Insurance Industry Outlook: Consolidation of Advantages for Leading Insurers; Solvency Remains a Key Constraint

Overview

This research report focuses on the dynamics of the insurance industry in China and Hong Kong in 2026. The core conclusion is that the industry is being led by top-tier insurers, with limited systemic risk. Despite constraints from the low-interest-rate environment and solvency regulations, leading companies continue to expand their competitive advantages through adjustments in product strategy, optimization of channel structure, and enhanced investment capabilities. The report considers the current industry fundamentals to be robust and recommends focusing on leading targets with scale and capital advantages.

Core views

Regarding liability-side transformation, listed insurers have basically completed the switch from traditional insurance to participating policies. In 1Q26, participating policies accounted for about 90% of regular first-year premiums, a significant increase from less than 50% in the first half of 2025. This transformation is driven by declining long-term interest rates and regulatory guidance, while demand for savings-type insurance remains strong. However, small and medium-sized insurers are re-evaluating their product strategies due to higher actual liability costs, profit-sharing mechanisms weakening shareholder returns, greater capital consumption, and complex cash flow management, with some returning to traditional insurance sales starting from 2Q26. The report expects the pricing interest rate for participating policies to be further reduced from 1.75% to approximately 1.25% in the coming quarters through window guidance, and the demonstration interest rate to drop from 3.5% to about 3.2%. In terms of channels and business quality, the bancassurance channel has regained growth after adjustments in expense controls, with new business premium growth exceeding 15% in 2025 and increasing by about 17% YoY in 1Q26. However, channel structure divergence is evident: small and medium-sized insurers with assets ranging from hundreds of billions to trillions rely heavily on bancassurance (50%-100%), whereas large insurers derive 60%-80% of premiums from agency channels, making value creation more sustainable. The proportion of regular premium payments in the bancassurance channel of the 'Old Seven' life insurance companies rose from less than 40% in the same period last year to over 60% in 1Q26, with CPIC and New China Life even cutting two-thirds of their single-premium bancassurance business. As regulators strengthen expense management (e.g., Document No. 65), the industry is shifting from 'expense-driven' to 'service-driven,' benefiting leading companies with brand strength and fixed cost amortization advantages. On the investment side, long-term bond yields have stabilized, and the curve has steepened (the spread between 30-year and 10-year government bonds widened from 22bps in May 2025 to 53bps in May 2026), providing certain support for insurance funds. Following the implementation of IFRS 9, listed insurers have generally increased equity allocations to 15%-20% of total invested assets and adopted more active strategies in participating accounts (increasing FVTPL assets), while remaining prudent in non-participating accounts. Large insurers have significant advantages in allocating alternative assets (ABS, REITs, private equity, overseas assets, and gold), while small and medium-sized insurers, constrained by liquidity, capital, and solvency, allocate more to transparent standardized assets such as public REITs. The median net investment yield of the industry in 1Q26 was only about 0.65%, indicating that yield pressure will persist. Regarding solvency and risk management, the full implementation of C-ROSS Phase II combined with the decline in the 750-day moving average government bond yield curve caused the median core solvency adequacy ratio of the industry to drop from about 130% in 4Q25 to about 120% in 1Q26, and it is expected to further decline to about 111% in 2Q26. Small and medium-sized insurers face difficulties in capital replenishment, while progress in revising regulatory rules is slow, making the launch of C-ROSS Phase III within the year unlikely. Nevertheless, the report believes there is no systemic risk, as leading insurers have strong capital strength, and regulators have moderately relaxed some risk factors in recent years. Insurers are addressing challenges through differentiated investment strategies (risk control focus for traditional accounts, stable cash flows for participating accounts), customized product development, and refined cost management. Large insurers focus more on asset-liability matching and service ecosystem construction, while small and medium-sized insurers focus on cost reduction, efficiency improvement, and liability cost control.

Analysis framework

The report employs a three-dimensional analysis framework of 'Liabilities-Assets-Capital' to evaluate the insurance industry. On the liability side, it assesses business quality and sustainability by tracking changes in new business premium structure (participating vs. traditional), channel sources (bancassurance vs. individual), and payment terms (regular vs. single). On the asset side, it analyzes asset allocation behavior and return potential by combining interest rate trends, accounting standard changes (IFRS 9/17), and account types (participating/non-participating). On the capital side, it evaluates operational constraints and risk exposure using the core solvency adequacy ratio as the core indicator, combined with the evolution of regulatory policies and capital replenishment capabilities. Additionally, the report particularly emphasizes the structural divergence between large and small insurers across these dimensions, using 'scale effects' as the main analytical thread throughout to explain why leading companies are more resilient under similar conditions.

Methodology notes

• Financial Industry Specific MetricsSolvency analysis

  Core solvency adequacy ratio as a key monitoring indicator for insurer capital constraints

  This ratio measures the extent to which an insurance company's high-quality capital covers its minimum capital requirements. By analyzing changes in this indicator for approximately 50 life insurance companies, the report judges industry capital pressure and the divergence trend between large and small insurers, serving as the core premise for understanding current differences in product strategy and asset allocation.

