Insurance debt growing

Credit risk is increasing in China's insurance industry, as insurance companies are relying primarily on subordinated debts to face the problems of insolvency and asset deficiency, a Beijing-based rating agency said, but analysts dismissed such risks Sunday.

Dagong Global Credit Rating Co said in a report Friday that China's insurance sector has faced problems since 2011 such as surrenders, complaints, slow responses to macroeconomic change and rising credit risks.

As a result, insurance companies with poor performance have had to borrow subordinated loans to ease capital pressure, driving the scale of their subordinated debt to record highs, the report said.

The funds raised by nine insurance firms from subordinated debt rose from 14.5 billion yuan ($2.3 billion) in 2009 to 94.5 billion yuan in 2012, according to company data.

But a large amount of subordinated debt doesn't necessarily mean an insurance company's credit risk is on the rise, and credit should be judged instead according to a company's overall situation, Zhong Ming, an insurance professor at Shanghai University of Finance and Economics, told the Global Times Sunday.

Subordinated debts with lower interest have become better choices for insurance companies to raise capital, as the sluggish economy has made stock issuance and borrowing from shareholders more difficult, Hao Yansu of the Beijing-based Central University of Finance and Economics told the Global Times Sunday.

"Subordinated loans are issued between financial institutions, which can re-borrow money if their debts are due, so it will not lead to rising credit risks," Hao said.

The top 10 insurance firms dominate nearly 90 percent of China's insurance market, and they develop stably without insolvency problems, Hao said, noting that there are likely insolvency and credit risks for small companies, but they do not amount to systemic risks that could affect the whole sector.

The insolvency problem is quite common in the insurance sector due to the excessive pursuit of scale expansion over the past decade, with insurance companies increasing their ratios of subordinated debts to net assets and approaching the 50 percent line set by the country's insurance regulator, Dagong said.

Current ratios are 43 percent for Ping An Life, 50 percent for China Pacific Life and 47 percent for New China Life Insurance.

But Hao noted that the industry has strict regulations on insurance firms' solvency situations, and the regulator will not let credit risks rise.