurance companies, one of the world’s largest pools of institutional capital, are expected to continue their quest for more alternative investments, driven by the search for higher yields and positive government policies, according to a new report by rating agency Moody’s.

Alternative investments in China generally refer to non-standard assets that are not traded on the country’s interbank market or exchanges. They can take on different forms, such as debt or equity investment schemes, securitisation products, trust plans, among others.

Last month, Ping An Life Insurance said it had invested about $25 billion in infrastructure debt, as it revealed its “non-standard debts” portfolio, totalling 290 billion yuan ($44 billion; €37 billion).

Moody’s analysis suggested a compound annual growth rate of 55 percent in alternative investments between 2013 and 2016, compared with 20 percent for the industry’s total investments.

However, the rating agency said the increase in alternative investments could weaken investors’ asset transparency, return stability and liquidity profiles.

“Alternative investments introduce additional layers of credit risk for insurance companies, as their complicated transaction structures and lack of disclosure make it difficult to assess the risk-return profiles,” said Qian Zhu, a vice president and senior credit officer at Moody’s.

However, Zhu also noted that these investments offer higher returns and often include infrastructure projects with long maturities, providing insurers with diversification and liability matching, while being in line with China’s ‘One Belt, One Road’ initiative.

The OBOR policy, proposed by President Xi Jinping in 2013, is a massive development strategy focused on enhancing connectivity and trade among Eurasian countries along the ancient Silk Road.

Chinese insurers’ appetite for alternative investments is expected to remain strong, thanks to policy incentives such as a relatively low capital charge on certain alternative investments under the country’s Risk-Oriented Solvency System.

Larger insurance institutions are more likely to benefit from higher returns with better resources in managing these investments, while smaller players are more “vulnerable” to the risks they carry, the report said.