20250302-东吴证券-保险Ⅱ行业深度报告_低利率下保险业的困境与出路系列报告（一）_山雨欲来风满楼_21页_924kb

Industry Analysis: Insurance Sector - Challenges and Solutions in the Era of Low Interest Rates

1. Core Challenges with Falling Interest Rates

Interest rates are now in a long-term downtrend. The 10-year Treasury yield has dropped from 10.9% in 1993 to 1.76% as of February 27, 2025, a decline of over 900 basis points. This is primarily tied to China's slowing GDP growth and老龄化 population, which are reducing investment demand. Life insurers face significant impacts on their profitability and valuation from falling rates due to their long-term liabilities.

Insurers rely heavily on the interest spread or “li difference” for profitability, which is being squeezed by investment returns declining faster than assumed insurance liabilities. This creates "li difference damage", where insurers struggle to cover liabilities, particularly when mismatched assets and liabilities become longer-term. The reserves metric is adversely affected by lower discount rates, leading to reduced pre-tax profits under new accounting standards (IFRS 17).

2. Valuation Implications

Decreasing interest rates force insurers to revise their economic value (EV) and net business value (NBV) model assumptions. Since 2023, companies have trimmed their long-term return rate assumptions from around 5% to 4.5%, potentially reducing NBV by over 10% industry-wide. High-yield fixed-income assets (like bonds and non-standard securities) dominate their portfolios (over 50% in 2024), making their performance highly correlated with rates. A 50bps rate drop could reduce four-year profits by about 2% according to sensitivity analyses.

3. Recent Developments

The sector appears temporarily better-positioned due to improved stock market returns and bond prices in 2024, boosting listed insurers' profits significantly with margins reaching above 5%. Claims of improved solvency ratios often stem from regulatory capital injections rather than organic improvement. But these temporary fixes don’t mask underlying problems: prolonged low yields could further pressure investments through regulatory stress tests (Capital International Requirements - CIR) tracking bond losses directly against capital buffers.

4. Historical Lessons: The 1990s Interest Rate Crash

The current environment echoes the 1990s crash where banks cut deposit rates while insurers held old high-yield products. For example, China Life had to strip non-core liabilities into separate holdings, using government co-funded funds to manage early damage. Similarly, Ping An and Taiping Insurance were burdened with long-term legacy products with returns maturing decades later. This problem was manageable then due to rising demand; today there are far more complex variables compounding the risk.

5. Distress in the Industry Today

While new business improved last year, concentrated market risks might damage stability. Troubled companies like Hualong Life, Ronghe Life and dozens of others face regulatory oversight with insurance guarantee funds being over capacity by only ~40% (CNY 243B). Should interconnected risks persist, potential bailouts may strain these public backstops excessively.

To navigate this, insurers should carefully manage interest rate risks through duration matching between assets and liabilities, explore alternative investments, maintain modest pricing for new products, and ensure strong capital structures. Regulators must also support disclosure and improve stress-testing methodologies to track real-time risks across companies and market segments.