Standard & Poor's Ratings Services said in Beijing Wednesday Chinese insurers will benefit over the medium term from further loosening of regulatory restrictions on how they invest their funds.

In the newly published "China Insurance Outlook 2006-2007", Standard & Poor's says the benefits are likely to come in the form of greater profitability and more effective asset and liability management. However, the way forward will not be easy.

Asset and liability management skills in the country's insurance industry are at best unsophisticated, domestic capital markets are shallow, and insurers are having to deal with risky assets and foreign currency fluctuations, says the China Insurance Outlook.

The report says it may be some time before the industry's investment profile rises to international standards.

The investment yield has recently improved, rising to 3.6 percent in 2005 from 2.9 percent in 2004 and 2.7 percent in 2003, partly as a result of broadening investment opportunities and improving stock market conditions.

The report says there is still considerable room for improvement since the insurance funds investment yield still lags the domestic bond market, where five-year government bonds were yielding 3.9 percent at the beginning of 2006 and corporate bonds of similar duration were generating even higher returns.

Some insurers have benefited by shifting their investment into financial and corporate funds out of lower-yielding bank deposits.

The Chinese government has reduced restrictions on insurers by raising the effective ceiling on equity investment to 4 percent of total assets from less than 2 percent and allowing insurers to invest in key infrastructure projects and foreign products.

By the end of June, eight insurance asset-management companies were in operation, managing funds equivalent to about 80 percent of the industry's total 493-billion-yuan (61.6 billion U.S. dollars) premiums in 2005.

Source: Xinhua