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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.