Insurance Industry Leader-Driven: The Strong Get Stronger Under Solvency Constraints
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Insurance Industry Leader-Driven: The Strong Get Stronger Under Solvency Constraints
Morgan Stanley believes the life insurance industry has completed the transition to participating policies, with leading insurers having solid advantages in products, channels, and investment. Although small and medium-sized insurers face solvency pressures, there is no systemic risk in the industry, and it continues to favor Ping An, China Life, and AIA.
- The proportion of participating policies in new business for listed insurers has exceeded 80%, and the pricing rate is expected to drop to 1.25%
- The bancassurance channel maintains double-digit growth, and stricter regulation benefits leading insurers
- Steepening of the yield curve eases spread compression pressure, but a duration gap remains
- Under IFRS 9, equity allocation increases, and participating account investment strategies become more aggressive
- Industry core solvency adequacy ratio faces pressure, with small and medium-sized insurers struggling to replenish capital
- Institution maintains 'Attractive' industry rating, top picks: Ping An, China Life, AIA
Report interpretation
Overview
This report focuses on the China and Hong Kong insurance industry in 2026, with the core conclusion being 'leader-driven'. The report indicates that under the guidance of low interest rates and regulation, the industry has basically completed the transition to participating policies, but strategies of large and small insurers have diverged. Although solvency remains a key constraint and small and medium-sized insurers face capital pressure, systemic risks are limited. Large insurers, leveraging their advantages in channels, investment, and capital, will continue to lead in product diversification, asset-liability matching, and long-term competitiveness construction.
Core views
Liability-side transformation and divergence: Listed insurers have basically completed the switch from traditional to participating policies by Q1 2026, with participating policies accounting for about 90% of regular first-year premiums. However, due to high actual liability costs, complex profit-sharing mechanisms, and capital consumption, small and medium-sized insurers are reassessing product strategies, with some returning to traditional policies or seeking a balanced mix. The report expects the pricing rate for participating policies to further decline from 1.75% to around 1.25% in the coming quarters, and the illustrated rate will also decrease, accelerating the industry's de-risking process. Channel structure and competitive landscape: After fee control adjustments, the bancassurance channel has returned to growth, with new policy premiums up about 17% year-on-year in Q1 2026. However, compared to large insurers, small and medium-sized insurers are highly dependent on the bancassurance channel (some reach 50%-100%) and still focus on single-premium products. Large insurers, on the other hand, strengthen value creation by optimizing the premium payment term structure (with regular premium proportion exceeding 60%) and enhancing the quality of their agency channels. As regulators strengthen fee management and promote a 'service-driven' model, leading companies with brand premiums and fixed-cost sharing advantages are expected to further expand market share. Investment side strategy and environmental impact: The stabilization of long-term bond yields and the steepening of the yield curve (30-year/10-year spread widened to 53bps) provide insurers breathing room. Under IFRS 9, listed insurers have generally increased equity asset allocation (15%-20% of total investment assets) and adopted more aggressive FVTPL strategies in participating accounts to capture excess returns. Meanwhile, large insurers have significant advantages in allocating to alternative assets (such as REITs, private equity, overseas assets), while small and medium-sized insurers, constrained by liquidity, capital, and risk management capabilities, focus more on standardized assets. The industry's net investment return rate remains low (median about 0.65% in Q1 2026), forcing insurers to improve returns through differentiated account management and diversified allocation. Solvency constraints and responses: With the full implementation of Phase II of the C-ROSS, the industry's core solvency adequacy ratio faces downward pressure, with the median expected to drop to around 111% in Q2 2026. Small and medium-sized insurers have difficulty replenishing capital, while large insurers have strong capital bases. The report believes the likelihood of introducing Phase III of C-ROSS this year is low, and capital constraints will continue to intensify industry divergence. Nevertheless, as regulations are continuously optimized and business quality improves, the industry overall does not face systemic risk.
Analysis framework
The report adopts a three-dimensional analysis framework of 'macro environment - regulatory policy - micro operations'. First, starting from the low-interest-rate environment and accounting standard changes (IFRS 9/17), it defines common challenges facing the industry. Second, combining solvency reports and regulatory guidance, it assesses the differentiated response capabilities of insurers of various sizes. Finally, by deconstructing product structures on the liability side, channel efficiency, and asset-side allocation behavior, it demonstrates why 'leader-driven' becomes an inevitable outcome in the current cycle. This combined top-down and bottom-up approach effectively reveals the inherent logic of structural divergence in the industry.
