June 5, 2018 / 4:20 AM / 6 months ago

Moody's upgrades China's life insurance industry on better product mix, lower leverage

SHANGHAI, June 5 (Reuters) - Moody’s Investors Service changed its outlook for China’s life insurance industry to stable from negative on Tuesday, on a more sustainable product mix and a slowdown in investment in high-risk assets.

Beijing has been cracking down on leverage across the financial sector, targeting risk in insurers by probing liability mismatches and overseas acquisitions.

The improved outlook reflects the expectation that the current moderate build up in leverage, shift to a diverse product mix and slower investment in high-risk assets will prevent deterioration “of Chinese life insurers over the next 12 to 18 months,” said Qian Zhu, a vice president at Moody’s in a statement.

“Premium growth will be lower in 2018, but insurance demand will be supported by steady economic growth, low insurance penetration and initiatives to promote long-term products,” Zhu added.

Life insurers are cutting risk by pivoting increasingly to long-term savings and protection-type products, rather than universal life policies - often short-term savings products, said the statement.

The high concentration of short-term savings products increased systemic risk for insurers across the market, as funds from such products are often invested in long-term projects.

This means that investors can request return of funds with very little notice, potentially leaving an insurer with a liquidity issue.

Life insurers should report stable profitability over the next year to a year and a half, but they may also see lower investment yields. (Reporting by Engen Tham; Editing by Kim Coghill)

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