Soochow: The insurance industry enters a new era of asset-liability management, building a system that fits the actual needs of China.

Soochow released a research report stating that the insurance industry has entered a new era of asset-liability management. 1) Asset-liability management is a series of policies and procedures that insurance companies use to maintain a reasonable match between assets and liabilities and reduce mismatch risk. Management goals include matching of term structures, cost/yield matching, and liquidity matching. 2) Under the constraints of low interest rates, new regulations, and solvency requirements, the new rules for asset-liability management are leading the industry into a new era of asset-liability management. The insurance industry is currently facing a challenging external environment of persistently low interest rates and asset scarcity, in addition to the full implementation of new accounting standards in 2026 and strengthened solvency requirements under the Second Generation Solvency Project. This underscores the importance of asset-liability management for insurance companies. Key points from Soochow include: Current situation: Internal and external improvements in asset-liability matching management 1) The asset-liability management of insurance companies involves comprehensive coordination from product development to asset allocation. Currently, with the combined guidance of external regulations and proactive industry adjustments, the situation of asset-liability matching is gradually improving. 2) In specific matching aspects: Cost/yield matching: on one hand, efforts are made to match fixed costs and net investment yield rates by lowering predetermined interest rates and transforming dividend insurance to reduce fixed cost requirements, and stabilizing net investment yield rates by increasing allocation to long-term rate bonds and high dividend assets; on the other hand, efforts are made to match comprehensive costs and comprehensive investment yield rates, mainly by setting upper limits on dividend/universal insurance settlement levels and relaxing equity investment restrictions. The effects of these two matches have already shown significant improvement. Term structure matching: in the past few years of declining interest rates, listed insurance companies have generally been actively allocating long-term rate bonds to lengthen asset duration and reduce duration gaps. Overseas experience: Asset-liability management experiences from the US, Europe, and Japan 1) Cost matching: on the liability side, controlling predetermined interest rate levels reasonably, establishing dynamic adjustment mechanisms linked to macro rates, and adjusting liability structures to increase the proportion of non-rate sensitive businesses during rate declines, with Europe and the US tending to develop floating income products, while the Japanese life insurance industry focuses on developing life differential products. On the asset side, the US shows markedly different allocations for various accounts, with higher equity proportions in separate accounts; European insurers emphasize alternative investment allocations and generally use derivatives for risk management, and Japanese life insurers have significantly increased their allocation to overseas bond investments. 2) Term matching: Europe, the US, and Japan all pay attention to term matching, especially large European insurers maintain very small duration gaps and dynamically adjust to changing rate environments, while also needing to control both asset and liability duration to achieve proper matching. Outlook: Establishing an asset-liability management system that suits China's reality 1) While developed markets overseas have provided valuable experience, not all experiences are feasible for implementation in the domestic market. It is necessary to establish an asset-liability management system that suits China's reality. 2) Liability side: it is important to fully leverage the advantages of floating income products. Currently, the transformation of dividend insurance in China has achieved phase results, but there are still issues of "indirect redemption" under fierce competition that must be avoided. In addition, in the future, products with a low guaranteed return and high floating income structure can be introduced, further reducing fixed costs. 3) Asset side: leverage the advantage of patient capital and adhere to long-termism. Small and medium-sized private insurers should emulate and improve long-term assessment mechanisms, with industry allocation continuing to focus on a core balance of long-term rate bonds and high-quality equity investments, maintaining a balanced structure of growth and value investments within equities. Risk warnings: 1) Downward trend in long-term interest rates; 2) Market fluctuations in equities; 3) New business growth falling short of expectations.