Fitch revises outlook to 'Stable' for several major insurance segments

Fitch Ratings has revised the rating outlook for some of the major segments in the APAC insurance industry - China life, Japan life or non-life, and South Korea life or non-life - to 'Stable' from 'Negative'.

The revision is based on Fitch’s expectation that key credit metrics will remain resilient with rating expectations over the next 12-to-24 months based on revised assumptions regarding the ongoing economic fallout from the coronavirus pandemic and its impact on the credit quality of the insurers.

The number of ratings with negative outlooks assigned to Chinese life, and Japanese and Korean insurers has fallen to less than 20% to date. The revision reflects the recovery of market sentiment as Fitch expects their economic environments to improve in 2021 due mainly to the governments’ fiscal stimulus and vaccination rollout. The insurers’ solvency buffers are likely to remain resilient on the back of sustained earnings, says the global credit rating agency.

China

Fitch expects Chinese life insurers to refocus on a quality product mix through expanding protection-type and long-term products after pandemic challenges in 2020. Consistent product strategies enable Chinese life insurers to enhance and sustain new business value.

South Korea

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

Japan

Fitch expects prolonged low interest rates will continue to be manageable for Japanese life insurers compared with those outside Japan. Japanese life insurers have adapted to the extremely low yields after more than five years by focusing on profitable protection-type products, which are not significantly affected by low interest rates.

Risks

However, these insurers continue to face credit and asset risks. Chinese life insurers’ credit risks are rising amid the increase in defaults in China’s credit markets. In addition, Fitch expects their earnings to remain sensitive to heightened capital-market volatility, resulting in higher asset impairment. Fitch also expects 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.

Source: Asia insurance review