Moody’s says new investment rules a big step for China insurers

Hong Kong, May 26, 2009 -- Moody's Investors Service says -- in a new
report -- that an amendment to China's Insurance Law, allowing insurers
to invest in new asset classes, will be central to helping them improve
long-term asset-liability management.

At the same time, the amendment can also raise their levels of risk
exposure as some insurers, particularly the smaller entities, may not
have the expertise to manage new types of assets.

"Moody's believes that the change in the investment rules represents an
important step for the insurance industry towards further deregulation,
and will have a far-reaching impact on the industry. Because of the large
amount of assets that Chinese insurers hold, the change will also be one
of the key factors driving the development of China's capital markets,"
says Sally Yim, a Moody's AVP/Analyst and author of the report. The
National People's Congress passed its new set of amendments on February
28.

The new asset classes allowable for investment include infrastructure
project debt, real estate investments, and additional types of bonds;
and equity investments are also broadly allowed, subject to regulatory
approval.

"The introduction of additional asset classes should enhance portfolio
diversification, which we view as generally positive," says Yim. "This
is especially relevant as some insurers' current counterparty exposures
to the financial institutions sector is quite high because of the limited
investment types allowed."

"Further, adding new investment types -- typically long-duration assets
-- will help improve insurers' asset-liability management (ALM), given
the current asset-liability duration gaps, especially among life
insurers," says Yim.

The report also notes the higher risk characteristics such as higher
volatility and illiquidity of the new asset types (except for
fixed-income securities) when evaluating an insurer's financial profile.
These risks could arise as insurers enter uncharted territory with these
new investment types, the report notes, adding that they have little
experience in assessing the risks associated with these investments,
which are traditionally more complex than existing asset types.

The new investment standards will broadly involve the same kind of risks
and benefits to life and P&C companies. However, due to the differing
nature of their insurance liabilities, life insurers should benefit more
from the new standards.

The report is entitled, "New Investment Channels for Chinese Insurers: A
Leap Forward." It can be found at www.moodys.com.