"Solvency II" Phase 2 has a gradual impact, and insurance funds face no systemic deleveraging pressure.

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

In response, an industry insider told the Daily Economic News that attributing the short-term market volatility mainly to “insurance capital reduction” is not sufficient. On one hand, the full implementation of the second phase of the “Risk-Oriented Solvency System” (known as “Solvency II”) will indeed have a significant impact on insurance companies’ investment behaviors, but this impact is fundamentally structural and gradual, rather than triggering a sudden passive reduction in holdings in the short term. On the other hand, the idea that “reductions by small and medium insurers lead to market declines” is more likely an exaggerated interpretation of localized phenomena, and does not have overall explanatory power.

“While there are reductions in holdings, the 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 already 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 “Risk-Oriented Solvency System” (Solvency II) regulations, Ge Yuxiang, a non-bank analyst at Zhongtai Securities, pointed out that the transition period for “Solvency II” has been extended to the end of 2025, and no new regulations will be fully implemented in 2026. The consultation draft for the third phase of “Solvency II” is currently under internal regulatory testing.

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

朱俊生, a postdoctoral fellow and professor of applied economics at Peking University, told the Daily Economic News that overall, the full implementation of the second phase of “Solvency II” will indeed have an important impact on insurance companies’ investment behaviors, but this impact is essentially a structural and gradual adjustment, not a short-term trigger for passive reduction.

朱俊生 believes that the new regulations aim to strengthen capital constraints related to interest rate risk, equity risk, and credit risk, primarily guiding insurers to return to asset-liability matching (ALM) and shifting investment focus from “scale-driven” to “sound management.” 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-paying, income-oriented 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, since 2022, the second phase of “Solvency II” has entered a continuous digestion stage with a transition period, and its effects have been gradually reflected over the past few years, rather than being concentrated at this moment.

Large and medium insurers face limited pressure to reduce holdings

朱俊生 also stated that the market rumors that “small and medium insurance companies reduced holdings at the end of Q1 due to solvency pressure, causing market fluctuations” should be viewed with caution.

“In reality, only some small and medium insurers with marginal solvency pressures, high equity holdings, or liquidity constraints may adjust their asset structures temporarily. This is an individual behavior and does not have industry-wide prevalence, nor can it form a systemic reduction force.” He believes that overall, insurance funds remain primarily long-term allocation funds, with continuous inflows from liabilities, leading to a focus on stable increases in major asset classes rather than high-frequency trading. Meanwhile, the overall size of small and medium insurers is limited, and their marginal rebalancing actions have a relatively small 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 “Solvency II” introduces counter-cyclical adjustments to the risk factors of stock investments, it reduces insurers’ impulse to chase gains and sell in panic. For large and medium insurers that hold over 70% of their funds and have already implemented the new regulations by the end of 2025, 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 growth includes new capital input and gains from the appreciation of equity assets themselves.

Zhongtai Securities estimates that about two-thirds of this increase is due to market value fluctuations, and one-third is due to active rebalancing. Under a neutral assumption for 2026, the total incremental stock and fund capital is estimated at approximately 713.3 billion yuan.