• Financial Industry Specific MetricsInsurance Three Variances (Interest/Mortality/Expense)

  Trade-offs between participating and traditional policies regarding interest spread loss risk and capital consumption

  While participating policies reduce guaranteed liability costs, their actual costs (including non-guaranteed portions) may be higher, and profit-sharing mechanisms reduce retained earnings for shareholders. The report uses this to explain why small and medium-sized insurers experienced strategic pullbacks after transformation, revealing the actuarial and financial logic behind product choices.

• Fixed Income and Credit AnalysisYield curve analysis

  Implications of yield curve steepening for insurance asset-liability management

  When long-term interest rates rise more than short-term rates (e.g., widening 30-year/10-year spread), it helps alleviate duration mismatch pressure and improve reinvestment returns. The report uses this indicator to judge insurers' willingness to increase allocations to long-duration bonds and the marginal improvement space on the investment side.

• Competition and Strategy FrameworkMoat / competitive advantage

  Manifestation of scale effects in multi-channel, multi-account operations in the insurance industry

  Large insurers form barriers in product transformation, channel compliance, and alternative asset allocation through control over proprietary channels, ability to amortize fixed costs, and access to diversified investments. The report cites this as the core logic explaining the increase in industry concentration and the premium for leaders.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Ping An Insurance of China (2318.HK / 601318.SS)

  Beneficiary Target: Strongest comprehensive strength, leading in product transformation, continuously improving agency channel quality, outstanding alternative asset allocation capability

  Strengths

  Robust balance sheet, stable FVOCI equity allocation in participating accounts, service ecosystem and integrated finance synergy create value

  Weaknesses

  Asset management segment remains a drag in the short term

  Comparison

  Compared to China Life, Ping An has more stable investment strategies in participating accounts; compared to small and medium-sized insurers, it possesses comprehensive scale advantages

  Risks

  Equity market volatility, persistently low interest rates, real estate-related asset risks

• China Life Insurance (2628.HK / 601628.SS)

  Beneficiary Target: Industry leader, significant optimization in bancassurance regular premium structure, strong capital strength

  Strengths

  Significant increase in bancassurance regular premium proportion in 1Q26, relatively robust solvency, gradual advancement of high-dividend strategy

  Weaknesses

  Decrease in FVOCI equity allocation proportion in participating accounts, indicating non-participating accounts bear more equity exposure

  Comparison

  Stronger bancassurance transformation efforts than most peers, but slightly less flexible investment in participating accounts compared to Ping An

  Risks

  Decline in A-share market, new business value growth below expectations, deterioration of interest rate environment

• AIA Group (1299.HK)

  Beneficiary Target: Focus on high-quality model, China business continues to show resilience

  Strengths

  High-quality agency channel, solvency adequacy ratio far above industry average (still over 200% in 1Q26)

  Weaknesses

  Mainland Visitor (MCV) business faces potential concerns over regulatory tightening

  Comparison

  Capital strength significantly superior to mainland peers, but business geographic concentration is higher

  Risks

  Regulatory restrictions on MCV business, slowdown in VNB growth, regional economic recession

Key data

• Proportion of New Participating Policies for Listed Insurers in 1Q26>80% (approx. 90% in Regular FYP)Significant increase from <50% in 1H25, marking the basic completion of transformation
• YoY Growth of Bancassurance Channel FYP in 1Q26+17% YoYContinuing the >15% growth momentum from 2025, supported by deposit maturities and improved channel margins
• 30-Year/10-Year Government Bond Spread (May 2026)53bpsSignificantly widened from 22bps in May 2025, beneficial for long-duration asset allocation
• Median Core Solvency Adequacy Ratio of the Industry (1Q26)Approx. 120%Decreased from approx. 130% in 4Q25, expected to further drop to approx. 111% in 2Q26
• Median Net Investment Yield of the Industry in 1Q26Approx. 0.65%At a low level, reflecting persistent yield pressure in a low-interest-rate environment
• Expected Pricing Interest Rate for Participating PoliciesFrom 1.75% down to ~1.25%Expected to be achieved through regulatory window guidance in the coming quarters

Impact & implications

The report believes the current industry landscape favors leading insurers, whose competitive advantages will further expand in a low-interest-rate and strongly regulated environment. For investors, this means prioritizing allocations to leading enterprises with sufficient capital, diversified channels, and strong investment capabilities, such as Ping An Insurance of China, China Life Insurance, and AIA Group. Although small and medium-sized insurers face short-term pressures, they can maintain survival by focusing on cost control and differentiated products. Overall, the industry's de-risking process continues to advance, and systemic risks are controllable, but individual stock performance will be highly divergent. Although AIA is affected by concerns over regulatory scrutiny of Mainland Visitor Business (MCV), the report believes the impact is limited and the market reaction has been excessive.

Risks

• Significant volatility in equity markets and persistently low interest rates affecting investment returns and solvency
• Difficulties in capital replenishment for small and medium-sized insurers leading to localized risk exposure
• Further tightening of regulations on bancassurance channel expenses or cross-border insurance business
• Actual payout ratios for participating policies higher than expected eroding profits
• Weak macroeconomic recovery suppressing insurance demand

What to watch

• Actual adjustment pace of pricing and demonstration interest rates for participating policies
• Progress and timeline for C-ROSS Phase III rule revision tests and implementation
• Changes in solvency adequacy ratios of major insurers in 2Q26
• Implementation effect of Document No. 65 on bancassurance channels and its impact on small and medium-sized insurers
• Regulatory policy developments for Mainland Visitor (MCV) insurance sales