Methodology notes
Valuing insurance companies using P/EV multiples and new business value multiples (NBM)
When valuing companies like AIA, the report uses the method of '1x Embedded Value + New Business Value x Multiple'. This is a unique valuation system for insurance stocks because the value of an insurance company lies not only in its current net assets but also in the future profit release of existing policies (EV) and the discounted future cash flows of new sales (NBV).
Focuses on the asset-liability duration gap and its sensitivity to interest rate changes
The report repeatedly mentions an average duration gap of 9.1 years in the life insurance industry and analyzes the effect of a steepening yield curve in reducing this gap. Understanding this metric helps assess the net value stability and reinvestment risk exposure of insurers under interest rate volatility.
Using the core solvency adequacy ratio as a key indicator to measure insurers' capital constraints and business expansion capabilities
The report regards solvency as the core bottleneck of current industry development and uses it to predict the divergence in product design and asset allocation between large and small insurers. This metric directly determines whether insurers can take on new business and withstand market fluctuations, making it a cornerstone for understanding insurance stock fundamentals.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Ping An Insurance (2318.HK / 601318.SS)Beneficiary: Strongest comprehensive strength, leading liability-side transformation, flexible investment-side strategies
- Strengths
- Robust balance sheet, high-quality agency channel, strong participating account management capabilities, comprehensive financial ecosystem creating value
- Weaknesses
- Asset management segment may still temporarily drag on operating profit
- Comparison
- Compared to pure life insurers, has higher business diversification and stronger anti-cyclical ability
- Risks
- Equity market volatility, persistently low interest rates, real estate and asset risk exposure
- China Life Insurance (2628.HK / 601628.SS)Beneficiary: Solid industry leader status, balanced development of bancassurance and individual agency channels
- Strengths
- Significant economies of scale, relatively ample solvency, productivity improvements bring potential for VNB beat expectations
- Weaknesses
- As a state-owned enterprise, institutional flexibility may be slightly inferior to market-oriented peers
- Comparison
- Compared to small and medium-sized insurers, has absolute advantages in long-duration asset allocation and cost control
- Risks
- A-share market decline, worsening interest rate environment, new business value growth falling short of expectations
- AIA Group (1299.HK)Beneficiary: Focus on high-quality growth model, resilience of mainland China visitor (MCV) business underestimated
- Strengths
- Excellent agent channel, high-margin product mix, healthy shareholder returns
- Weaknesses
- High sensitivity to cross-border business policies, valuation implies high growth expectations
- Comparison
- Compared to domestic insurers, output per agent and margin rate are at industry-leading levels
- Risks
- Tightening of MCV business regulation, slowdown in VNB growth, regional economic downturn
Key data
- Proportion of participating policies in new business for listed insurers>80%Q1 2026 data, significantly increased from less than 50% in H1 2025
- Growth rate of new policy premiums in bancassurance channel~17%Q1 2026 year-on-year growth, continuing the recovery momentum from 2025
- 30-year/10-year government bond yield spread53bpsMay 2026 data, significantly widened from 22bps in the same period of 2025
- Industry median core solvency adequacy ratio~120%Q1 2026 data, down from ~130% in Q4 2025
- Industry median net investment return rate~0.65%Q1 2026 data, at a historically low level
Impact & implications
The report believes that the current operating environment is accelerating industry survival of the fittest. For investors, this means they should focus more on leading companies with comprehensive competitive advantages. Large insurers are not only better able to adapt to low interest rates and strict regulatory environments but can also use capital and technology barriers to build moats in long-term tracks such as pension ecosystems and wealth management. Conversely, if small and medium-sized insurers fail to achieve differentiated breakthroughs in niche areas, they may face long-term capital depletion and value erosion. In the short term, although the market may overreact to news about MCV business regulation, high-quality targets with solid fundamentals still have allocation value.
Risks
- Further decline in long-term interest rates exacerbating spread compression risk
- Significant equity market volatility impacting investment returns and solvency
- Unexpected tightening of regulatory policies (e.g., MCV business restrictions, fee control upgrades)
- Failure of small and medium-sized insurers to replenish capital triggering localized liquidity risks
- Weak macroeconomic recovery dampening insurance demand
What to watch
- Actual pace of adjustments in participating policy pricing and illustrated rates
- Progress of Phase III C-ROSS testing and potential implementation timeline
- Subsequent enforcement of bancassurance channel 'reporting and execution consistency' and its impact on small and medium-sized insurers
- Changes in equity allocation ratio and FVOCI/FVTPL classification for listed insurers' participating accounts
- Monthly sales data and regulatory developments for mainland China visitor (MCV) business