"Solvency II" Phase 2 Has Gradual Impact, Insurance Funds Face No Systemic Deleveraging Pressure

Recent market news suggests that “small and medium insurance companies are reducing their holdings due to new solvency regulations, causing market volatility.”

In response, an industry insider told the “Daily Economic News” reporter that attributing the short-term market fluctuations mainly to “insurance capital reduction” is not sufficient. On one hand, the full implementation of the “Second Generation of Solvency” (China’s risk-based solvency system) will indeed have a significant impact on insurance companies’ investment behaviors, but this impact is fundamentally structural and gradual, not a trigger for passive reduction of holdings in the short term. On the other hand, the claim that “reductions by small and medium insurers are causing market declines” is more likely an exaggerated interpretation of localized phenomena and does not have overall explanatory power.

“There are also reduction phenomena, but their scale is limited, so there is no reason to believe that insurance companies’ actions are causing the stock market to fall,” said an investment professional from an insurance company. A securities analyst also analyzed that for large and medium-sized insurers, which hold over 70% of the funds and have implemented the new regulations by the end of 2025, the actual pressure to reduce holdings is not significant.

Related impacts have already been gradually reflected

Recently, market volatility in stocks and bonds has intensified, drawing attention to the behavior of insurance funds as core incremental capital.

Regarding the rumors about the impact of the implementation of the “Second Generation of Solvency” regulatory rules, Ge Yuxiang, a non-bank analyst at Zhongtai Securities, pointed out that the transition period for “Second Generation” has been extended to the end of 2025, and no new regulations will be fully implemented in 2026. The draft for the third phase of “Second Generation” is currently under internal regulatory testing.

In March 2012, the former China Insurance Regulatory Commission launched the construction of the risk-based solvency system; in 2016, the first phase of “Second Generation” was officially implemented; by the end of 2021, the former China Banking and Insurance Regulatory Commission issued the “Insurance Company Solvency Regulatory Rules (II),” clarifying that the second phase of “Second Generation” would be enforced starting from the first quarter of 2022, with a full implementation required by 2025 at the latest.

Postdoctoral fellow and professor Zhu Junsheng from Peking University’s School of Applied Economics told the “Daily Economic News” that overall, the full implementation of the second phase of “Second Generation” will indeed have an important impact on insurance companies’ investment behaviors. However, this impact is essentially a structural, gradual adjustment rather than a short-term trigger for passive reduction of holdings.

Zhu Junsheng believes that the new regulations, by strengthening capital constraints related to interest rate risk, equity risk, and credit risk, mainly aim to guide insurers back to an asset-liability matching (ALM) approach, promoting a shift from “scale-driven” to “sound management” in investments. In terms of specific allocations, it is not simply about reducing equity assets but about shifting equity investments from high volatility, trading-oriented assets to low volatility, dividend-yielding, allocation-type assets. It also emphasizes increased allocation to long-term fixed income assets and imposes higher risk penetration and capital constraints on alternative investments.

More importantly, the “Second Generation” phase two has been in a continuous digestion stage since 2022, with a transition period in place. The related effects have been gradually reflected over the past few years, rather than being concentrated at this moment.

Large and medium-sized insurers face limited reduction pressure

Zhu Junsheng also stated that the market’s claim that “small and medium insurers reduced holdings at the end of Q1 due to solvency pressure, causing market fluctuations” should be viewed with caution.

“From actual conditions, some small and medium insurers with marginal solvency pressure, high equity holdings, or liquidity constraints may indeed adjust their asset structures temporarily. However, this is an individual behavior and does not have industry-wide prevalence, nor can it form a systemic reduction force.” In his view, insurance funds are generally long-term investors, with liabilities continuously bringing in funds, which determines their main strategy of stable incremental asset allocation rather than high-frequency trading. Meanwhile, the overall size of small and medium insurers is relatively limited, and their marginal rebalancing actions have limited impact on the market.

Ge Yuxiang also told reporters that objectively, some small and medium insurers may face certain performance realization pressures, but considering that the “Second Generation” introduces counter-cyclical adjustments to the risk factors of stock investments, it reduces insurers’ impulsive “chasing gains and selling losses.” For large and medium insurers that have already implemented the new regulations by the end of 2025 and hold over 70% of the funds, the actual pressure to reduce holdings is not significant.

According to data from the Financial Regulatory Authority, by the end of 2025, the total balance of insurance companies’ fund utilization will reach 38.5 trillion yuan, a 15.7% increase from 2024. Among these, the balance of equity funds invested in stocks and funds is about 5.7 trillion yuan, up approximately 39% year-on-year, an increase of about 1.6 trillion yuan compared to the previous year. This includes new capital inflows and gains from the appreciation of equity assets.

Zhongtai Securities estimates that about two-thirds of this increase is due to market value fluctuations, and one-third is from active rebalancing. Under a neutral assumption in 2026, the annual incremental funds for stocks and funds are estimated at about 713.3 billion yuan.